A VC’s Optimistic Outlook on Today’s Startup Landscape

Intro 00:01
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Kate 00:18
Welcome to Startup Success. Today we have John Frankel, the founding partner of ff VC in studio, which is a real treat. Welcome, John.

John Frankel 00:29
Well, thank you.

Kate 00:32
It’s so fun to have you here. I know you founded ff VC about 16 years ago, correct?

John Frankel 00:37
Yes. It’s scary that it’s that long ago.

Kate 00:41
It’s not scary. It’s impressive. So tell us about ff VC. You know, an overview of why you founded it. I know you were in the midst of a long Olympic career at Goldman Sachs. So I’d love to know the catalyst too.

John Frankel 00:55
So it’s very simple what we do. When companies are just getting going – three or four people, a deck, maybe some revenue, maybe not some revenue – that used to be called Seed stage. Today, they like to call it pre-Seed stage. But we get involved very early. And we really help people build companies. So we may not be the experts on a drone era fall design or experts on generative AI models. But we help people who are building their businesses.

Kate 01:34
Got it, like really build that foundation.

John Frankel 01:40
It’s all the stuff they don’t know. It’s kind of funny, but very few, in fact, only one of our CEOs is actually a CPA. It’s usually not the DNA of CPAs. And the DNA of CEOs is usually different. There’s always an exception, these exceptional persons, but generally, CEOs don’t know about contribution margin pinouts. They don’t know about mastering accounting; they may know something about GAAP accounting, kinda. But they’d much prefer to talk about bookings and billings, and we’re really concerned about helping them think through cash flows. We’re concerned about helping them think through product and pricing models, think through branding, and the like. And you know, what we really want to do is get them from that Seed stage, late a Series B stage, at which point other VCs come in, and they bring everything they bring to the table. So we’re this really early alpha slice of a company’s existence,

Kate 02:40
What attracted you to that early stage? Because that’s difficult. There’s not a lot proven at that point.

John Frankel 02:47
Well, anything you do in life is difficult. And honestly, the earlier the stage, the more the heartache because you’ve got a higher failure rate amongst companies, you’re wrong more often. But, you know, from our perspective, or from my perspective, I find it fascinating. You know, we have a company called Mana, which is a last-mile drone delivery. It is up and running hundreds of flights a day in Dublin, on a positive contribution margin basis and making money. It’s kind of amazing. Net Promoter Score is through the roof. You know, we invested about four years ago on an idea, you know before the company was formed, and you know, they’re poised now for greatness. I think the skies will be filled with drones. And so you know, for any company we invest in we have an underlying view that we think this is going to be a very big area. And then other things we can do to help: can we be additive beyond just cutting a check? And if we are, then we look to invest. You know, we have investments in drones and robotics, applied AI. We’ve had an interest in AI for gosh eight-plus years, and we do quite a bit in FinTech. Most of our investments are in Enterprise. When we first started, it was about 50% Consumer and 50% Enterprise. We’re more in Enterprise now. And you know, what we really tried to do is be that support the founders. It sounds simple, but there’s a lot of stuff we do. But think about the normal curve. The normal curve is if you have 100 Seed-funded companies, companies went around say four or 5 million or less. Only 30 go to raise a Series A, 10 Raise a Series B, one goes public, and probably one gets to $100 million revenue run rate. In our portfolio, 70 raise an A, 50 raise a B. And I don’t know if we’re not old enough yet to have enough statistical significance in IPOs, though we’ve had four companies that are public, and about 10% of our companies get to 100 million revenue. So the stuff we’re doing was skewing higher. Can I point that there was this? Or it was that it’s very difficult because, you know, there’s …

Kate 05:12
That’s what I was gonna ask. Why? Why are you?

John Frankel 05:16
It’s very difficult to know what we do. But we’re constantly fine-tuning it. We run a very active platform; we have a newsletter, you can link to it off of our website ffvc.com. It goes to about 30,000 people. So we have a really big community. And it’s our Give / Ask / News newsletter – things you want to give community, ask community, and news. It goes out twice a month, and on the back of that we run a lot of events, some for the community, some for our portfolio companies. Then, you know, we tend to lead rounds, sit on boards, and be highly engaged. So a lot of VC firms, they’re set up as each partner has their own own team and pods. We run as one pod. So anyone can talk to any of the founders and help them in any way. It doesn’t all run through one person. It’s a different way of approaching it. And we think it leads to better returns.

Kate 06:19
Well, it does, so that’s great. And what a lot of great, helpful resources for your founders. I haven’t heard VCs focus on that, that often.

John Frankel 06:29
That’s kind of what we do. Why did I get into it? I was at Goldman for 21 years, the last 11 years on the sales and trading floor in New York for US shares covering hedge funds. For those who have a few gray hairs, 99 was a crazy year in the markets. And I made a lot of money in my personal trading account. And I just looked around and said everything is high beta, everything is correlated to the markets, where can I get alpha? And where can there not be a daily mark to mark to distract me? And so I started angel investing. And by the time I left Goldman in 2008, I actually made more money on a realized space as an Angel than I had working for Goldman for 21 years and said, Maybe I should take this professional,

Kate 07:17
I would say so. That’s a pretty good sign.

John Frankel 07:20
And the advice I’d give people, you know, Goldman is a pretty intense place. And prior to that, I was at Arthur Anderson, which was a pretty intense place. And so I just took six months off and tried to do nothing. But I found myself in a lawyer’s office after five months drafting documents that I have a VC fund. So you saw what you do, as opposed to a knee-jerk reaction, I gotta be busy.

Kate 07:45
Right, that’s smart. Yes, I like that. That makes a lot of sense. So obviously, you’re onto something here with, you know, your angel investing was so successful, your fund now is so successful, what do you look for, and those early stage investments, because there’s not a lot of proof yet? So what catches your eye? Because I’m guessing you see a lot of pitches.

John Frankel 08:09
I feel like if I give you a list of things, it’s gonna sound like the list that everyone else has. (Okay.) So yeah, it’s like, does the founding team got domain knowledge, are they all inside research people, is there an outsider that can actually sell? What’s the bounce of a team? What do we think of a space? Do we think they can build a defensible business model over time? You can put together a list of 12 items, I would think pretty much every company fails like three or four of them when we end up investing, but the others are so strong that they sort of pull us over. We like secular growth. We like businesses that are not capital intensive. So whether the sky is going to be full of drones or not, it doesn’t depend on the growth of the economy or the price of oil, or whatever. Again, I’ll come back to last-mile drone delivery. At scale, the cost of delivery is about $1. (Wow) The delivery time is about three minutes. The cost of delivery terrestrially, putting someone in a car, is about $10. And it takes about 30 minutes. So it is literally 1/10 of the price and 10 times better as a product. If you order McDonald’s, your french fries are going to be crisp, and they’ll all be there. (Laughing) So, it is a very differentiated experience. And it was, you know, that made this investment. We knew it was a very heavy lift. A lot of unknowns. And I remember I sat down with Bobby, the CEO, December a little over four years ago, and one of my LPs said you got to talk to this guy – crazy idea, but looks like you’re kind of thing. After about 40 minutes, I turned around to Bob and so I’ve got a problem. He goes, What’s your problem? I go? Well, I don’t know if you can build the drones. I don’t know if they’re going to kill people. I don’t know if we’re going to be too noisy. I don’t know if a customer will adopt. I don’t know if a business will adopt. I don’t know your cost of delivery. He goes Whoa, you said you have one problem? Yeah, my problem is I think you are uniquely placed to solve all these problems. And so my problem is, we’ve probably got to look at investing. So you know, we ended up leading the Seed round, and we had a board meeting today. The company is crushing it, they’re very well disciplined, about 110 people now, it’s a completely different place. And I honestly believe, obviously they need access to capital like any other business does. But I think this can be one of the fastest companies, that gets to a billion, 10 billion and then 100 billion of revenue. Because I think 80% of the US population are in dense, but not too dense locations, suburbs. So think of it like that. Who would absolutely want last-mile delivery from local stores, whether it’s food, whether it’s groceries.I think the demand is through the roof, if you could actually put the supply there. (Absolutely) And I don’t think we’re just gonna let Amazon do it. We want to get it from our local bookstore, and our local coffee shop. I think there’s all of that dynamic. The other dynamic is the economies of scale are fascinating for fast food restaurants. They doubled their EBITDA when they added drive thru, they can add another big chunk of EBITDA by adding drones makes sense. It’s an additional distribution channel for their kitchens. And so I think all the economics are there. I think the consumer demand is there, I think the supplier wants the additional volume. And honestly, we as a society probably don’t want the cars on the roads, getting in accidents, creating a larger carbon footprint and creating traffic. And, you know, I think I think all of that just means it’s inevitable. It’s an incredibly large new market.

Kate 12:25
That’s so exciting. This is what must make you love what you do 16 years into it.

John Frankel 12:32
Yeah, but look, we have 90 companies, I’ve spoken of 1. But you know, we’ve got other companies in digital identity that help banks protect against fraud called Secure, or a company that’s helping enterprises move high performance compute out of the data center. The easy stuff is easy to move – the stuff that’s the rocket science in a company that’s much more difficult to become we call Rescale, as San Francisco does. In the drone space, you have another company called Zenith that has high-altitude fixed-wing drones – signs of like a 737 that goes up 11 miles up and just hangs there. That can be used for communication and observation. On the consumer side, we’re in a company called Indiegogo, which is in crowdfunding. And we’re also in another company called Privacy Hawk that really helps keep all of your data scrubbed out of data brokers, which helps reduce your footprint for ID theft, reduces a lot of this marketing to you, etc. So you know, I’m just giving you an example, but I could give you 90 examples.

Kate 13:46
It’s fascinating. I mean, just to see all these things evolve over the past 16 years must be so motivating, right where you’ve seen the markets go?

John Frankel 13:56
It is, I mean, to give you a sense of numbers, we tend to invest where there’s no revenue and no market cap. Our companies are generating over 1.2 billion in revenue, worth over 10 billion, they employ over 5000 people, but through the products they generate, they’re touching millions of people, and hopefully, you know, enhancing them through better solutions and elsewise.

Kate 14:22
I mean talking to you, you have a very optimistic lens. A lot of people lately on this show have been so down on the startup ecosystem and the market, but it sounds like ff VC didn’t miss a beat.

John Frankel 14:37
So there are a couple of elements: Where you stand on this depends on where you sit. Right, so if you were the kind of person who backed things because they were trendy. We didn’t back blockchain businesses because we saw no use for the technology. Now maybe there will be use, but there are just fundamental flaws in distributed databases. They’re not 1/10 the price. They’re not 10 times more efficient, except for cross-border micropayments, but that’s a very small space. Now, if I told you in 1995 that I could connect all the world’s computers together, and you go, okay, that’s intellectually interesting, but how do you do that? And then someone comes along and invents Mosaic and you get the browser, and from the browser, you got social networks and everything else that came downstream of that. So blockchain needs that Netscape moment. You know, we’ve tended to avoid AR and VR to date because we really haven’t felt the hardware was there. We’re just getting close with the Vision Pro. Or the software was there. It’d be too expensive to write the content when that was saying that AI can write the content very cheap. So, I think in the next couple of years, AR and VR could be very interesting. So you know, there are areas we’ve avoided that have been very trendy. And when you have downturns like we’ve had since 2001, the trendy stuff that isn’t really a business tends to get punished. Also, we’ve been very price disciplined, so we weren’t doing the 100 million dollar pre-rounds on a deck that still, two years later, has no revenue. So that’s part of it. Now, have valuations come in? Yes. Has there been less capital being raised by companies? Yes. Have some companies been caught wrong-footed and not have the liquidity they expected around but weren’t able to raise? Yes, you know, this has been very much an ‘07-’08 moment – a draw down in the market. But honestly, it’s not like the technology has stopped. Technology is accelerating. You know, we’ve invested in AI for many years. It’s come on to lots of people’s radar in the last year, but it’s a huge enabler to many things. And, we think a lot of that’s investable. We’re great believers in factory automation and building of new factories in the US, bringing supply chains here. And I just don’t believe they’re going to be built carbon copies of the ones they are replacing, say in China. They’re going to be built using modern tech stacks, modern software stacks, and the like. So I think there’s a huge opportunity in reshoring, nearshoring, and onshoring of manufacturing and supply chains in the US. So you know, the technology hasn’t slowed down. The price is now a little bit more realistic. And, you know, we suspect this is going to be, you know, just a very good vintage the next couple of years. As a venture investor, you have to assume you’re going to have two recessions between first check and exiting. (Kate: Really?) We’ve had a period, well, 2008 to 2020, was just up in the public markets. I would tell people we are in year 8 of a 6 year upcycle, we’re in year 10 of a 6 year upcycle, we’re in year 12 of a 6 year upcycle. Cycles happen, and you’ve got to expect the downs. We’ve gone through a downturn. I think things are going to come back. I think we’re at that inflection point, we’re already starting to see some companies raise money at high valuations. So you know, we’re starting to see that that’s an indication that the animal spirits exist. They may not be as broad as they were in 2021. But that probably wasn’t good either.

Kate 18:47
No, it wasn’t. You’re right. That’s a good way of phrasing it, I think, especially around the technology and the opportunities that are still out there. We have a lot of founders, early stage founders, who listen to this show, and they always request that I ask for advice for them from someone like you. What is your advice for an early-stage founder listening right now who’s trying to scale, they’ve raised a pre- Seed, they’re trying to raise that Seed stage round? What kind of advice would you give them? Where should they focus?

John Frankel 19:23
<19:23>I mean, it’s always difficult, so understand that. Again, 70% of Seed-funded companies in the industry don’t raise an A, and 70% of them don’t raise a B. So understand that. That’s number one. Number two is you really want to understand that the nature of this business is you’re in the business to run a business. So get to revenues early. And then listen to your customers. Listen to what they want, listen to what the problems are, and adjust your product to address those problems. And then the last one is really run your numbers based on cash, not GAAP. Just understand that accrued numbers don’t make payroll. Cash makes payroll. So you’ve got to be on top of those numbers. Yeah, I mean, those are a few points of general advice.

Kate 20:19
I especially like what you shared about cash running, you know, managing that way. I don’t think a lot of founders do that, especially listening to this show. Are you all actively reaching out to your founders? Do you come to board meetings? Like, how do you operate after you’ve made an investment?

John Frankel 20:38
Oh, no, no, absolutely. I mean, I probably have attended more board meetings (and this is not boasting, it just is) than pretty much anybody. I’ve sat on the boards of over 60 companies during my career. That just creates a lot of volume. But I like to attend board meetings. I like to be engaged. I also call up founders and talk to them offline. Board meetings are fine, but it’s not the only time you should be talking with your founders. They call me at different times, Hey, I’ve got this problem, Hey, I’m doing this, Hey, I hate that, Hey, how do we deal with this? If I can help, I do. If I can’t, I try to find the right person who can help. And you know, we have a team of people. So it’s not just me they can rely on. They can talk to Charlotte, who runs our platform. Or one of our associates. We try to provide them with a lot of resources to help them get things done.

Kate 21:36
That’s great. I think the founders listening they’re always looking for VCs. They really enjoy these episodes, where we kind of showcase a VC and the founding partner and the thesis behind it. And when you look for an investment, it’s very helpful for them. For those listening, how do they find out more information? If you could share your URL where you are if they want to follow you.

John Frankel 22:02
So our website is ffvc.com. Our newsletter is on there, so you can link and sign up to that. If people are looking for jobs at our portfolio companies, you can also access that off our website. I’m on Twitter, John underscore Frankel and you follow my nonsense there. From our newsletter, you’ll see there are events and other things that we host that people can attend and be part of.

Kate 22:28
That’s great. This was really interesting to hear your take on the market and what you’re excited about and to walk us through the peaks and valleys of the ecosystem. Thank you. It was really helpful and interesting.

John Frankel 22:44
Not at all. Thank you for your time. And yeah, I mean, look, I’m a VC. You’ve got to be optimistic. We have long periods of not knowing what’s going on with companies. And we live the ups and downs with our CEOs. But yeah, I generally have an optimistic view on life. I think it’s the only way to live.

Kate 23:06
It came through, and it was very refreshing. So thank you very much. Thank you for your time.