- JJ Kasper
JJ Kasper, Will Bachman
Will Bachman 00:01
Hello, and welcome to Unleashed show that explores how to thrive as an independent professional. I’m your host will Bachman. And I’m pleased to be here today with JJ Kasper, who is a McKinsey alum and the founder of a venture capital firm blue collective. JJ, welcome to the show. All right, thank you. So JJ, I, of course, want to explore your journey and understand some of your you know about what your firm does and the type of investments you make. But first, I wanted to ask you some quick, rapid fire questions to help us build a primer about venture capital. So some quick questions here, you can just give a two or three sentence response. All right. All right. So what’s the difference between VC and private equity?
JJ Kasper 00:47
Ah, technically private or technically venture capital is private equity, if you wanted to, you know, have the dictionary definition, it is private equity. The way that people use it, though, colloquially, the difference is venture capital is always minority positions. And private equity typically, although not always, is going to be controlled positions are on a path to control, and bigger chunks of venture capital investors would take.
Will Bachman 01:18
So private equity be the umbrella term, just meaning it’s a privately owned company, as opposed to a publicly owned company, and its investors being as opposed to just the founder, owning the company.
JJ Kasper 01:30
Right? And if you wanted to get really pedantic, you’d say it’s the asset you’re buying is in the private market. But yes,
Will Bachman 01:37
yes. Okay, in terms of some people will talk about different aspects of the private equity market, like, oh, the lower mid market, the mid market. So it sounds like there’s a spectrum and VC is one, one of those slices. Is that fair to say?
JJ Kasper 01:56
Yeah, and I would say V’s relative to the designations of like, Lower Mid market, mid market, and, and everyone defines those very differently, those would typically those would typically be used to break apart the private equity. And then I’m using it in the sort of the way we typically say private equity versus VC. And so VC, though, is a piece of private equity, that is really reserved for companies from inception to something, some sort of exit event that are growing extremely, extremely fast. And so because the owners that make it, I’m saying that it’s because the mid market thing is more referring to the size of the company, whereas venture capital sort of a carve out for, in essence, almost the stage of the company and the the quality of the growth.
Will Bachman 02:49
How do venture capitalists make money?
JJ Kasper 02:53
Oh, God, we don’t for a very long time, at least when you start a firm like me. But where are you? Where you do make money over time, it’s the same way, folks in the you know, private equity world bank money as you make money through management fees that your investors pay you to do your job. And then you get paid also on the success of your decisions, your investment decisions in carry, when companies exit and return investment profits.
Will Bachman 03:24
Okay, so you’re it’s not just the exit price of the asset when you sell it, but you also do get a percentage of the the assets under management, if you will, or the
JJ Kasper 03:35
correct. That’s that’s, that’s right. That’s the typical model. And I would tell you, as a maybe philosophical person I have the model is fantastic. So long as it’s working correctly, and I think we certainly are, but I think that private equity folks, venture capitalist should be most incentivized by the carry the profits on the back end. And frankly, investors into these funds should demand that what happens often, though, with bigger firms is that dynamic gets flipped, right? You reach a certain AUM, where you are making more money than God would know what to do with from the management fee. And that, of course, I think takes your mind off of the success fee, right?
Will Bachman 04:18
And what’s the typical management fee percentage is 2%, or some others?
JJ Kasper 04:22
Yep, it’s still not the same. There’s some there’s probably more variety in venture capital than the broader private equity world in both directions. So you’ll see sometimes early firms that’ll have a lower management fee, you know, because they’re trying to attract investors, then again, actually, if you’re like us, we actually have a higher math and see, although it’s all front loaded, because we look at it as we are a very small firm, and we pay ourselves a pittance. And we want to make sure we do a good job and then we actually taper off our management fee but there’s a there’s a bit more variety of venture capital I’d say you see anywhere from one and a half to two and a half more often. And then private equity tends to be a little bit more centered around to
Will Bachman 05:07
Sebastian Mallaby has a fantastic new book, The Power Law came out earlier this year on the history of venture capital. Other than the power law, are there any other books on venture capital, the history of it, greatest players, any other books that you recommend on on the industry?
JJ Kasper 05:27
There is actually and I would say maybe as a side note, I have some I believe in a practitioner in this industry for seven years, I have some issues with the Mallaby assessment, maybe more around the implications, but a great book, although it’s it’s quite dry and boring, but is Vc, an American history? It’s the only book I would actually recommend in VC. It’s by a guy named Tom Nicholas, I think he’s a Harvard guy, I’m not entirely sure. That’s not reason to recommend it. But it’s actually about the thesis is that venture capital and private equity, grew up out of the whaling industry, in the 1700s. And what’s interesting about it, and you can, you know, agree or disagree or not care at all. But what’s interesting, though, is he actually has transcripts slash photos of the original contractual agreements from the whaling times. And it is, strangely enough, it’s very close, but to 20 model, they paid a management fee that equated to something that sort of would approximate that 2%. And they got paid a success fee, that was about 20% of the profits that came back from Unleashed. And if you were a whaler, you would send out 100 ships, I might have been number 100 ships in a year, you expected 20 of them to return with people alive, you expected 10 of those to actually have caught up giant whale where you made a ton of money. So actually, even from the sort of investor side, the model was sent as a portfolio model with where you expected a large number of losses. And of course, the whaling it’s like dead bodies, etc. But it’s a very, it’s a really interesting, you wouldn’t think that’s very interesting, but he really gets into it. So I would recommend that book, if you’re disinterested in the history of this.
Will Bachman 07:16
That is good for the whaling investors not so good for the whalers. But I have heard that comparison before I have the whaling industry, which is pretty cool. How do venture capitalists compete with one another to get access to deals? Because you’re obviously investing in the companies and competing to find companies, but then you’re also competing to be accepted? Right?
JJ Kasper 07:44
Yes. I would make a distinction here, I would say the the modes of competition, or how firms compete, I would say is very different between really early stage venture capital firms like us. So meaning like day 02, year two, versus the later stage, folks, the folks that you will typically be saying in the newspapers and stuff like the Andreessen and the sequoias, etc, I’d say the model, how they compete is actually quite different. Getting the later stage side, which tends to be what is mindshare? For most people in the industry and what you see in the newspapers, I would say, and I, I’ll add the adjective, your, unfortunately, I think it’s become a lot like the a&r business, in the records industry. In that, it comes down to a lot of which firm has sort of the biggest megaphone, and can hype up their, you know, founders and companies so that they can get the next set of investors interested. And also, who’s got the biggest wallet, right. So you can continue to fund where a company sort of misses a step or otherwise you can actually fund and paper over the next round, and so on, so forth. So there’s been this, because of that, to this, and then this, for a lot of reasons, there’s been this real, you can see it where the firms that say only like 10 years ago, might have had 200 300 400 under management now we’re approaching one five 10 billion 2001. Andreessen is now 23 billion or something under management. He’s crazy numbers. So he’s a big platform play, where we compete, it’s very different. That’s why it was one reason why we like early stage, really, really early stage and we invest often in most of our companies when investment or pre revenue. We like it because at the end of the day, it just comes down to your network, like who you know, and who you’re getting to know. And the, in the early days, too, I’d say the, quote, expertise you can bring to bear but in the early days, the expertise is really just expertise about building company in the early days, it’s not a industry expertise is less important in the early days, then network connections and understanding what that early journey looks like. So whether you’re a cowboy boots company, like we’ve got, or a bio 3d printing company, the first two years of both those companies look pretty similar, right? Like the founder, what they were going through was super, super similar. And what we bring to bear is, we’ve been through that before ourselves. And now we’ve seen it, you know, 100 plus times. And so we have at least helped the guide a little bit and coach, like, don’t do this, do do this, so on and so forth.
Will Bachman 10:31
So the larger sort of later stage firms, they’re competing on the megaphone, or how much publicity the
JJ Kasper 10:37
brand platform. Yep.
Will Bachman 10:40
And we say platform, in addition to the PR, I imagine there’s also being able to provide services or advice on helping find talent or or counsel from seasoned veterans or,
JJ Kasper 10:54
Yep, I’ll give you a hot take here. I don’t know if anyone your audiences will have the perspective disagree with as they do, I’m happy to have a chat about it and be corrected too. But I’ll give you my hot take is. So yes, by platform, it does, it does mean that I also just mean a bunch of capital, right, like a bigger Wallet. So you can fund a bigger and bigger round. But the piece that is that we often gets called our industry value add. It’s a lock. It’s in many ways. Also for the VCs, it’s a copy of what the private equity folks have done forever, right. And I said earlier, I started define private equity is either as sort of a big stake slash or control stick, right, you have more control over the company, more ownership, and therefore more influence. And so the VCs have copied that. And my hot take is, I actually think most of that is irrelevant, and a waste of money. And I don’t say that because I’m, I’m sitting here at early stage, I don’t deal with it. I say that, because when I talk to our entrepreneurs that are now later stage and have raised from big firms, they don’t give a stitch for that stuff. Right? Like great entrepreneurs do not need that they will fit. In fact, I remember chatting with one of our guys who’s got a 250 million revenue company after five years, and he’s living high on the hog. He’s got a great business. And he’s got an investor that does a bunch of this value that stuff like, you know, forums and playbooks and et cetera, et cetera. And I said to him something like, you know, how was the did you go to that CEO forum or this or that you said, What I didn’t know that was happening, I don’t have time for that shit. So a lot of that actually comes from big institutional LPs. So it’s very bizarre is there’s a weird part of the business model of VC that’s almost been trashed. It’s been transplanted and forced on the season. But if you’ve got a big wallet, you just say, let’s sort of cater to that and do it. I’m not sure the entrepreneurs really care. I’m not saying that isn’t helpful in certain places, they’re probably folks that do it very well. I think in general, though, it’s just a waste of time. And it’s a, it’s a vanity metric for talking to LPs.
Will Bachman 13:00
Walk me through these different stages of investment, like what they mean in practice. So Angel precede seed series, A, etcetera, I’m probably missing some what, walk me through these different stages.
JJ Kasper 13:17
Yeah, and I’ll give you sort of the cloud, I’ll give you my definition. But sort of the classical definition, once you realize when you’re in this world is people often you know, change the terms and use what they want. But and the best way to think about this also, too, is not so much in terms of the name of the round, but actually the stage of the company, right? That’s more determinative than gives it a seed round. And so when you first start your company, you got to fund it somehow. And a lot of great entrepreneurs actually do fund it on credit cards, or with some sort of, you know, personal savings or otherwise. And frankly, we actually liked that, as investors seeing that and seeing that they did it and put some money at risk. But that first round is usually called that at the angel round, or the friends and family round. And that’s typically happening, typically, pre product, so pre launch pre product, pre MVP, whatever you want to call it, right? So that’s where it’s, you know, founder or two founders a pitch deck and a dog. And I always tell people to you hear from entrepreneurs, a lot of times I don’t have friends and family that have wealth, and I always say, I think it’s worth more than I don’t either. I always say I think it’s more a metaphor, right? Like that first round, they not 99% of the investments in you write since they trust you. That’s why friends and family, right because your friends, family, hopefully trust you. But there are other people that do too. Sending. That’s the that’s the first one that’s usually pre product, then you got a product and you are beta testing it, you’re making it better. You’re getting ready to do to get into monitor, monetizing whatever that product is, that’s where you typically raised what gets called now a precede round. That’s sort of that next stage now that’s also where sometimes but not always, institutional investors like myself, so The people that do it as soon BC as a job start to get involved, whereas that first one, that’s why it’s called Angel friends with them, we usually as individuals, then you have seed round is, that’s typically where this has changed over the last few years too. But I’d say seed is then typically, where you’re actually in market, you’ve got a little bit of data a little bit of traction, you can actually show how things are going in terms of numbers. And that’s going to be your seed round. And what happens in it. The one after that, then it’s called the Series A, and that’s the, that’s the big that’s the big one kind of always has been historically, where it’s sort of like we’re a boy becomes a man or a girl becomes a woman, like that’s the big one. And that one is the term. It’s used in this industry, which always confused me in the early days, but I sort of get it now is what’s called product market fit, right? So you’ve demonstrated at that point work, let’s hope you have, the investors have determined that you’ve demonstrated that there are there is a significant segment of people or businesses whomever willing to pay for your product, right? That’s the one to where people say, I’m gonna throw some fuel on the fire or whatever it all those metaphors. And so after that, then B, C, D, E, that’s all just scaling. With one one thing that’s gotten missed over the years, like if you go back to what VCs used to write 10 years ago, and this wasn’t like all the blogosphere stuff today, but like people actually wrote in letters to their investors or otherwise, or health folks, in the old days, since he talked about investing. One thing is not missed, though, it’s actually Series B and beyond also with Stark was was often about starting to craft a path to profitability that’s gotten lost a little bit in the last, say, five to 10 years of VC here in the States. But you know, that’s how it’s set up. And so sometimes, you know, you might see a Series F A series G. And that’s just a company continuing to raise in the private markets, as they see all the thing have to do.
Will Bachman 16:52
Roughly, is their thumb rolls around kind of how much money we’re talking about at each stage. Yep,
JJ Kasper 16:58
which also shifts over time. So I, as I said, a little bit in the seven years, but I tell you, this has shifted from us even in my time, but yeah, so I’d say the angel friends and family, if there is one, sometimes there’s not. But it’s usually going to be what’s called 250 to 500k that precede round now, it’s going to be anywhere from 500k to maybe at the high end, one and a half million, the seed round is going to probably be two to four. And then that a round, there’s less, I’d say there’s more variability there. But that may be 10 million plus 10, to 20, to maybe as much as 30 million. And the rounds after that can get ginormously bigger. But that’s based more on category and business needs.
Will Bachman 17:41
And how does it normally work at called the precede round, or you might start to get involved with a seed round. That is that like one investors, those typically multiple investors coming together,
JJ Kasper 17:57
multiple. And so I take typically multiple, it should be multiple, that’s the best answer for the entrepreneur. And for the investor, I would go as far as to say we, we have made that mistake in our past of taking a bigger chunk of an early round than we should have. And it’s a bad decision. And so it’s actually at this point, now it’s a you know, that’s for us to invest, it’s, you know, we might take, we might have the biggest tech in the round, but we need some other people at the table. And that’s, as I said, we think that’s important for the entrepreneur for the business, like they need to hear different points of you, not just from us. And they need to also demonstrate that they can raise from folks other than just us start building relationships. So that’s those early rounds. Typically, it’s a, you called a party round in private equity. But that’s actually that’s the ideal round. As you get later states there. It also still is like a, you know, a bunch of different people. But at that point, though, you find the lead investor in each round, which is the, you know, going to be the investor that is typically writing the biggest check and also setting the terms for the round, you’ll typically find in later stage. So A, B, C, so on and so forth, that there is one or two really big investors that are gonna take 90% around or something like that.
Will Bachman 19:15
So what’s the minimum investment for a VC fund typically, and we can talk about the an early stage fund like yours.
JJ Kasper 19:24
I would say there, it’s a huge range, and it’s more than anything else. This depends on the size of the fund, you’re deploying. Right. And so So within that, that’s what I mean by that is, and it differs by stage to right. So if you’re participating at ABCD, probably gonna write bigger checks and folks to do what we do, although sometimes not necessarily. But I would tell you the there’s an upper limit, maybe it’s the way to put it, there is an upper limit to how much a VC really can be investing per round, any individual VC, that sometimes MTCs violate that, I think too bad outcome, but there’s sort of an upper limit. So if I go back to our example, in the seed rounds that often are, let’s say, two to 4 million, we might invest one to 2 million, we would never invest, let’s say, if it’s a $3 million round, we would never invest more than half the round, doesn’t matter what our ownership is, we would never take more than 1.5. And again, I get back to the, you know, we want other people around the table, and all the other reasons why we like that. What you see sometimes, though, is, and so that’s dictated, though, our numbers are actually dictated by the size of the font that we’re deploying. And also what we think the market can actually the company can actually bear at any given point. But, but a VC, but so there’s an upper limit, I think there’s a bit on the other side, you know, there’s some check that’s too small for entrepreneur, but you see a lot of great early firms. I mean, we’ve, we started out with a small first fund, and we were writing checks in the seed round of at Max 500k, when we started out, right. So you could go lower, but there is some number which you really shouldn’t be going higher, it starts to not work.
Will Bachman 21:08
So in the lower side, would you sit, you know, for is it like 100k, or something would be it doesn’t make sense for you to get all wrapped up and spend time on something, if it’s less than a certain number,
JJ Kasper 21:18
I get, I think, if you’re talking about from the shoes of a VC investor, I think it really does come down to how big the fund is, right? I’ve seen early like when often called emerging, like what what we maybe still are an emerging VC, or micro VC with a $3 million, first one. And they might be writing a check for 50k, you know, in certain rounds, so be it right? From the perspective of the entrepreneur, obviously, their life is made easier if they can get bigger, fewer bigger checks, instead of many smaller ones. But you know, most early rounds turned into a bit of pass the half. So they’re happy to have, you know, a 50k. So as I say, I’ve seen VCs write very small checks when they’re just starting out, and they have a very small first fund, and they’re just trying to demonstrate that they can generate deal flow and invest in good founders and good companies. And on
Will Bachman 22:07
that topic, how much money does a VC need to begin investing?
JJ Kasper 22:15
Ah, as I said, I think you can get away with very little the, the, the, the, the factor weighing in the direction of having more though, is going to come down. Like when you start your own VC firm like we did, you also aren’t entrepreneurs. So then it comes down to also do you have the savings, wealth, etc, to, you know, invest in yourself and the intestinal fortitude to take a lower salary for some number of years and to get off the ground. But you can do you can do the simple math on this too, though, just to give your any of your listeners a sense of this. The management fee is typically 2% on capital. So you know, if you’ve got a $2 million fund, what are you doing, you’re doing 40, you’re making 40,000 in management fee a year, right? So it’s not a lot to live on. And you probably also have other expenses, too, and a whole bunch of stuff. So you start to do the math, right, like our first fund was, was $10 million. That was enough to support one partner at a much reduced salary and one associate.
Will Bachman 23:23
And you probably have some legal fees and bookkeeping fees and accounting fees and contracts. What are the different structures for a VC fund?
JJ Kasper 23:35
Great question. There really is. Well, I will tell you there’s there is one, one overwhelming option, which is the same structure used in the broader private equity world, which is a limited partnership. Yes, I think that up a set of LPs and then a GP entity attached the general partner that directs the decisions and you have a management company also attached. That’s set up for a variety of reasons. I don’t need to go through that, or I can at some later date. But there’s there’s a lot of reasons for that. Now, I would tell you, that’s I would wager 95 plus percent of VC firms are set up that way. Frankly, maybe it’s 99%. There are there are maybe two variations on it. One has emerged recently, although it’s really nothing new, which people will call sort of a rolling fund. That’s actually still often set up legally like an LP but it has different they’ll take capital over time per deal and sometimes won’t be set up as a limited partnership where they’re just actually each individual deal is packaged separately as a legal matter. And then there is a the other variation which you really don’t see a lot in DC i I’m actually not sure I know of any pure VCs that have this structure. They may exist, but they know who they are. I know Some private equity firms have this structure, which is the Evergreen fund. So it’s not a, from a legal perspective, it’s very similar to the LP GP structure, but it’s the the, the term of the vehicle less per in perpetuity, right. So profits don’t get distributed, they they can be reinvested over and over again, you know, to the end of time, so to speak. And so that’s a slightly different model, I would say, it’d be really cool to see some some creative variation in the VC world, we actually have talked about it a bunch of times, on our end, we have actually a thought or what we might evolve to over the next five years. And we’ve done some interesting stuff internally, too, as to how we share equity. But there’s very little, I may just not be aware of it too. But I see very little innovation in VC, you see a lot VC actually, as I said before, on most stuff, VC just basically takes what private equity, you know, matured over the last 4050 years that buy out guys and stuff and just applies it to their own when, in a lot of ways it’s not applicable or not right.
Will Bachman 26:01
Some people might ask, Hey, why does the business owner take venture capital money? Why not get a bank loan? What would what, why don’t get people get loans?
JJ Kasper 26:13
Ah, some do and, and some was some do, and some. Some of our companies that take venture capital from us do end up taking loans. And we encourage that actually, for a whole bunch of different business models and categories. And it’s great for us as early stage investors where you start taking on debt and being strategic about debt sooner rather than later because it’s non diluted for us non dilutive for them non dilutive for their employees, it’s a great, a great win. But I think what you’re asking them is maybe more so like the, the choice between venture capital and other types of financing, I sort of interpret as more of a question. And I would say to you, I actually think at the early stage, this is when, frankly, when I say when we have gotten investment decisions wrong, and I would look more generally the industry when the scene gets investment decisions wrong in the early stage, I actually think it’s a it’s it’s a it’s a category error. It’s a putting venture capital into a business, that shouldn’t take venture capital, right? Because venture capital is a, I always tell entrepreneurs, it’s a it’s a scalpel. Right. And it’s like it’s almost a crude scalp. It is it is meant for the smallest segment of businesses, it’s businesses that can grow crazy, unreasonably extremely, like, you know, you look like you’re the at the NASA Space Camp, and you’re under seven G’s and you’re facing, that’s the type of growth if your company can achieve that type of growth. You might be right for venture capital might be right for you. Like, if that’s possible, then venture capital might be right for you. That implies also a ton of risk, right? So I tell I tell all the folks to because we’re trying actually a really simple offense to try to figure out that category error. Is this a business that could use venture capital and be successful? Or is it is it not, it’s actually might be a good business, but they shouldn’t be raising venture capital, right. And I always tell entrepreneurs, it’s, I made the stats wrong, I don’t know what code and everything else, but it’s like every year in the US is about 500,000 to 600,000, small businesses started and relative to our population, and that’s a huge numbers, awesome. All of that 500 600,000, every year less than 1% raise venture capital, capital V, capital C, venture capital, of the less than 1%, that raised venture capital every year 99% of those companies fail. Right. So it’s a it’s a scalpel, where you can very easily hit an artery. And so when I say to folks who is like, now again, when you’re early debt might not be available to you. But you can still go the route of raising from individuals, and you still call an angel round, but you actually build a giant business, without equity financing, or with equity financing, where you raise it from individuals and angels, actually, through the lifetime of what you do. And I invested early in a company called Sir Kensington’s, which I catch it was early, and they did bring in private equity, like financial sponsors later in their life. But the early days, almost the first five, six years, we’ve all individuals and family offices, and that’s great. And it wasn’t a ton of equity capital, and they created a huge business and a great brand. And so you don’t have to have venture capital to be a big business. But if you have a if you want to have a big business in a shorter amount of time, venture capital might be a thing to consider. But you have to understand also, you’re taking on a tremendous amount of risk.
Will Bachman 29:43
How much equity do you think is like the right amount for founders and for key employees to hold of sort of the archetype of a VC funded company? Where does that typically land
JJ Kasper 30:00
I’m at the highest level, I’d say more, not less. And we want that to be even over the lifetime of a company. Although everyone’s won’t even see it early stage like he wants to the founder the team to have, they should have the lion’s share of the company more, not less. I always tell entrepreneurs also, even with employees, early employees later employees more, not less. That would be my that’s my own philosophy as their respective bluetooh. And the way we share putting, but everyone makes it on call, I’ll tell you look as you go. And there’s, there’s a decent, I’d say maybe somewhat decent on transparency in the industry, where people will report on, you know, by stage by role, what are sort of the ranges of equity given to different key employees and otherwise, but at the end of the day, it does come down to the founder and their philosophy on this. And, and also, obviously, the negotiations with that employee, and it’s a trade off between cash or equity. And but in the early days, we just say, my comment also often to our entrepreneurs, and it’s similar, again, to our own firm, is, if you’ve got an employee in the early days, first couple of years, who is only going to work for you for some crazy hive, cash salary, they are not a good fit, right. It’s just that’s a that’s a disqualify thing right out of the gate. It were a founder, too, we see this sometimes where you see a founder in the first two years, and they want to pay themselves a CEO 200k or 250 care. So your audience may listen and go, Oh, my God that’s hidden. It’s been like, it’s like, that’s crazy. That’s insane. And you see that often, actually, people coming out of the corporate world that did make a lot of money, and they’re like, holy crap, I gotta live, I got kids, and so I get it. But in the early days, the founder, the team that should be motivated by the equity, and they should have more, not less.
Will Bachman 31:53
Let’s talk about your firm. So tell me a little history of blue collective and about your journey?
JJ Kasper 32:04
Well, I’ll start with the firm. We started this almost seven years ago. It my, one of the other partners, and I started the firm together, he and I were, were and our longtime friends. And also we had been calling we actually met when we were both partners at McKinsey and Company. He is one of my rare friends that I want to work with, in professional setting, and I enjoy working with, and I have a whole list of friends I would never like do business with even if I love them, right? So he fits in the other group. He and I were he might describe this differently, but both had a professional midlife crisis in the sense that we’d sort of done a bunch of stuff. And we’re thinking, what do we do next? We actually don’t Genesis, this is only he called me up and said, Let’s do something together. Let’s build a business together. And so yeah, absolutely. So we’re kind of going through what that might be thinking about different ideas. And then his wife, one day is extremely successful. And wiser than all of us, she said, I sort of off the cuff, but she was like, you know, you guys have been angel investing for a while and you really like that. Why don’t you do that? We had, again, all we had been doing was angel investment. We had never been professional investors. He and I both between two of us are each individually have run businesses and started businesses and been advisors to businesses to the consulting stuff. And I was a lawyer before that. So we had a bit of a random walk to get where we were. And she sort of said, you know, sure her comment was like, you enjoy it, and it’ll be hard, right? Like, it’s something new. And I guess I was like, 35, or something time and I was like, that does sound. It does sound hard. And for what it’s worth, I was not particularly enthused about the idea, most of my career to that point had been working with LBO firms, some small private equity firms, mid market firms, big firms, hedge funds, etc, some VC firms. And while I, while I absolutely, I still am very close friends with many of my actors, you know, the people I my clients, I sort of said, I don’t know, like, that doesn’t seem like the industry for me. And my comment to just amongst friends here, I said, I tend to look at all these industries that are assholes. And Brian, who’s the guy started this with the way he convinced me to throw the word up, as he said, All right here because I like I like the challenge. He said, Why don’t you just think about it like this? We’ll do this together. It’ll be fun, but we’ll be what we will be doing over the next 1020 30 years. We will be testing the following hypothesis. Does does investing turn you into an asshole? Or are assholes attracted to investing? I still remember that. That was. That was in a weird way. Kind of a funny moment. I Yeah, we got to talk about so we built this and about the firm, we do. Super, super, super early stage venture investing. So back when I was talking through the stages we do, I’ll tie it to the business days, we do typically pre revenue, sometimes pre product companies. And if they got revenue, it’s minimal revenue. By virtue of that, we are typically investing in what gets called the precede round. Sometimes, though, it gets called the friends and family round when people look at it in hindsight, and will also invest in the seed round, but we like earlier, earlier is better for us, right? Two thirds of our investments are happening that precede earlier. And when we started this two, we said this was somewhat naively but given our angel investing time, which I’m sure many of the people listening to this and in your network, have this happen to them, which is having worked in the professional services role with lots and lots of people, young people, older people, etc, clients and consultants, what started to happen as you got more senior in that world is people would come to you and they’d say, Hey, you get an email and say, Hey, JJ, you know, it’s Joe, remember me, I was a BA or analyst on your team, you know, four years ago, I’m starting my own business now, would you take a look, and you would have a chat, and even half the time didn’t know what the heck the industry was your business, but at that point to the only a pitch deck, and so you made a decision based on it might have been a faulty memory, but your memory of that person and their competence and their grit and their resilience, all the stuff you thought matter, and and also trusting them. And so Brian, I had both been doing that. And we had been, I think, probably more lucky to not, but we’ve been somewhat successful doing that. So that when we started this, we just said, let’s do that, like, let’s make that real. Let’s try to make that systematic, and can you make systematic and so our model is super early stage into great founders where we can build a conviction that they have the potential to be a great entrepreneur. And we say always that kind of a pretty good idea doesn’t have to be great idea, which. So all that said, it has ended up being we’ve sort of realized this as we’ve gone, a strategy that again, everyone hearing that my say, oh, that sounds reasonable, and so on, so forth. How do you do that? So we have a whole way we do it and process now. And we get smarter this every year. But what we’ve realized over the years is the way we do it is very different than the way most VCs do it. I mean, you can. Sebastian Mallaby book is a great thing here. He does a lot of that book is about how the and I’m paraphrasing are such probably butchering what he says so apologies to him. But you know, part of the underlying theme in that is venture capital is about finding the most outrageous ideas. I guess if the interviews with Peter Thiel and Vinod postle, and all these folks, and yeah, you know, this is about you find the craziest idea ever, you give up a bunch of capital and a bunch of more capital. And, and it’s either, you know, it’s either it’s a moonshot, right, it’s either a Grand Slam, or it’s a total strike down right over and over again. And there is an element of that and what we do, but our again, maybe this is something that I talked to more than details, but we’ll do that later. Now. That is, our model is look for phenomenal people, not phenomenal ideas. Look for phenomenal people. Because at the end of the day, you find phenomenal people building these big giant businesses all the time that don’t that don’t look crazy in any way. Or maybe it is right how they operate. And all that’s, that’s what we’re looking for. We’re not looking for outlier. Outlier ideas. That’s, that’s the Sebastian Mallaby word. I think we are looking for outlier people. That’s the whole model.
Will Bachman 38:36
Okay. So you’re optimizing on talent. So tell me about your framework or your approach. Is it just a gestalt? Or do you have sort of, we have the seven categories we look at how do you think about, you know, gauging and evaluating the talent? If that since that’s such a critical piece of of the what you do?
JJ Kasper 39:02
Yeah. I’ll give you three. I’ll give you three answers to that. Because I will tell you the, the the answer is not so much. Here’s the list of ingredients, right. It’s more the process that matters. I am, I will, I will draw a comparison to but I’m not comparing our investment acumen at all to Warren Buffett, but it’s a little bit like the discussions around Warren Buffett and other great investors like that who are consistently good. I mean, we need to we’ve been really good so far. We need to do that over 34 years. So I’m not making that person just be super clear. But there’s always that discussion with him where it’s like, I know he just got he just gets lucky. Lucky, not really 50 years. Yes, just luck. And it’s funny too, because people will say that will say I mean what he says exactly what he does. You know he really looks at The book value, you know, he factors in growth a little bit, that’s kind of it and always pick and value, he literally will walk you through exactly what he does. And they go, You can’t do that consistently. And it’s like, no, no, you Thomas Keller could give you the recipe for what they receive famous dish, the caviar, whatever he gave you the recipe for that? I promise you, you couldn’t do it at home. Here’s my quick answer. Number one is, yes, there are criteria. So there is a list of ingredients. But I would say it’s not that far removed from what probably other VCs, at least claim are looking at a certain level of intelligence, certain type of intelligence, certain level of leadership, visionary grit, resilience all the above, we have a few particular things we do look for. Also, though, I do think sort of matter, we look for what we just got dilution sensitivity. We want people that understand that every round of capital they raise actually reduces the size of the price for them. And they’re really important to us that often is not important for other industries. So we have a couple list of things. Number two, we actually have a unique way we do it, how we do it, and all the former or current consultants on the line will understand this immediately. Our diligence process is primarily a series of case studies. Right? Meaning, what we’re trying to gauge is if we’re trying to figure out potential, and that’s really hard to figure out. So what we’re trying to figure out in a interview type scenario, which is a conversation to be clear, is how they think how they make decisions, right? How they make trade, all that type stuff. We’re trying to gauge that. And so what we do is the case is their business. And as we said, we’re investing early. So businesses, you know, Bill, that’s, that’s the subject of the case. So we’re asking them questions about that, right, which sometimes are forward looking, hey, I know you’re not launched yet. But how are you thinking about pricing? If their answer is no, no, that’s bad answer. If their answer is, it’s here, and here is the pricing. And then you say, but what about these other models? And they go not not doing that? That’s not a good answer. It’s like, it’s very similar to the case studies, we probably all went through to get a job with whatever firm we worked out or look at now. And then the third bit is it. It comes through discussion, right? So we have a, like probably many of the firm’s you all work out or used to work at it is a flat structure in blue. This is part of the fundamental values of who we are we crib very liberally from the McKinsey values, obligation to dissent, which we translate as everyone has a voice. Not everyone has a decision. But we don’t make a decision with every voice. And so what you do by virtue of that is you’re getting everyone’s read, right? And we’re getting everyone’s read on that person, right? So, you know, we’re talking through their commercial acumen. And you’re getting every one person’s point of view? Well, I’m not sure it’s that great. Well, why do you say that? Well, because, you know, he told us that story about that time. And he did this and that, I think it’s actually pretty good. Here’s what I saw this, I observed this, I said, that’s the, that’s how we do it. Like, it doesn’t always work, or just like any other VC, we got a lot that go to zero. But where it works, it works really well. And it allows us to find people early, who build these gigantic businesses and people also that tend to get passed over by every other investor. And we love that. Yep. Oh, that’s, that’s the not short answer. But that’s, that’s the best answer I can give you in a short amount of time.
Will Bachman 43:25
And how are people getting into your funnel? Are you you know, relying on your network to refer people to D? Are people just coming in cold on your website? And you know, asking for money? Or do you have like run contests? Or how are you getting the discussions with the folks?
JJ Kasper 43:46
Um, it is the first it’s mostly the first two things you said so I’d say it’s, it’s our network, which is constantly under construction, right? So like we live and die by the network that we’ve got, we live and die by whether or not that can keep growing so at the same time to be like one of the one of the there’s a lot of empathy learned from the McKinsey days and consulting days and even operating days and even the lawyer days all that in order to start to understand what it meant to be an investor. One asset though, from the McKinsey day giant network, but which I just a bunch of friends all around the world, different industries fantastic. That was a huge help, but you can’t you can’t get lazy on that or you can’t take that for granted. And so it’s even how we trained our associates to like you’ve got to be continually building that because a lot of our model two is finding people before they even know they’re gonna be an entrepreneur. And those are the best for it so yeah, I’ve met you six months ago at some event I you know, through a variety of things I’m I’m starting my own thing when to reach out you guys seem friendly and good perspex center so it’s network as we’ve gone on seven years in it is also Brown, in the sense of like, we get me Have more cold emails than we can handle at this point. Also, you know, referrals, we get emails from people that we passed on ages ago to saying, you know, I know you’ve passed on the first one, here’s in second or you passed on me, but I like the chat. And here’s this other entrepreneur I’m friends with, would you mind talking with them? And our model is always be accessible. So we always have a conversation. We certainly only invest in less than 1% of the companies. But we try to be helpful if we can. And I tell you, though, what we don’t do is some of this where you are going towards the end. And maybe we should I actually think this is probably our failing, we are really bad. I’ve put this way. Will you are my first podcast ever to podcasts. I don’t think I’m very good at podcasts. But I don’t do these in the VC world, though this is par for the course people doing podcasts are doing video interviews they’re doing the Twitter feed is all you know, spending all day on Twitter, you see the comments from big VC is about how sourcing is is 99%. Twitter, we barely touch it. I mean, we’ve actually debated as a firm many times do we just actually just say we’re not going to touch at all, and we try start and stop. So we don’t really get much deal flow at all through that we are a we stay off, we invest in operator entrepreneurs. And we also have stayed off the radar. As I said, I think that’s probably a failing, the longer we do this. And we really should get our name out there. But we we struggle with that we’re not good at it. And we we struggle to figure out how to do that in accordance with our own values and principles.
Will Bachman 46:32
How do you kind of it sounds like you’ve built quite a large network. I’m curious, you know, kind of mechanically, how you deal with that? Do you have like a CRM system? Do you have an approach where like your higher value contacts, you try to touch base with them every, you know, twice a year, reach out to them? Give them a call something? How do you kind of manage that network of relationships that you’ve built up?
JJ Kasper 46:59
Yeah, I, um, as a firm, we don’t do anything systematically meaning at the entity level. And we’ve talked about that in the past, it may be overtime, we do start to do that at the individual level, but there is an expectation that we are each doing, however we see fit. And I tell you different people on the team have different strategies for this in terms of how they do it. And some people are less driven and this and that, but I would, but the outcome is probably the same, which is about what you’re saying, which is you, there’s sort of high priority, folks, you’re touching base with frequently, others maybe less frequently, et cetera, so on and so forth. So everyone’s sort of doing that, that’s an expectation, if you’re on their team, too, I would tell you the underlying philosophy, though, which again, I know, this may sound sort of like touchy feely or something is you gotta come friends with people. So I always I try not even use the word networking on like, internally, because it just feels artificial. To me. It’s just making friends, right and building relationships. And if you get to know people and actually know them, and who they are, what makes them tick, how many kids that got, are they married or divorced, all that sort of stuff. It’s a lot easier to do, who’s my high priority folks versus not. And that’ll be a merge also of sort of personal and professional, which tends to be the most valuable. So any, I don’t have a great life hack tip, tip for you guys there. As I said, some people in team are very illustrative and others not LinkedIn, personal CRMs. But me personally, I I, it’s a bit more free flow for me. And I sort of know who I need to. Then the reason I bring up the friend point is, I think about his friends. It’s like, Oh, my God, I haven’t caught up with haven’t caught up with Jeremy in a while. Right? Wonder what’s going on in his life. And it turns out, Jeremy also refer to those deals in this net, but it’s for me, I tried to make it. So the motivator is, I like this person, I want to spend time with him.
Will Bachman 48:52
Talk to me about the profile of some of the founders you’ve invested in are these people who are coming out of grad school and had some idea or consultants or bankers or corporate people or very young people, what are what are some of the maybe maybe there’s just a wide, very heterogenous group, but give me give me some examples of what are the different profiles?
JJ Kasper 49:19
I’ll give you some examples. I would say it is extremely varied. It’s extremely heterogeneous. And that’s a good thing. Because as best I can, it’s a decent marker to us that we are evaluating things on their merits as opposed to other criteria. I would say I’ll give you some examples, right? We’ve got a guy who was a C suite executive at a fortune, like a fortune 100 company, giant company and doing that for nearly 30 years. So Ah, a bit older too, but always had an entrepreneurial streak and built something and one of his companies are built early sort of version of something one of his companies and said, you know, this, this actually has applicability beyond and was able to spin out, obviously, with their permission, everything else and teamed up with a younger guy, but the two of them, one was actually a consultant. So, I get Gary is the fellow I’m talking about in Boston was consultant, Gary was his client, they spun out and created this company called uncork. And it’s a massive company now, hundreds and hundreds of millions of revenue and not some, you know, say crazy, silly valuation, but I think deserved and growing crazy, too, and it’s a no code enterprise app development platform. And I mentioned him they’ve had success. It’s the so maybe the profile there is sort of the the older former successful corporate person profile in early stage VC, I will tell you that profile is that is persona non grata, right like that is anyone listen is trying to do a startup when you get older. It is harder for a bunch of personal reasons to but it’s, it’s hard to do in DC, you’re not given time a day. In fact, for the first few years of that company’s existence, Gary had when you walked into Uncorks offices on the wall, he saw a logo, that standard startup architecture. And then around it, though, floor to ceiling he had had on there all these verbatim quotes. And when you got closer, you would read them it was all of the knows that they got in the early days fundraising, and the one front and center, I won’t name the VC firm, but it’s one of the ones you everyone would be familiar with. From their Managing Partner, it said, You’re too old. That’s one profile. We got a bunch of young people too. We’ve got or younger people, maybe we’ve got these two ladies running a company called laminata. It’s a podcast company, so they make content. And they started only two and a half, three years ago. One of the ladies is her name’s Jess, Her background was a TFA for a really long time. And she’s through a random set of events got involved, as the executive producer of pod save America at some point in her life. And then she teamed up with a friend of hers who isn’t creative, right? Like a playwright and artists, etc. And has run a nonprofit for much years at Arts nonprofit. They teamed up to create content, they got this great business and the economics are fantastic. And they’re growing super fast. And that also that was that when and when she went off the rails the initial round, no one took her seriously right? What is someone who did TFA nobody ever liked. So we love that. So they’re great. I will tell you. And we’ve got really young folks just coming out of undergrad and got a company called Green Project technologies. That guy worked at Goldman for one year. He He’s got more energy than than anyone. And he’s building a platform for SMB carbon emission monitoring, and then broader sort of sustainability methods, say like recipes. And so he’s a little bit more the classic, young person frenetic energy, etc. Although at the same time, I’d say at the early stage, you’ve come you’re coming out of a professional services firm tends to be the case, early stage VC say, Well, I don’t know, Goldman, like, what do you know about anything? But yeah, so it’s, it’s a, it’s a broad range, I’d say to just do the final funny comment. We, we have in our we have in our whenever we raise a fund, we have, in our perspective, a page that says here’s the diversity of the portfolio, we we defined that more broadly than just color your skin or who you’re sleeping with, or this and that that’s on there. But like, it’s, it’s broad. Yeah, we got parents, and we got people over the age of 50, and this and that. And we’ve had that in there forever. And it speaks to the heterogeneity of the founders. And we’ve got like 40% female founders and all this. And I had this funny conversation a few years back, we raised in our second fund. It was good conversation. I chat with a guy for about two hours. And then he’s he’s looking at that page. He said, Man, you really didn’t focus on this very much. And so yeah, like it’s part of our model. We’re looking for people with great talent and skills and potential. And he said, Well, this is amazing. The DDI metrics are really off the off the charts, and that’s amazing. And he said, What do you do to optimize for this? I have never been asked that question before. And I sort of paused and I said, we don’t do anything. Really though. We don’t do anything. And maybe we should, but we don’t. And we get these great, you know, outcomes anyhow, at least from that dimension. And, and I said, Look, if we didn’t have a portfolio where the founder profiles were varied, we would probably be, we would probably be worried we got a ship portfolio, we’d be scratching our heads going, what the hell’s wrong with our own network and our own point of view, that are zeroed in on whatever people that used to play lacrosse at DePaul or something like that? What are we doing? Right? So, but as I said, that’s not something you’re optimizing for. But what ends up happening is when you’re looking for founders out in the world that are overlooked and undervalued by other investors, by virtue of that you’re going to end up with a very diverse portfolio are a very diverse set of founder backgrounds and profiles, and rightfully so. And we hope there’s a commonality around skill sets and potential.
Will Bachman 55:44
So, JJ, if there’s any overlooked and undervalued founders out there, or someone who knows someone who’s potentially an overlooked and undervalued investor, how would people get in touch with you? Or where would you point them online? Your website or any other?
JJ Kasper 56:02
email anyone that accompany Alright, email us?
Will Bachman 56:06
You want to give a website? Or how should people find ya WWE
JJ Kasper 56:08
dot blue collective.com You can email me at Jay Jay Kasper, that’s k s p er. It’s like the gospel with a K at Blue collective.com. You can email anyone on the team though the email addresses are on the site. And if they don’t get back to you, it’s probably because they’re overloaded. And if they really don’t get back to you let me know because it’s hard. As I said, it’s the expectation on the team that that people get back to you. That’s what we tried to do. We don’t always succeed. But that’s the that’s the aspiration. And the goal internally, is actually be accessible to early stage entrepreneurs. It’s a tough, tough game, starting a business. We can’t answer all your questions, but we hope we can at least be a good person to listen.
Will Bachman 56:49
And we will include those links in the show notes. JJ, you have been a fantastic guest. And I’m so proud that this was your first podcast interview. Your your podcast virginity.
JJ Kasper 57:02
I’ve gotten Unleashed on the Unleashed podcast. That’s that’s what’s happening.
Will Bachman 57:07
So that’s right. So that was that I learned a ton and it was fun hearing about your business. And it was very generous of you to do the primer section and educate me. It was great chatting and listeners, if you would be so inclined to give the show a five star review in iTunes. It does help others discover the show and and it makes me feel good. And that you can also go to umbrex.com/unleashed and sign up to get an email about the show. JJ, it’s been great speaking with you again, good catching up.
JJ Kasper 57:37
Yeah, thank you. Well, it was very good. And I enjoyed the questions and this was all that so thank you very much.