20VC: Firstmark's Rick Heitzmann on The Rise of Pre-Emptive Rounds, His Biggest Learnings From The Pinterest Board, 2 Things VCs Can Do To Prepare Their Companies For The Downturn and Why Now Is A Good Time to Be Contrarian and Invest In Consumer

Rick Heitzmann is a Founder and Partner @ Firstmark Capital, one of the leading East Coast venture funds of the last decade with a portfolio including the likes of Airbnb, Pinterest, InVision, Shopify and Discord to name a few. As for Rick, he led the seed round for Pinterest and also led the deals from Firstmark in Ro, Riot Games, Draft Kings, Discord and Airbnb. Prior to founding FirstMark, Rick was an entrepreneur as a founding member at First Advantage which he helped grow and sell to First American (NYSE: FAF). Rick has been recognized by CB Insights and the New York Times as a Top 100 Venture Capitalist globally. In Today’s Episode You Will Learn: 1.) How Rick made his way into the world of venture and came to found one of NYC's leading venture funds in the form of Firstmark? 2.) How did seeing the booms and bust of the macro impact Rick's investment mentality today? With the impending crash, what 2 things does Rick advise managers need to prepare their portfolio by doing? Does Rick agree with Bill Gurley in saying, "the biggest challenge of today is the over-supply of capital"? 3.) How has Rick seen his style of investing change over the last 20 years? How does Rick think about price sensitivity today? How has that changed over the years? How has Rick seen himself change and evolve as a board member? What does Rick believe makes the best board members? What advice would Rick give to someone who has gained their first board seat? 4.) How does Rick think about the structure of the Firstmark portfolio today? How important does Rick believe it is to have temporal diversification within the portfolio? How does Rick think about optimising investment decision-making processes at Firstmark? Why does Rick believe, despite the negatives, that attribution is fundamentally important? 5.) Does Rick believe that we are in a consumer bubble today? What are the core elements that pique Rick's interest when analysing a consumer investment today? How does Rick think about CAC's scaling way faster and higher than anyone expected? Why does Rick believe the duopoly of FB and Google is now over? Why does Rick believe that true venture size exits can still occur in consumer? Items Mentioned In Today’s Show: Rick’s Fave Book: Moneyball: The Art of Winning an Unfair Game Rick’s Most Recent Investment: Crisp As always you can follow Harry, The Twenty Minute VC and Rick on Twitter here!

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  You are listening to the 20 minute VC with me, Harry Stebbings, and now back from San Francisco. But what a week it was out there. And if you'd like to see more on that, you can find me on Instagram at H Stebbings 1996 with two Bs. I always love to see you there. However, to the show today, and as a true venture nerd that I am, I've always admired and respected this individual. He's built an incredible firm over many years, and so I'm very thrilled to welcome to the hot seat today, Rick Heitzman. Rick is a founder and partner at First Mark Capital, one of the leading East Coast venture funds of the last decade, with a portfolio including the likes of Airbnb, Pinterest, Invision, Shopify, and Discord, just to name a few. As for Rick, he led the seed round for Pinterest, and also led the deals for First Mark in Row, Riot Games, DraftKings, Discord, and Airbnb.

• 0:43Harry Stebbings?

  Prior to founding First Mark though, Rick was also an entrepreneur as a founding member at First Advantage, which he helped grow and sell to First American. Rick's also been recognised by CB Insights and the New York Times as a top 100 VC globally. I'd also want to say a huge thank you to Zach at Row and Beth McNamish at First Mark for some fantastic question suggestions today. Mojito's on me for that team. I really do appreciate it. But before we dive into the show today, I'm sure you've heard about it, but my word, this is a product I love, Carter. Carter simplifies how startups and investors manage equity, track cap tables, and get valuations. Go to Carter.com/20vc to get 10% off. And more than 800,000 employees and shareholders use Carter to manage hundreds of billions of dollars of equity.

• 1:26Harry Stebbings?

  And Carter now offers fund admin, so you can see real time data in the Carter platform and work with Carter's team of experienced fund accountants also in the background. Go to Carter.com/20vc to get 10% off. And speaking of companies that have taken our ecosystem by storm, I have to talk about Brex, the company which built the corporate card for startups and who is the fastest company to reach unicorn status in history. Brex founders Henry Fian Pedro built a payments business in Brazil, but kept getting rejected for a corporate card in the States. So they built Brex with no personal liability, up to 20 times higher card limits, and huge rewards like 7x points on Uber and Lyft, 4x on Brex Travel, and 2x on SaaS software. If you're a VC backed startup based in the US, see if you qualify for a Brex card today at Brex.

• 2:10Harry Stebbings?

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• 2:53Harry Stebbings?

  including the likes of Build Zoom, Goldbelly, Sweetness and Career Karma. Go to rankscience.com/20vc for your first month free. You've heard enough from me, so now without further ado, I'm very excited to welcome Rick Heitzman, founder and partner at First Mark Capital.

• 3:13Speaker 01

  You have now arrived at your destination.

• 3:16Harry Stebbings?

  Rick, what can I say? I've wanted to do this show for such a long time. I've heard so many great things from so many of your founders, but also the team in Matt, Amish and Beth. So thank you so much for joining me today, Rick.

• 3:27Speaker 02

  I'm a little scared about what my partners had to say, but I'm excited. I've been a long time listener.

• 3:31Harry Stebbings?

  I mean, it was incredibly truthful feedback, but I can't wait to get stuck in.

• 3:35Speaker 02

  Scary, scary.

• 3:37Harry Stebbings?

  Terrifying, but how did you make your way into the world of venture and come to found one of the best performing funds last decade in First Mark, Rick?

• 3:44Speaker 02

  So there's probably two ways I got into venture. First, in the mid 90s, when you were in the first grade, I was in distressed buyouts. And out of college, I became an investor. I was always fascinated by investing, but I was in distressed buyouts. And then as I understood and started using the internet, I realized that hey, this is going to be fundamentally different and wouldn't my life be so much better if I could be part of a growing pie, fundamentally changing growth as opposed to fighting over a shrinking pie in distressed buyouts? And therefore I transitioned to VC and spent some time in VC, both in San Francisco and New York, before leaving to be an entrepreneur and then looped back in later in life.

• 4:25Harry Stebbings?

  I do want to touch on that kind of transition out of venture because it's a super interesting element. When you founded the company, talk to me about that. Why did you come back to the world of venture first?

• 4:34Speaker 02

  My passion was always investing and I unfortunately have a very short attention span. So the ability to work with a lot of people on a lot of projects, on the hardest projects, probably suited my personality more. And I was always interested in what was happening next. So working on what was happening next in a range of industries with the brightest people I could find was just a fascinating business challenge. And although different, much more suited to my personality than just being a startup operator and growing companies.

• 5:03Harry Stebbings?

  It's exactly the same reason for me. It's the reason I called it the 20 minute VC because of the short attention span on my side. But I do want to ask a question from your partner Amish. You said, how did gaining the entrepreneur's perspective, how did that impact your mindset as an investor?

• 5:16Speaker 02

  Well, I think there's probably two things. In that you don't really understand, and I was not an operator before, when I was first a VC and then became an entrepreneur, that you understand that you have to have a deep empathy for entrepreneurs. When you talk about people and people's performance in an organization, they're just not boxes on an org chart. And when you talk about cutting expenses or changing things in a PowerPoint, there's a real human impact of those elements. And you might be having to replace somebody who was a long time member of your team, or there might be some nuance which you can't capture in a couple hours of a board meeting or a sidebar. So you understand that the journey is much more nuanced and complex than what you get at first glance.

• 5:59Harry Stebbings?

  I absolutely love that in terms of that empathy, especially in terms of the team itself being more than just boxes on the org chart. I do want to discuss the theme of change today. So much has changed within the ecosystem, the macro cycles, you as a VC, you as a board member. But I do want to start from the very top, so on the macro. You mentioned that your entry into venture in the mid 90s. When I was in first grade, sadly, Rick, I wasn't actually born in the mid 90s.

• 6:22Speaker 02

  Oh, you're brutal, Harry.

• 6:24Harry Stebbings?

  But let's move swiftly past that. So you've been in venture since then. You've seen the boom and bust of the dot com, 2008. We had Josh at First Round on the show and he said that seeing the bust made him more conservative. How did seeing the booms and busts impact your investing mindset today, Rick?

• 6:39Speaker 02

  It definitely made me more conservative in the bust. So I was an entrepreneur in 2000. And you're kind of living hand to mouth. I was trying to raise money between Thanksgiving and Christmas of two thousand and one, post-September eleventh, during the holidays, and everyone thought the internet was a pet rock and nothing was really going to happen in technology. It's all a fraud. So it really made me very focused on capital efficiency and risk capital. And I think as I mentor manage companies, I have been more conservative and I have been focused on a lot of controlling your own destiny as opposed to maybe being more aggressive and pushing the throttle more.

• 7:18Speaker 02

  And as I catch myself doing that, and maybe I'm able to get feedback from my fellow board members or entrepreneurs that I partner with, it's helpful to say, oh, I'm going to push this further and put you further on the risk spectrum. And whether that's payback period on investment or a different way to expand into new markets. I feel like I'm always thinking about both the upside and the downside of cases.

• 7:40Harry Stebbings?

  Can I ask one big question for me? It's really interesting hearing that risk mindset analysis. Because one question I always ask is how do you know when to pour fuel on the fire? And a lot of people say on the show, oh, it's when unit economics work carry. And I look at then some of our biggest companies today in your Uber's Instacarts of the world, where actually they poured fuel on the fire way before and you have to project unit econ quite a few years ahead before you really see that upside. How do you think about when's the right time to really pour fuel on the fire?

• 8:07Speaker 02

  Yeah, I'm probably thinking about it in, you know, if capital is available, are you risking the company? So if you think you're getting close to making unit economics work, or do you think on a risk reward basis by pushing forward and whether that's creating density in the geography of your Uber or Lyft or any kind of marketplace business where you need repeat usage and density to really drive the underlying fundamentals of unit economics, you can buy ahead of the curve by knowing that if you're able to achieve these operating metrics, the business will work better overall. I think the second piece of that would be, are you able and do you have enough confidence? And you're able to take on enough financing risk that you're able to go and do that.

• 8:49Speaker 02

  So Uber and Lyft basically had an infinite financing pool and they had a very cheap cost. Capital, therefore, they were able to experiment more and push themselves more out on the risk curve. If you have founders who are excellent fundraising and they're able to portray a vision, which is very broad and obviously you could build a very big company. You have the opportunity to experiment not only in products, but in the economics of your business.

• 9:13Harry Stebbings?

  I'm really interested. You said that and I'm so sorry for going off schedule so much sooner than I thought I would. But you said about buying ahead of the curve there and something that I'm seeing just continuously. And I'm not sure if it's great and a sign of a thriving ecosystem or a concern and a sign of inflation in the macro. But it's preemptive rounds. How do you think about the massive rise we're seeing in preemptive rounds today?

• 9:33Speaker 02

  Amazing that I would say most of the rounds we see are companies are never raising money. And a couple of things we've seen that we've seen early in the cycle, maybe a post seed. And we hear that they're not raising money and they'll raise in a few months. And then a few weeks later, the round's already done. So our take on it as an investor who wants to be in the best companies is your job as an investor is to invest. So any company that's meeting with you, they should assume that you're interested in investing and they're interested in taking investment dollars. So you can't reactively wait for someone to raise their hand and say they're raising. You have to proactively be focused on the best companies and the best entrepreneurs.

• 10:13Speaker 02

  And basically proactively kick off a financing process by putting out a term sheet or being more aggressive.

• 10:19Harry Stebbings?

  No, I absolutely love that in terms of the proactive outbound there. It's one of the things that's changed in the venture ecosystem as a whole. And I do want to discuss the venture ecosystem. As we've said, you've seen it over the last two decades. In your mind, how's venture evolved as an asset class over the last 20 years, Rick?

• 10:34Speaker 02

  It's generally become a professionalism of venture as an asset class over the last 20 years. It was still small partnerships with thin teams and really much more of a ad hoc community that had maybe somewhat of a deep community in Silicon Valley and around Route 128 in Boston. I think as the industry has matured on the whole, you've seen those communities become more structured. You've seen firms look more like companies. If you look at the biggest firm with all the services, a pyramid form of management of their own human capital and their own organization. It's gone from being an artisan business on the whole to being a structured business that looks more like a buyout group.

• 11:15Speaker 02

  I think that there is both positives and negatives to the formalization of the venture economy.

• 11:20Harry Stebbings?

  Can I ask, I'm very much a fan of the artisanal view of venture and it really being that more craft-based partnership is exactly kind of how we think about it at Stride. Do you think we're going to lose that artisanal feeling, given the volume of depth of companies that we're seeing, the algorithmic play that we're seeing in a lot of quant AI, even early-stage funds? Do you think we might lose that artisanal element?

• 11:40Speaker 02

  I don't think we're going to lose it because there's folks like you or I who really treasure that and they really view working with an entrepreneur as a partnership and not being, especially at the earliest stages, solely driven by quantitative and being data-driven in their decision-making process. So I think you're going to have a choice of which direction you go and as an entrepreneur, you could pick even large firms that come at the world more like a craftsman, like a Benchmark Capital, or I know you've had some of their partners on, or you could come at the world with much more of a structured approach with a full army of people helping you. And certain entrepreneurs would rather go in that direction. So it'll just be like having chocolate and vanilla ice cream if the entrepreneurs could choose one.

• 12:20Harry Stebbings?

  I mean, you teed me up perfectly there with the mention of Benchmark because I wanted to ask, one big change is obviously the supply of capital in the market today. And Bill Gurley from Benchmark said on the show that the biggest challenge he faces is the oversupply of capital in the market today. How do you think about this? Let's start with that on the oversupply.

• 12:37Speaker 02

  I think there's definitely an oversupply of capital. That might be a bit selfish and I wish there was a lot less capital, be a lot less competition. And therefore that would drive from just a supply-demand perspective, lower pricing for me as the VC with the same quality of entrepreneurs. So I think that there's an oversupply of capital in the VC market. However, talking to my friends who are investment managers and other asset classes, they believe the same thing. So as you're looking at a decade of a bull market, if you're looking at historically low interest rates across the board and therefore a flight from fixed income, everything else is basically over-capitalized and it's really depressing returns across all asset classes.

• 13:16Harry Stebbings?

  You mentioned there about kind of oversupply in all asset classes and there is a general consensus feeling that a downturn is coming. I'm obviously acutely aware of this feeling and not having experienced it before. What actually happens when that happens, having seen it before? How should one be preparing and how should one be thinking about it as a fund manager today?

• 13:33Speaker 02

  So we always know that there's a downturn coming, we never know when it's going to be. So we try not to spend too much time thinking about something we can't control. We know it's around the corner. I think there's two things that we've thought about and we've done as investors, both in the downturn of two thousand and one to two thousand and five. Then again, during the global financial crisis is how in control of your business? Because in a downturn, you have to be much more efficient, including capital efficiency. So can you get a company to a point where you're eliminating financing risk in a downside case? And that can be a company of any stage. It can be a seed or a series A company where you're able to take the burn down to a point you have more time to figure out product market fit or a go to market strategy.

• 14:17Speaker 02

  It could be a growth stage company, which is still burning a lot of capital, but wants to normalize that burn to make sure its capital lasts until it's able to get to profitability. And by eliminating financing risk or mitigating to a certain extent financing risk, you're able to have much more control on the time you have. And if you think about early stage investing as trying to create as much optionality as possible to figure out exactly what's going to create a big business. The key element of increasing the value of that option is time. So by eliminating financing risk and therefore increasing the length of your fuse, you're able to increase time.

• 14:50Harry Stebbings?

  I'm so pleased you said that about eliminating financing risk because I think we've seen a lot of first time funds, investor funds very quickly within the first day, eighteen months. And they're going to have a lot of companies coming back for refinancing at the same time. My question being, how important do you think is temporal diversification within the portfolio itself as a fund manager?

• 15:07Speaker 02

  I know, I know you've mentioned this to the last couple of your guests, I think it's very important. We always look at it on the classic model of we invest over three years. And because of that, you're able to get multiple microeconomic cycles. You don't know until five years later was that a good time or a bad time to invest? But you want to be able to capture as broad of a band as possible because you want to focus yourself on finding the best companies, not choosing market time. So being able to invest over a longer period of time is very important. And frankly, you hopefully have the benefit of being able to raise a large enough fund that gives you that window for diversification.

• 15:43Harry Stebbings?

  Obviously, the timing that we mentioned there does affect the pricing within the market. I do want to ask you, Sam Elshaw, you mentioned you listen to his show, which I'm thrilled to hear. But he said that maintaining price discipline is the hardest challenge he faces today. How do you think about your own price discipline? And how do you assess your own price sensitivity?

• 15:59Speaker 02

  We've gone back and looked at this and first mark, we've been around for almost a dozen years. And we're incredibly data driven and we've gone back and looked at false positives and false negatives and decisions we've made over the years. And we've come to see is that if we're wrong by 20 or 30% on price in a seed in a series A company, it doesn't matter that much. If we're off by 50% on price, it does matter. And 100% price matters more. And the pricing and some people talk about, well, the price doesn't matter as long as you're in the best deals because it will all come out. If you know it's the best deal, you should put in as much as possible, but oftentimes you don't know till later. And where we see it in a portfolio construction and fund management perspective is that you're able to increase your shots on goal.

• 16:42Speaker 02

  So if you pay twice as much for a company, you're definitely going to be able to invest in half as many companies and therefore have half as many chances to invest in a great company which could return the fund.

• 16:54Harry Stebbings?

  In terms of shots on goal, there's a time when the reserve allocation, really, that's just a serious opportunity cost of dollars and you're not really even retaining your ownership in the company that you're reserving into. When do you think about kind of peeling off on the reserves? And how do you think about that versus another check in the core fund?

• 17:10Speaker 02

  So as we think about just in our core fund, we have a growth fund as well that's able to continue to support our companies as they grow. But in our core fund, our early stage fund, we think about it as we want to continue to invest in the winners. And frankly, even at the series A and series B level, you're not 100% sure those are winners. But you have a good sense of the team being able to execute and having the market open up to you. And sometimes you're able to have a really good sense of product market fit and go to market. So you want to put as many dollars behind that as possible. And one of the other things we figured out is although you want to reserve some for downside protection, those dollars aren't really as valuable as opposed to making sure that your true winners, you're able

• 17:53Speaker 02

  To put dollars behind. It kind of goes back to you can only lose a hundred percent of your money, but your winners could drive ten times plus that of returns. So you shouldn't look at it as opportunity costs, or you should look at it as opportunity costs on the winners, instead of looking at it as downside protection for the losers.

• 18:11Harry Stebbings?

  I do want to ask it because with the changing times, obviously, you also change as an investor and as an investing mindset. How have you seen yourself change as an investor over the last two decades, Rach?

• 18:19Speaker 02

  So I think, you know, as an early investor in my twenties, I thought I could help across every element of the company. And as you go to the board meeting, you'd sit with the marketing folks, you'd sit with the finance folks and opine on details. Almost trying to be too into the details of the business. And especially after becoming an operator and gaining more entrepreneurs empathy, I realized that director's job is much different. You know, your job is to although know the details and be able to swoop in and really drill down on things which don't seem to be working or don't seem to make sense to you. Your job as a partner to the founding team and the CEO is to be able to provide that perspective across your portfolio

• 19:01Speaker 02

  and across maybe macro trends you're seeing where things that don't make sense to you in the business. And oftentimes, when you're trying to drill down at too detailed a level, you might either take the board off track or you might defocus the CEO. So you have to maintain the right altitude to be able to ask the right question at the right time. And like a lot of things you learn, I've learned from experience and, you know, experience comes from making a lot of bad decisions. So I've erred on both sides of that, but over time, it's a skill which I think a lot of young VCs can understand and learn better.

• 19:34Harry Stebbings?

  Speaking of time, really interesting. How do you think about time allocation across the portfolio? Is it spend time with the winners, they're the ones that are going to drive the returns? Is it spend time with, it sounds terrible, the losers, that's where the reputation may be built? How do you think about time allocation across portfolio?

• 19:49Speaker 02

  So we go through and my partners and I think about on a biannual basis, where are you spending your time on boards and how do you prioritize your boards? And how do you prioritize the companies in the portfolio? And that's not a purely quantitative exercise. You might qualitative. We think that a company has tremendous upside, although today you might only have a small number of dollars in, or they might not have quite achieved product market fit or some quantitative valuation jump. So we think about how do you prioritize your board seats? And that prioritization should drive your allocation of time. And we're big believers in time being your most valuable resource, not only in your job, for your investors, your entrepreneurs, your LPs, but even in life as you're growing and becoming a better person every day. So as we think about how we're going to allocate that time across the portfolio,

• 20:34Speaker 02

  it's very individualized and it's really about not only being there to support your winners and probably less to support the losers, but making sure that the entrepreneurs whose companies are not going to be very successful, that you're able to help them through the process of exiting that company or the process of getting to a good sale. And I think it's a really hard thing and I I haven't experienced that as an entrepreneur, but when something you've poured your heart and soul into for a number of years, you realize it's not going to end the way you might have thought of that. It requires good entrepreneur empathy and maybe might not be the best return on financial investment, but it's the right thing to do as a person to provide that entrepreneur as much help as they need to get themselves in the business and to into the right place.

• 21:18Harry Stebbings?

  Absolutely. In terms of kind of getting them in the right place there. I do want to touch on, you mentioned a specific moment in maybe the life cycle of a company there. In terms of moments, were there any inflection moments for you sitting on boards that changed the way you think about what it takes to really be a great board member?

• 21:32Speaker 02

  Yeah, I've had the benefit of sitting with some good board members over time. I was able to be on a board with John Doerr, you know, I've been on a board with Mitch Lasky from Benchmark. I, you know, some really excellent people and excellent board members. And I think what I was able to learn from them is talk less. So you might have an opinion on a lot of things or, you know, maybe even if you're younger, an opinion on most things, but you're diluting your own voice by talking so much or opining on so much. Pick out before the board meeting, read the materials ahead of time, be thoughtful of where you think, you know, the most important issues for the company are and your perspective on those and patiently wait for a time to ask a thoughtful question

• 22:14Speaker 02

  or lend a subtle perspective to really focus on those things instead of defocusing the board and wasting time on things which aren't really going to be the strategic elements that the company needs to do to move.

• 22:27Harry Stebbings?

  Can I ask, in terms of the board environment itself, my partner Fred always tells me, Harry, on a board you have to create an environment of safety. How do you think about creating an environment of safety for the entrepreneur? That they can really come to the board with anything, down sales numbers, head of sales that just left, whatever the good or bad thing that's happened. How do you think about creating that atmosphere and environment of safety?

• 22:48Speaker 02

  I haven't heard that before. I think it's great. I would, I probably have more talked about in the past of authenticity or transparency, that you have some entrepreneurs who either don't want to deliver bad news or don't want to let you down, and they're not intentionally painting a rosier picture, but they're trying to be, at least at their core, optimistic as almost all entrepreneurs are. But what you want to be able to do is provide a space where you can authentically deal and share problems. As an entrepreneur, that was probably not the culture in the 90s or even 10 years ago, where there was a tremendous power distance between investors and entrepreneurs. And you kind of felt like you had to go and ask permission for capital or ask permission for everything,

• 23:31Speaker 02

  and you were owning the problems and you had to bring those problems in a structured way to your board. I think the best boards realise that you're all stakeholders in the company, that you're all shareholders in the company. And any problem that exists in the company is everyone's problem. So this is a shared problem and therefore you need to come with a shared solution. And I think early in relationships, hopefully before you even invest, that the entrepreneur, you're able to have a great relationship with the entrepreneur, that you're able to see the authenticity there, you're able to talk about how important transparency is, how important it is that you're constantly telling each other the unvarnished truth. And that safe, protected space, which I think Fred's putting well,

• 24:16Speaker 02

  creates that transparent environment, and that's what the best boards have. And either the board members or management is able to say, I made a mistake, I don't understand what you're saying, I don't know what to do. And that's where you can really have conversations, where you push the ball forward. But if you're hiding something where something's not working, a person's not working out... Or the team doesn't know what to do, sometimes that that that could fester over a period of months or quarters and be a potential mortal injury.

• 24:45Harry Stebbings?

  I do want to discuss some of the companies that you've sat on the board of, and in particular, the space that they're in first. Now, a lot of them, and you have a particular passion, as do I, for the consumer business. A space that's seen like an influx, a serious influx of VC dollars over the last couple of years. Where do you think we're at with consumer with that in mind today, Rick? And is it the bubble that many suggest?

• 25:04Speaker 02

  I don't think so. I I think that I would say enough people are down on consumer now. It's a good time to be contrarian on consumer. I think there's a lot of, on both the consumer enterprise side, me too companies or companies that are super segmenting the market. And therefore, you're never going to build a big company without perfect execution because the market size isn't that big. But if you look at next generation of way consumers are using things, you've spent a lot of time looking at how AI is going to impact consumers. And how that's going to be able to change the way consumers interact with the web. There's a next group of companies coming that I think will be just as interesting as the last group.

• 25:43Harry Stebbings?

  So are you looking at the infrastructure layer of the kind of e-commerce experience or actually the brands that sit on top of it?

• 25:48Speaker 02

  Both pieces. So if you think about the logic underneath and ways, for example, that your phone might be able to provide data as well as previous recommendations, which would form where you're going to have dinner tonight by being able to use machine learning to algorithmically suggest ideas for you, or whether you sat at a bar for two hours, so therefore your phone could suggest an Uber to pick you up. So there's a lot of logic underneath there that's coming from point multiple data sources about you as a person, as well as any logic that might come off your phone. But then it goes through the infrastructure layer of personalization. And there's even apps that are doing a better job of capturing that data and delivering you a better experience.

• 26:27Harry Stebbings?

  So I agree on the excitement there, both in the infrastructure and the brand layer. I do have two worries that I really want your help to get over, actually. So to me, there's first customer acquisition cost, fundamental lack of scalable and affordable distribution channels. To me, cats are just scaling way out of control, way faster than people think. Am I right in saying this? And how do you think about this lack of economically viable distribution channel?

• 26:50Speaker 02

  I I think that's a real problem. I think, you know, there's two things is that to a certain extent, the duopoly of Facebook and Google has been broken in that they were not only the biggest, but also the fastest growing customer acquisition channels. And therefore, you're you're getting perfect pricing in those methodologies. I think Snap and Pinterest have kind of broken through that duopoly. And therefore, there's some heterogeneous ways to acquire customers, but not as many as you'd hope. I think the way you'd have to differentiate is on a product basis. So if you're offering the same service through the same customer acquisition channels, there's no competitive advantage. But even as we look at consumer companies and we think about companies, especially in the healthcare space of Hubble and Row,

• 27:31Speaker 02

  that have proprietary backend and by being able to deliver and having a specialized supply chain in both companies, either delivering pharmaceuticals or medical devices. You're not competing with Rick and Harry's Pharmacy, but you have proprietary backend infrastructure, which is enabled to deliver a proprietary service. Therefore, you don't have to compete with everybody on the front end.

• 27:53Harry Stebbings?

  Speaking of kind of ways to avoid competing with everyone, another way is to actually own your own lines of distribution yourself. How important is that for you when assessing the viability of especially kind of a consumer brand opportunity?

• 28:05Speaker 02

  I think it would be great. It's obviously important if you completely own that customer experience. It's improbable, especially when you're starting out at the seed and series A, that you could own that full stack of customer experience. So what you want to do is something a bit clever and thinking back to Airbnb with Obama owes and having cereal at the Democratic convention and the Republican convention years ago. There is are ways that are non scalable, as Paul Graham would say, that the earliest stages to get off the ground and then kind of light that fire that is either viral. As you might have seen in Airbnb and a lot of the a lot of the network and marketplace business models.

• 28:43Speaker 02

  Or a way that to start that ball rolling without having to compete on the front end with the Facebook properties or the Google properties, the beginnings of customer acquisition.

• 28:52Harry Stebbings?

  I absolutely love the story in terms of the Obama cereal for Airbnb. I do want to touch on the second concern that I have, and it's around kind of exit environment. I absolutely see it's possible to get to the fifty, even a hundred million in revenue, which is by no means a small feat. That's an incredible achievement. But then my concern is you get bought for one point eight X EBIT. And for the VC as an asset class, it maybe just doesn't work for the model. Am I seeing this wrong, Rick? And how do you think about this?

• 29:17Speaker 02

  I think if you have commodity supply chain and you're selling commodity products, you can get into the mode where, especially as you get over growth, you're trading like a legacy business where you're trading at one to two times revenue because you haven't been able to show that growth. A lot of the companies that we invest in have both higher growth, which obviously shows you have a slightly different or better product. And they don't have to compete with everybody else in the activity chain. Therefore, you get a slightly higher multiple. For example, Hubble has a proprietary backend. They have an exclusive ability to sell private label contact lenses on the internet in most countries. And by being able to do that, you're not competing with Harry and Brick's contact lens company.

• 30:00Speaker 02

  You're not competing against all these other players in the market. But most of their markets, they are the sole online private label contact lens company. And by being able to have that kind of market leadership, you're growing further and you have higher market share. So therefore, you know, you're going to trade at a higher exit multiple. But, you know, I have seen that. I don't know where. An interesting company to watch as this all plays out is, you know, the rumored IPO of Casper.

• 30:26Harry Stebbings?

  For sure. No, I think that's going to be a very landmark occasion for the space itself and a real kind of signifier. I do want to touch on one company that you backed that a lot of your partners told me we had to discuss. And you mentioned it earlier, and it's Pinterest. And so before the quick fire round, we're going to do a story time round. So as I said, spoke to four of your amazing partners, all of them said Pinterest is a must ask. How did you find them? What's the early story there, Rick?

• 30:49Speaker 02

  So the early story is, again, this was the trough of the global financial crisis, beginning of two thousand nine, where not many people were interested in entrepreneurship and not many investors were interested in writing checks. But I was a judge at the NYU Business Plan Contest. And Ben and Paul, the original team, along with Ben's

• 31:10Speaker 02

  Girlfriend's brother, who's now Ben's brother-in-law, was going to NYU. So they recruited him to the team so they could get in front of some investors. And through that process, although they lost the business plan contest, I was enthralled by both their ideas about how the mobile web is going to change the discovery process and just really impressed by how thoughtful Ben was and how they've thought through product and the categories and even how they were going to build their business. So despite, I would say, everybody running from the doors from either the public markets and especially the illiquid private markets, you know, we were excited to be the lead investor in the seed round for Pinterest.

• 31:47Harry Stebbings?

  I mean, huge congratulations for that. I do want to ask you, speaking of Pinterest and speaking of kind of the best companies in one's portfolio, often they're the most competitive, not always, but often. In terms of kind of fighting to win them, what've been your biggest lessons on what it takes to truly win the best deals?

• 32:02Speaker 02

  I would say, you know, a couple of companies. Pinterest actually had a seed extension round that wasn't even completely filled out. So, you know, there was a round very early on at Pinterest where anybody could have invested. So I think this is the same thing at Uber and a number of other companies. The companies that are the hottest 10 years later oftentimes are not very clear at their earliest stages. But there are a fair amount of companies that have great teams, have a clear market, and come out of the gates hot and are just always fantastic companies. And in a world where competition's only increasing, we probably have not seen a deal in a long time where at least not, at least there's not a couple other people looking at the deal and competing for the deal. So, you know, as we win those deals, it has a little to do with me. And I think that being able, having been an entrepreneur that had a billion-dollar exit,

• 32:47Speaker 02

  having several billion-dollar companies I invested in, you know, I'm kind of familiar with the path of how to get to that billion-dollar exit and how fast growing technology companies scale from a human capital perspective, from a financial capital perspective, as well as from an operating perspective. But I think the key thing, and that's actually have to be an old guy like me to have that experience, but as maybe someone new coming into venture, I think the thing I even use more than that would be not having me tell the story, but having my references tell the story. And with every entrepreneur I meet, I tell them I'm A hundred percent referenceable. There's a long list of companies I've invested in. Feel free to call anybody who's worked at any of those companies and ask them anything.

• 33:28Speaker 02

  And those people often are able to tell the story of what it is like to work with Rick Hides and what's it like to work with First Mark. And therefore they're able to do the heavy lifting for me. And regardless of if you've been doing this for a long time or a short time, once you're able to work with somebody, help them impact their business. You're able to use them as a reference and they could give an authentic version of what it's going to be like to have Harry on the board or Harry as an investor in their company.

• 33:54Harry Stebbings?

  I'm so glad you said about references there, Rick, because I did speak to your founders before the show. I spoke to four of them, including Zach. Yeah, sorry, I stalked you. But listen, they all gave me a hundred percent incredible references. And the MPS School that we have for you is now, we spoke to nine people before your show and nine people responded and had a conversation. So that's the highest hit rate we've ever had. So I mean, clearly something is working very well. But I do want to ask one from Boya at Merlin, who asked, what was your biggest takeaway from sitting on the Pinterest board?

• 34:23Speaker 02

  I think the biggest takeaway sitting on the Pinterest board was the way the Ben structured and scheduled the board was that we got a massive amount of information way ahead of the board meeting. So we knew all the metrics, all the operating functions, all the numbers, all the financials ahead of the board. And we actually had access to anybody on the management team. So if we had a question about a number that might seem funny or an expectation we might have had that might not have been met, we had the opportunity to ask that individually to whoever it may be. And then he was able to follow up with a memo, one to two pages of what he was thinking as CEO and co-founder and how the board could help him think through the challenges he was facing.

• 35:08Speaker 02

  It was different over the 10 years going from a couple person company to a billion dollar revenue company. But it was the same structure and format. So you never had to, no one was ever caught having a member of the management team read them a slide. You never had to go through anything you've already read through by yourself. You were constantly, and they were also very short board meetings, you were constantly thinking. And helping the company think through its media issues. That's, I would say, the highest way a board can function with the company.

• 35:36Harry Stebbings?

  I absolutely love that. There's a structure and there's takeaways there. Incredible to see the journey and obviously Ben is just such an incredible entrepreneur. But I do want to move into my favorite element, right? Being the quickfire round. So I say a short statement, you hit me with your immediate thoughts. Are you ready to rock and roll?

• 35:51Speaker 02

  I'm ready to rock and roll.

• 35:52Harry Stebbings?

  Okay, I need to read more, I have to admit. So what's your favorite book and why?

• 35:57Speaker 02

  I'm still gonna stick with Moneyball. That was my favorite book for a long time. I just love books that are really about something else. And obviously, it's a book about baseball, but it's really about thinking differently. And I think the only way that you're able to be either a better person or a better investor is not follow the herd, but be able to strike out on your own and think differently about the world.

• 36:17Harry Stebbings?

  What's the best board meeting format? Hours, structure, what's the best?

• 36:21Speaker 02

  I think the best structure is a board dinner the night before, where people could re-warm up to each other. So you're not walking into a cold room in the meeting, not temperature wise, but in terms of everybody getting up to speed on the weather, the traffic patterns, all the other bullshit. And then, so you've already warmed to the room and then having a three-hour meeting, of which very little to no slides or walkthrough, but it's structured in what I call the three Ps of people. And that's the most important thing going on at companies of almost any size, of where your human capital is and where you might have deficiencies. Product, and that's a point where you might have a demo or a product roadmap where you're able to say, here's where our product is today and here's where it's going.

• 37:03Speaker 02

  That's really the heart of your economic engine and how good your product is. And then performance. You know, therefore, these people are producing this product and selling it. And here's our performance and what are you seeing in those elements of performance that matter? And that is generally not walked through on a granular basis because everybody's already read the document, they had questions they've already asked. If there was additional questions, you talked about it at dinner, but you're able to walk through the three Ps that are essential to any company and you're able to dive deeply into the most strategic elements of the business.

• 37:34Harry Stebbings?

  Question from Zach at Row, one of your entrepreneurs. How do you earn the position of being the first call for founders?

• 37:40Speaker 02

  I think being honest. A lot of people are hesitant to provide negative feedback to your founders. And if something is wrong or something you disagree with, being honest and say you disagree with that, or maybe you haven't had experiences that would lead you to believe that that was true. And therefore, if Zach wanted to call me, and knock on wood that I hope this implies that I'm Zach's first call, that he knows he's going to get the truth from an experienced person who has his best interests in mind.

• 38:06Harry Stebbings?

  What does the investment decision making process look like for you at First Mark, Rick?

• 38:10Speaker 02

  I think you have individual conviction. The investment process at First Mark is individual conviction. So myself or one of my partners really believes in an idea. And then you build consensus around it. And I think it's your partnership's job to challenge it and ask the hard questions, which you may or may not ask yourself as you fall in love with an entrepreneur or a business. But our job is to protect each other from themselves by being able to pressure test the conviction you have for a business. And then, once we make a decision through consensus, then we're all universally supportive of that decision, that company and those entrepreneurs.

• 38:45Harry Stebbings?

  Do you believe in attribution in venture, Rick?

• 38:47Speaker 02

  I think attribution matters over time because there is a single person who largely manages that company, who serves on the board of that and everything else. But it's largely less important than anyone's reputation that is the most important thing you could ever have.

• 39:03Harry Stebbings?

  Why is New York important now in your mind?

• 39:06Speaker 02

  New York's always been important. I think you're able to look at New York as the centre for commerce in the world. More Fortune 500 companies are based here. It's the centre for many industries. I think as we started the business, New York was not a venture leader. It's quickly become the second biggest venture market in the world. And I think there's a couple of things. Industries are based here, customers are based here, and most importantly, talent's based here. Yourself aside, and I would say that most young people in the world would choose to live in New York compared to any other city.

• 39:36Harry Stebbings?

  No, I think I would too, to be fair. I'm totally aligned to that. I love New York and so absolutely aligned.

• 39:41Speaker 02

  Why are you moving?

• 39:43Harry Stebbings?

  Next week, I'm coming to live with you, Ray. Thanks so much. But no, I do want to ask the penultimate one. The biggest challenge for incredible firms kind of scaling today like First Mark is generational transition. How do you think about generational transition?

• 39:56Speaker 02

  I hope this wasn't a hint from one of my partners, but I think we think about it is that we want to be a collective partnership. I think all of us want to do this for another couple of decades and we want to do this as long as we're good at it. So we manage the firm in general as a partnership and as a collective of hiring and firing, investment decisions, helping each other out of whether they'd be tough times for an existing company or struggling with decisions, getting into a company or even selling. So I think that over time, any individual becomes less important as we build a collective culture that helps us to succeed.

• 40:29Harry Stebbings?

  Now, I'm so sad that this is the last one. I've so enjoyed this, but I want to finish on it. Your most recent publicly announced investment, Ray, and why did you get so excited and say yes?

• 40:38Speaker 02

  So actually, I just had an investment that was announced yesterday, a company called Crisp, and it's an entrepreneurial team I backed before, and Ari Trashnell and Doug Liddon, who were the founders of a company called Tapat. I invested in the mobile space. I was a seed investor there, invested in every round, served on the board, and that company was bought for several hundred million dollars a couple of years ago. And it's the same team coming back and looking at food waste. And if you look at the food supply chain, almost half of all food is wasted because of not having the technology in the system and not thinking through what the best way is to produce, measure, and distribute food. I think from a global perspective and having an impact on people, this could be

• 41:21Speaker 02

  one of the most important companies out there. From a value creation, it could be important, and it clearly has the mega trend behind it of sustainability and consciousness as we apply technologies to new problems.

• 41:32Harry Stebbings?

  Ray, I'm absolutely gutted that the episode's over. We will have to do a round two. I've always got so much more to ask, but thank you so much for joining me today, and I've absolutely loved having you on.

• 41:41Speaker 02

  Thanks for having me on. I might have to come back then.

• 41:45Harry Stebbings?

  I have to say, I do just love having Rick on the show. Such a fantastic guy. And if you'd like to see more from him, you can find him on Twitter at Rick Heitzman. Likewise, it'd be great to welcome you behind the scenes here at the show. You can do that on Instagram at H Stebbings 1996 with two Bs. However, before we leave you today, I'm sure you've heard about it, but my word, this is a product I love, Carter. Carter simplifies how startups and investors manage equity, track cap tables and get valuations. Go to Carter.com/20vc to get 10% off. And more than 800,000 employees and shareholders use Carter to manage hundreds of billions of dollars of equity. And Carter now offers fund admin, so you can see real time data in the Carter platform and work with Carter's team of experienced fund accountants also in the background.

• 42:28Harry Stebbings?

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• 43:10Harry Stebbings?

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• 43:55Harry Stebbings?

  As always, I cannot thank you enough for your support and I can't wait to bring you a fantastic episode on Friday with Dom at Fast.