20 VC 031: Investing in Gaming, Luxury Goods and Disruption with Maha Ibrahim, General Partner @ Canaan Partners

Maha Ibrahim is General Partner at Canaan Partners. Maha is renowned in the venture industry for her ability to to spot technology trends extremely early, proven through Maha being one of the 1st investors to recognise the huge potential of social gaming. As a result, Maha led Canaan's early investment in social games pioneer PicksPal (acquired by Liberty Media) and was a seed investor in Kabam, the world's largest developer of massively multiplayer social games. Due to Maha's incredible success in venture, she was included in Silicon Valley the '40 Under 40' award by The Silicon Valley Business Journal and is a regular on Bloomberg TV. Items Mentioned in Today's Show: The Real Real ClusterHQ Lending Club In today's episode you will learn: How Maha made her transition into the world of Venture Capital? As one of the 1st investors in social gaming, what did Maha see that other people did not? With the gaming industry being as fast moving and fickle as it is, shown through the likes of Zynga's troubles, is Maha concerned for her gaming portfolio companies, in their ability to maintain their dominant presence in the sector? Maha is an investor in The Real Real, a company which had revenues of over $100m last year. What does Maha believe is the reason for this incredible success and where does she see the future for The Real Real? Increasing amounts of capital means increasing competition for VCs, what does Maha believe VCs can bring to the table to beat off the competition? What is Maha most impressed by, in terms of entrepreneurs pitching to her? Where does Maha believe the next big forms of disruption are coming from? We finish today's episode with a quick fire round where we hear Maha's thoughts on the hardest part about being a VC, how Maha measures her success as a VC and her most recent investment and why she said yes? You can follow Maha 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 episode thirty-one of the Twenty Minute VC. Now, on today's show, I am thrilled to welcome Maha Ibrahim, general partner at Canaan Partners. Maha is renowned in the venture industry for her ability to spot technology trends early, proven through Maha being one of the first investors to recognise the huge potential of social gaming. She led Canaan Partners' early investment in social games pioneer Pixlab, which was acquired by Liberty Media, and was a seed investor in Kabam, the world's largest developer of massively multiplayer social games. As a result of Maha's incredible success, she was included in the Silicon Valley Forty Under Forty list and is a regular on Bloomberg TV.

• 0:45Harry Stebbings?

  We had such a great time recording this and I can't wait to hear what you think. So, without further ado, here is Maha.

• 0:57Speaker 01

  You have now arrived at your destination.

• 1:01Harry Stebbings?

  First, I'd like to start off by hearing a bit about your background and how you got into the technology industry, and then later made your transition into the world of venture capital. Could you tell us a little bit about that?

• 1:12Speaker 02

  Absolutely. Thank you for having me. I joined venture fifteen years ago during the first bubble, and about a year later it subsequently popped. I had spent my years prior to that thinking that I would go into academics. So, I have a PhD in economics from MIT, and my desire was to go into academics.

• 1:41Speaker 02

  When I was in graduate school, I noticed that it was a pretty solitary existence and decided thereafter not to go into academics, but more to go into industry. So, I went to BCG in San Francisco for eight months and looked outside my window and said, "There's all this technology innovation happening. Why am I sitting here in a consulting firm in an ivory tower?"

• 2:06Harry Stebbings?

  And when was that? Was that ninety-nine?

• 2:07Speaker 02

  That was in ninety-eight.

• 2:09Harry Stebbings?

  Ninety-eight, okay.

• 2:10Speaker 02

  Then I joined Quest Communications where I became Vice President of Business Development. Quest at the time was an upstart telecommunications company. And my role there was really to interface with the network equipment companies in the valley, as well as the content providers in the valley. And those largely were venture-backed startups.

• 2:33Harry Stebbings?

  Okay.

• 2:33Speaker 02

  So that allowed me to interface with a lot of VCs that were backing these companies. And then the transition of venture was seamless thereafter.

• 2:43Harry Stebbings?

  And how did the bubble, um, obviously bursting, as you said, very shortly after you joined, how did that affect your mindset going into it? Did you ever feel, you know, like it was, it was too difficult? Or did you persist and carry on? How did that work out for you?

• 3:00Speaker 02

  I definitely persisted and carried on. I really didn't have a choice, but I also liked what I was doing and was very intrigued by the thought of venture capital. It was a tough five years. It was a very slow five years. Um, but on the other hand, I got to see what it meant to have companies close down and companies really have to concern themselves with expenses and burn rates and all of that yummy stuff that is less of a concern these days as things have been going up and to the right for the past five or six years.

• 3:37Harry Stebbings?

  I'm very intrigued also by this question about burn rates. Some people say a high burn rate is great because it indicates, um, possibly the potential for huge growth. And then others say the much lower burn rate with the kind of lean testing model is better. Which one do you tend to prefer?

• 3:53Speaker 02

  Uh, it might be that I'm pretty old school, but, um, I believe in getting to profitability and having a business plan that gets you profitability. But having said that, if there's truly a market there that you feel, sorry, let me sit back, if there is a product market fit that you feel is dead on and you're seeing customers adopt and adopt and adopt. There is a huge virtue and a huge benefit to being a first mover and a in a and the biggest mover in the in a huge category and that's where you really wanna step on the gas. So it's a delicate balance.

• 4:33Speaker 02

  Um. There are companies that I have in my portfolio that are in massive markets and are the leaders in those massive markets. And my guidance to them is going to be a lot different than my guidance to an early stage company that's still making its way with product market fit.

• 4:47Harry Stebbings?

  Absolutely. And I I'd like to dive into some of those companies now, um, and in particular Pixpal and Kabam. Um, you were really one of the first people to recognize the potential for social gaming. Leading me to us, what did you see? Do you think that the rest of the market maybe didn't?

• 5:06Speaker 02

  Um, I'm not sure that the rest of the market didn't, uh, but Pixpal was my first investment, was my first consumer investment generally. Uh, and it was pretty clear that there was a movement from um, from traditional fantasy sports to something that was more uh, of a frequent contest like you see now with companies like FanDuel and DraftKings.

• 5:32Harry Stebbings?

  Absolutely.

• 5:32Speaker 02

  We were just too early to the market, frankly. And uh, didn't benefit from mobile, but at the time, there was a massive movement from gaming and gambling to fantasy sports and I really wanted to take advantage of that on the web.

• 5:52Harry Stebbings?

  Okay.

• 5:52Speaker 02

  And and that's why we invested in Pixpal and it ended up being a good outcome for us. The company was sold to Liberty Media. And I think lives on to this day. And then Kabam, obviously, uh, we invested in for a variety of reasons. It turned into a mobile gaming company, uh, after first being a Facebook, uh, community, fan-based community company. So that company had a lot of pivots. But certainly has taught me the size and scope of the mobile gaming market is is just almost infinite at this point.

• 6:27Harry Stebbings?

  And at what stage do you like to go into your investments? Do you have a preferred round?

• 6:33Speaker 02

  Uh, we like to invest at the Series A.

• 6:36Harry Stebbings?

  Okay.

• 6:36Speaker 02

  So we have traditionally, Canaan has traditionally been a Series A player for over ten years now. The, the firm has been around for twenty eight years. But the focus of the firm in the past several funds has really been focused at that early stage where the product market fit is still a question. And we're really taking a risk on both product market fit and frankly, market timing and market size.

• 7:03Harry Stebbings?

  Sure. And, and going back to the, the gaming industry. Does the fickle nature of the industry as a whole worry you as an investor? I mean, we've seen the likes of Zynga uh struggle in the face of being unable to churn out bestsellers um like Farmville. Is this a problem for you when investing in such a fast-moving industry?

• 7:23Speaker 02

  If, if I were to do it today, it would be very hard for me to make an investment in the mobile gaming space for a variety of reasons. The biggest reason is that the, it, it is a winners, and I say that plural, take all market. The market has consolidated into, let's say, ten or twelve big global players. And it is very hard for independent new guys to insert themselves into the app store. You may get a random game every now and then coming up the charts. But really keeping that game uh and keeping the audience engaged and keeping that game growing is very hard and does

• 8:07Speaker 02

  require some more sophistication than just a straight game developer um from several years ago would envision. It really takes an audience and customer acquisition team and engagement team unlike what has uh heretofore been needed in the mobile gaming space.

• 8:29Harry Stebbings?

  Absolutely.

• 8:29Speaker 02

  So it, it's, it's a difficult business, not just because it's a history-driven business, but just because of the uh, the, the leader takes all dynamics of it right now.

• 8:39Harry Stebbings?

  Sure. Now, I really would like to discuss The RealReal, a company I believe you've been invested in since their Series A.

• 8:47Speaker 02

  Mm-hmm.

• 8:47Harry Stebbings?

  I saw in Fortune magazine recently, they, they generated a staggering hundred million dollars last year. Um, what is it about The RealReal do you think that's making them such a dominant player in the fashion industry? And where do you see their future going?

• 9:03Speaker 02

  Yeah, this is one of the the companies that I'm really proud of because the original thesis of the company has held true three years later. Uh, and the company has just grown successively ever since we invested in it, almost without a hiccup.

• 9:19Harry Stebbings?

  Could you provide a little description just for our audience that maybe?

• 9:22Speaker 02

  Sure. Yeah, I'm happy to. So they are the leader in luxury consignment. So they do flash sales and they uh, they will take in and authenticate and photograph and describe very high quality luxury merchandise. That can be clothing, accessories, jewelry, handbags, shoes. Uh, at at very, at at very low price points relative to the retail value, but also very high quality brands and high quality merchandise. So most of this merchandise is, has either not been used or been used very, very lightly.

• 10:02Speaker 02

  We take it in, we authenticate it, and we then make it available to our customers. And in so doing, the consignors, the people that are giving us the merchandise, uh, will generate anywhere between sixty and seventy percent of that sale. But we believe that the curated and authentic marketplace that the RealReal provides, provides a lot more uh, comfort and usability to our customer base.

• 10:32Harry Stebbings?

  Okay.

• 10:33Speaker 02

  So the com- the company's been doing exceptionally well. They've grown from uh, first year ten million in sales to fifty million in sales, to last year about a hundred and five million in sales, and they're looking to double this year, which there's no reason they can't, given the quality of merchandise on the site.

• 10:50Harry Stebbings?

  And and are they planning to expand outside of the US in in the next year or so?

• 10:56Speaker 02

  Yes, so we just started shipping internationally about four months ago and that has been an exceptional, it was, it started as an experiment, it's become an exceptional success for us. Without any bit of marketing, we've already reached ten percent of our sales coming from international, that is outside of the United, outside of the United States. And again, that's with no marketing. Um, the plan is in the next year or two to expand and put an outpost somewhere in Asia, if not two outposts in Asia, just because the demand for luxury goods there is so exceptional. Um, but first we are really making sure that we own the US market, which at this point I think we do.

• 11:39Speaker 02

  Uh, and then we're going to expand globally. So the ambitions are high for this company.

• 11:43Harry Stebbings?

  And with the extremely, um, attractive prospects for companies like The RealReal and the increasing amount of capital available, VCs face great competition between firms.

• 11:55Speaker 02

  Yes.

• 11:56Harry Stebbings?

  What can VCs bring to the table to beat off the competition?

• 12:01Speaker 02

  So the business has changed dramatically from when I joined fifteen years ago. When I joined, uh, the vast majority of venture players were generalists. That is, one might do a, an enterprise software company one month and then a couple of quarters later, one might invest in a consumer oriented company. That is less and less the case. So what I advise new, um, entrance into the VC market or junior people to do is really to differentiate based on a franchise. So pick an area and it need not be a, a, a niche area, it could be a pretty broad area. And really develop a thesis in that area for where the white spaces,

• 12:44Speaker 02

  where the hidden gems are, where the big markets are, where the pain points are. And get to know the entrepreneurs, get to know the corporate development executives, get to know the engineers and product people at big companies in the space. So that your network is broadened in that space, but you're also, you're also looked at as a subject matter expert and can brand yourself as such. That, it seems to me, is the easiest and potentially the only way of differentiating yourself in a market such as this.

• 13:17Harry Stebbings?

  And what markets then did you choose when, a few years ago, when you were contemplating which niche to choose, which one did you go for?

• 13:25Speaker 02

  Sure, as I mentioned years ago, um, I joined venture from Quest Communications, was a telecommunications company, and largely my work there was in data center infrastructure software.

• 13:36Harry Stebbings?

  Okay.

• 13:37Speaker 02

  Um, so I have spent a lot of time and effort in that space, um, I've had a couple of exits in that space in the last two years, um, and have currently, I I've invested in three other companies in the space in the last six months, and that's again aside from the more generalist investments of Kabam, which is the mobile gaming company we mentioned and the RealReal.

• 14:01Harry Stebbings?

  Sure.

• 14:02Speaker 02

  But again, the sweet spot being that, that data center software area.

• 14:05Harry Stebbings?

  And you recently, switching sides of the table to the entrepreneur now, you recently tweeted an article named Twelve Ways to Impress a VC.

• 14:15Speaker 02

  [laughing]

• 14:16Harry Stebbings?

  If there was, if there was one thing that an entrepreneur could do to impress you, this could be maybe when they're coming to pitch to you, for example, more than anything else, what would it be?

• 14:25Speaker 02

  I wish I could give you a one thing as an answer, uh, but I will tell you a couple of things and I'll let your, your, um, listeners ferret out the, the true answer. Um, we lose money as VCs, large, as early-stage VCs, largely because we've gotten the market timing or the market size wrong. The market size just isn't big enough, or the market hasn't evolved as quickly as we, we suspected it would. Now, I'm looking for a founder or founders to come in and tell me why a market is big and why their product is really going to attack and take over that market.

• 15:06Speaker 02

  I'm also looking for a team, and it need not be a big team, because again, we're early stage. Who is intelligent, driven, nimble, and at the same time humble. Enough to realize when they need to course correct. So it's a recipe of different ingredients as opposed to one. You know, one piece of, one piece of food.

• 15:32Harry Stebbings?

  And how long do you think, it's a very interesting topic in terms of course correcting and potentially changing original ideas.

• 15:38Speaker 02

  Oh, yeah.

• 15:39Harry Stebbings?

  How long do you think is long enough to give an idea a chance to succeed? And then how, you know, after what period should you maybe consider pivoting a bit?

• 15:49Speaker 02

  There are very few companies that don't have to pivot. How much they pivot is a different story. And it, it depends on again, what the market feedback is. The pivot might be, we need to sell differently. The pivot might be, we need to market to a different audience because we have the customer base slightly. Slight, the customer base that work were slightly off target, or the pivot might be a wholesale change in product. And again, all of that depends on what market one is targeting. And also the technical viability and the technical difficulty of whatever the company is building. So I wish, again, I could give you a concrete answer, uh, but instead I'm going to give you a whole hearty, it depends.

• 16:33Harry Stebbings?

  And how, how would you traditionally like entrepreneurs to connect with you? Uh, would you like kind of a referral from a, a partner or a colleague of yours? Or a Twitter reach out? How would you normally like to be made contact with?

• 16:50Speaker 02

  So I want to be contacting you because I have been working in the space for a while. But there are invariably companies that I can't touch because of time constraints. And because my network isn't as broad as, you know, the seven million, seven billion people on the planet. Um, so what I'd like to do is have people come through a referral. Whether it's a referral from the, an entrepreneur I've worked with before. Or come people in my, my portfolio companies or other VCs or attorneys. Um, but again, it referrals that are hitting the sweet spot of my investment. So typically, series A.

• 17:34Speaker 02

  And potential some seed. As well as uh companies that are largely again in the data center infrastructure software space, but. I will do things like consumer deals as well. So if they I'd like them to come through a referral from somebody who I view as credible.

• 17:51Harry Stebbings?

  Okay. And I read recently that you stated, obviously, you look for disruptive pitches. Leading me to ask, where do you think the next big forms of disruption are coming from? And how are you planning to get in early on them?

• 18:05Speaker 02

  So uh I feel like I'm investing in a couple of ones already that are. That are in and around the. The areas of massive transformation. And that's again where we really as VCs. Want to be investing. We make money when massive transformations happen. Like in the case of Lending Club, which is a portfolio company of ours where we invested in the Series A.

• 18:31Harry Stebbings?

  Congratulations.

• 18:32Speaker 02

  Yes, thank you, thank you.

• 18:33Harry Stebbings?

  That's a massive congratulations.

• 18:34Speaker 02

  Massive, yeah, exactly. And we made a bet there that peer-to-peer lending would be. A massive market because. Banks were just not providing loans at the rate that they'd used that they had been before, given the two thousand eight, two thousand nine. Crisis and it worked. Um so we're looking for companies of massive disruption. In my area in particular, um uh containers are now the new thing. So. Uh you see companies like Mesosphere and Docker and Core OS coming up and really trying to. Um supplement, but but truly the um the.

• 19:17Speaker 02

  What they're trying to do is completely replace uh very, very large companies like VMware. And the the notion of using virtual machines in um. Uh uh for applic- for running your applications on. Um so I believe that that is a huge disruptive force in the industry. Uh in in again, the the data center software space where I play, uh and so we're investing there heavily.

• 19:43Harry Stebbings?

  Fantastic. And if it's okay with you, we're gonna jump into a quickfire round where I say a word or.

• 19:50Speaker 02

  Please.

• 19:51Harry Stebbings?

  Perfect. How do you measure your success as a VC?

• 19:55Speaker 02

  By my company's success.

• 19:57Harry Stebbings?

  Okay, is that in terms of exits?

• 20:00Speaker 02

  Exits and just the progress they're making.

• 20:04Harry Stebbings?

  Okay, what is the hardest part about being a VC?

• 20:09Speaker 02

  Seeing companies fail.

• 20:12Harry Stebbings?

  And finally, your most recent investment and why you said yes?

• 20:17Speaker 02

  My most recent investment was in a company called Cluster HQ. It is a former CEO of mine, Mark Davis, who sold his company a couple of years ago to VMware. And this is a UK and US-based company, again in the container space, looking to provide storage solutions for containers.

• 20:41Harry Stebbings?

  Fantastic. And Maha, thank you so much for coming on the show. I've hugely enjoyed chatting with you and I hope to have you on again soon.

• 20:48Speaker 02

  Oh, my pleasure. Thanks so much.

• 20:50Harry Stebbings?

  Now, for all the links and incredible resources mentioned in today's show, do head on over to the blog at www.the20minutvec.com. And please do follow us on Twitter at 20minutevc, all in letters. And we can't wait to see you in the next episode.