Craig Shapiro – Better for You, Better for the World - [Invest Like the Best, EP.11]

This week Patrick takes a deep dive in the world of Venture Capital with Craig Shapiro, founder and CEO of the New York based Collaborative Fund, which was an early investor in companies like Lyft, Kickstarter, and Reddit. We cover Craig’s investing roots, his process for sourcing and evaluating investment opportunities, and the very useful “villain test.” Please enjoy! For comprehensive show notes on this episode go to investorfieldguide.com/shapiro/ For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

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

• 0:00Patrick O'Shaughnessy?

  This podcast is sponsored by CFA Institute, the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals, working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The Chartered Financial Analyst credential is the most respected and recognized investment management designation in the world. The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome, everyone. I'm Patrick O'Neal, and this is Invest Like the Best.

• 0:43Patrick O'Shaughnessy?

  This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 0:59Speaker 01

  Patrick O'Neal is a principal and portfolio manager at O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:21Patrick O'Shaughnessy?

  This week, we dive into the world of venture capital. My guest is Craig Shapiro, founder and CEO of the New York-based Collaborative Fund, which was an early investor in companies like Lyft, Kickstarter, and Reddit. Craig's mission at the Collaborative Fund is to find and invest in companies that are both better for you and better for the world, a unique combination which leads to very interesting investments. One of the great things about getting older is the ability to judge people's character faster and more accurately. Within five minutes, Craig made a very strong impression on me as a person. You can tell that he is both humble and kind, but also driven and incisive. This is a special person and a special guest on the show. Like the Ted Saidis episode on hedge funds, this conversation on venture capital is a

• 2:03Patrick O'Shaughnessy?

  great high-level introduction to alternative investing. You can find show notes for this episode at investorfieldguide.com/shapiro. Please enjoy our conversation.

• 2:18Patrick O'Shaughnessy?

  I read a post by yours which has really inspired me, which is the one about roots and the importance of personal roots in sort of the outcomes in your life and your professional career. I would love to start by hearing a little bit about your personal roots and how they sprouted what has become the Collaborative Fund.

• 2:39Speaker 02

  Yeah, well, you know, my grandfather was an immigrant to the United States. He came over from Russia in the luggage section of a boat. You know, one of these stories where he came in to Ellis Island, lived in the Lower East Side at a very young age, never had a formal education beyond elementary school, and started out with a push cart. He was selling fruit and produce on a cart and somehow made his way down to Washington, DC, got married and raised my father and his two brothers above a small grocery store. And, you know, that story of just kind of lifting himself up by his bootstraps and, you

• 3:23Speaker 02

  know, creating a life for him and his wife and my father and his two brothers is kind of the American dream in its truest form. And it just inspired me in so many ways. I mean, it's just incredible to have thought about all of the challenges that he faced. And in talking to him before he passed, you know, one of the things that I feel like he passed down to myself and to the rest of our family was just the belief in kind of working together, that you can't go alone. And that was, that was part of the thinking behind Collaborative Fund, was, you know, kind of supporting people who are just getting started, who against all odds were trying to do something positive, and helping them.

• 4:08Speaker 02

  And capital is, you know, in essence, it is the most universal kind of resource, certainly not the only, and maybe not even the most important, but it's universally needed when starting a business. And so that kind of inspired me, you know, as kind of a mechanism for, for supporting entrepreneurs. And I think about that often. You know, I don't want to belabor the point, but I do, I do feel like that background... And your roots are both a metaphor, but also, you know, literal translation of like what we're what we're growing here and that, you know, that seed blossomed into, you know,

• 4:49Speaker 02

  I think, in my case, a wonderful family. And, you know, I'm hoping that with Collaborative Fund, you know, we're able to kind of build a similar organization using some of the same principles and values.

• 5:02Patrick O'Shaughnessy?

  That's a really, really neat story and leads well into, I think, maybe I'll call it your mantra, which is this kind of dual-sided filter that you're looking for in, I think, in businesses, maybe even in founders, which is better, better for me and better for the world. Maybe you could describe how you got to that sort of Venn diagram where you're trying to hunt in the middle or the intersection of those two things.

• 5:24Speaker 02

  You know, it's funny because I feel as though, you know, the world, the world kind of bifurcated those two things. You kind of had, you had organizations that were really focused on doing good in the world. They were mostly nonprofit organizations, you might imagine, something like the Red Cross, and it fit on one end of the spectrum. And on the opposite end of the spectrum, you had organizations whose sole purpose was to generate as best financial returns as possible for their shareholders, shareholders, something like Coca-Cola. And, and it was, you know, it was very clear and distinct.

• 6:04Speaker 02

  And I feel like culturally, the, the world has kind of migrated somewhere in between those two ends of the spectrum. When you look at, I think, the leading organizations today, they fall somewhere in between those two. And so, you know, they, if you look at, you know, there's, there's a nonprofit called Kiva, which does microloans. I, you know, I think they, if you look at how that organization's run, it would almost surprise you, you know, it was started by a former PayPal employee and a Stanford Business student. And it's, it's run almost like a for-profit business in a lot of ways.

• 6:47Speaker 02

  You know, if you're sitting in their boardroom, I think you'd be surprised. It may look and smell different than what you would imagine of a nonprofit. And I think the same holds true in some public organizations or for-profit organizations. So my hunch is, not having ever attended a Starbucks board meeting, but I think Howard Schultz does talk about what Starbucks's role is, both in the community as well as kind of a global citizen. And so I think, you know, the world has kind of shifted in this direction that it's not kind of as black and white as the Red Cross or Coca-Cola.

• 7:26Speaker 02

  But ironically, our financial markets haven't really kind of shifted alongside culture. And so you still, we have these, you know, somewhat antiquated financial systems and metrics that are still measuring and rewarding kind of an old-school system. And so, you know, I think that creates an opportunity, and not just for collaborative fund, but I think for a lot of investors across all asset classes to invest in kind of organizations that kind of fit somewhere between those two ends of the spectrum. And I genuinely believe in our, kind of, the core of our investment thesis is that

• 8:07Speaker 02

  the businesses that get that right, that balance right between those two, are the ones that are going to generate the greatest financial returns over the next decade and beyond.

• 8:18Patrick O'Shaughnessy?

  And probably returns beyond just financial, too, right?

• 8:20Speaker 02

  Absolutely.

• 8:21Patrick O'Shaughnessy?

  Stakeholder return instead of a shareholder return.

• 8:23Speaker 02

  That's right. That's absolutely right.

• 8:25Patrick O'Shaughnessy?

  It's interesting how you mentioned Coke and its sugary product and how I think financial markets are, you know, they lag. And one of the things that's a really popular topic these days is ESG investing, which is, it sounds great, it's very hard to implement, especially, you know, in an index fund or at the, you know, the pension level, it's a very romantic notion, but as a passive secondary investor, it's hard. And so I am fascinated by... To hear more about your process for finding these businesses because there's something horribly impersonal about entering a ticker and clicking buy and you're an investor, I guess, but you're really just a buyer.

• 9:09Patrick O'Shaughnessy?

  Maybe you're affecting the company's cost of capital or something by your buy or sell decision, but you're not making direct investment of not only your money, but your time.

• 9:17Speaker 02

  Yeah.

• 9:17Patrick O'Shaughnessy?

  So obviously, the venture world is much more hands on.

• 9:20Speaker 02

  Yes.

• 9:21Patrick O'Shaughnessy?

  So everyone's got their funnel, right? There's some wide swath of opportunity that narrows down into whatever you actually own. I would love to hear about kind of the stages of that from your perspective, how you sort, how you find things to begin with. We'll talk, I'd love to talk a lot about evaluating people and ideas and then kind of, once you invest, how you, how you manage, how you, what you do beyond just, you know, a dollar check.

• 9:44Speaker 02

  Sure.

• 9:45Patrick O'Shaughnessy?

  So maybe we'll start at the top with the top of the funnel and how do you, how do you find, how do opportunities come to you? How does deal flow work here in New York City for you, kind of away from the venture, the venture epicenter out west?

• 9:55Speaker 02

  Yeah, yeah. You know, venture is interesting in that it's the only asset class that I'm aware of where the underlying assets don't yet exist. So when you're going out to raise a venture fund, it's a very strange kind of mental exercise because you're convincing people to invest in things that don't yet exist in most cases. And that I think that's, you know, just factually different than investing in public equities or, you know, bonds or, yeah, that you, you may have an opinion as to, you know, whether commodities are going to go up or down.

• 10:32Speaker 02

  But one thing is for sure, they exist and this is, it's a strange exercise to go out and kind of convince people to invest in a fund, you know, for things that don't, don't yet exist. But if you look historically, that's kind of worked out in some cases and it's, you know, it's, it, the, particularly in, in the U.S. The kind of entrepreneurial spirit and just new business creation has been, I think, a driving force of our economy. And so, you know, and, and, you know, low and behold, if you, if you get it right, if you, if you're able to invest in some businesses very early on in their evolution. It can pay tremendous rewards. So the risk-reward profile is interesting, but also just the tenor of how you raise

• 11:17Speaker 02

  that capital is interesting. For us, we have several sources of deal flow. Like, how do we find stuff? One is just kind of, I like to think somewhat unique to who Collaborative Fund is, and this goes back to our roots. And so, in selecting who our limited partners are, who our investors are, they're actually a great source of deal flow. So, we have a number of entrepreneurs who have invested in Collaborative Fund. Folks like Chuck Templeton, who founded OpenTable, or Scott Hyferman, who founded Meetup, Ron Gonan, who founded Recycle Bank, Chad Hurley, who founded YouTube, and folks like these

• 12:01Speaker 02

  individuals that see a lot of deal flow themselves. So, in the case of Ron Gonan, subsequent to Recycle Bank, he became the recycling czar under Mayor Bloomberg. And so, really, any startup that is in the waste management, recycling sandbox, looks to Ron as somebody who really knows the space, is well-connected. And so, a lot of times, he's seeing deal flow that he's not able to parse or evaluate himself, and in some cases, will share that with us. And so, our limited partners are a really rich source of deal flow, because oftentimes,

• 12:44Speaker 02

  their time and energy is spent a bit at a later stage. So, they're deploying larger amounts of capital into more established businesses. The stuff that's really messy, just getting started out of a garage somewhere, they may not have the time to evaluate every single one of those opportunities. And so, Collaborative Fund actually serves as a wonderful, almost like an outsource for a lot of that early-stage deal flow. The second, and frankly, this has become an even richer source as the fund has aged a bit, is our actual portfolio. So, we've now invested in...

• 13:24Speaker 02

  You know, over 50 companies and those companies themselves spawn companies. You know, when, when one of the co-founders decides it's time to move on and start selling new, or the VP of Engineering wants to start his or her own business. And so we have this, you know, ever-expanding pool of talent that just, you know, continuously kind of refreshes itself. So that's how, that's how we find the bulk of our investment opportunities.

• 13:51Patrick O'Shaughnessy?

  So that's clearly an edge, right? Where it seems to me, in my very limited knowledge of the venture world, that, that sources of deal flow is maybe one of the most important aspects of the firm. And so, so dig a little bit more into the first one. So you have these, these great people, these limited partner investors themselves. How, how did those relationships get cultivated?

• 14:14Speaker 02

  Yeah.

• 14:14Patrick O'Shaughnessy?

  Because that's obviously the most important step. Think about it sort of like a, you know, a cold call versus an extremely warm lead.

• 14:20Speaker 02

  Yeah.

• 14:21Patrick O'Shaughnessy?

  On the sales side. How, how did you meet these people? What was your background to get these limited partners?

• 14:27Speaker 02

  Yeah. You know, there's, there's two things I think are important there. One is, you know, prior to doing Collaborative Fund, I was an entrepreneur. And so through business, I was able to build relationships with some of these folks, which I just had the kind of good fortune of bumping into them, doing deals with them, working together with them. In some ca- in some cases, working on opposing sides, but building a mutual respect. And so I think, you know, not coming, ironically, not coming from the investment world, but more as an entrepreneur and battling it out.

• 15:02Patrick O'Shaughnessy?

  Heroes.

• 15:02Speaker 02

  Yeah. I think, you know, I was able to form some of those relationships. The other, which I think is, you know, certainly not, you know, only applicative to Collaborative Fund, but I do feel like is somewhat unique, is our, our brand and our values are somewhat self-selecting.

• 15:21Speaker 02

  And so let's use Scott Heitman, founder of Meetup. I think even though our relationship wasn't super close, I think he saw what we were trying to do and just believed in it. I think the underlying mission served as a wonderful beacon, if you will, or a magnet to attract the type of people who could be value-added in the efforts that we're pursuing. And I think that's really important because I look at so many financial managers and they choose either their own name, right? So it's, you know, Smith and Associates, or they choose just kind of an innocuous, you

• 16:01Speaker 02

  know, Ridgecrest, you know, mountain, you know, mountain summit partners. That really, you know, I heard, you know, I was with some hedge fund managers, one of them was telling me, you know, he chose the name of his firm based on the streak that he grew up on. Very common. Yeah, and I think that's, there's something really, I love that, but I think you miss the element of that beacon, right? So nobody's saying, you know what, Ridgecrest, you know, that's something I want to get behind. But I think collaborative fund is kind of a stake in the ground that says, you know, we believe that essentially, you know, collective action and resources are going to be a competitive

• 16:44Speaker 02

  edge in the for-profit kind of venture world. And I think that that's a way of life, that's a kind of a thesis on where things are going and is just attractive. And not just to the sources of capital, but frankly, the same holds true for entrepreneurs as well as partners and media and you name it. It's like, it's a very, it's, your brand is, we take that very seriously, so.

• 17:14Patrick O'Shaughnessy?

  Tell me a little bit about your entrepreneurial roots. So what was the business or businesses that you started?

• 17:19Speaker 02

  Yeah, so I was involved with two in particular. One was a startup in the mobile technology space.

• 17:27Patrick O'Shaughnessy?

  For those that can't see, in the room where we are, there's a cool time series of cellphones. I don't know if it's chronological or not, but definitely some what now look like ancient devices even though they're only 10 years old.

• 17:39Speaker 02

  Yeah, it was a startup called Proteus. And we were building applications very, very early on in the mobile ecosystem. And so you can imagine kind of text-based marketing. Some of the things that we did were voting on live television. So during sports programs, who do you think is going to be the MVP? And even during awards shows and those types of things. Obviously, American Idol kind of blew that whole kind of sector up in a large way in the US. And that business, we ended up partnering with HBO and doing kind of as their exclusive

• 18:24Speaker 02

  mobile partner. So we built games for Sex and the City and Sopranos and Ringtones and the like. And that business ended up getting acquired at the end of 2005. And then subsequent to that, I worked at a media company called Good Magazine. And Good Magazine is an organization that celebrates individuals, businesses, and nonprofits that are pushing the world forward.

• 18:51Patrick O'Shaughnessy?

  Talking about deal flow.

• 18:53Speaker 02

  Yeah, I think the experience there was informative and useful on a number of levels, and ironically, very complimentary to the experience at the mobile business. So without kind of boring you with the details, the mobile business was bootstrapped. We really, we didn't raise much outside capital. And so we kind of had to figure out a business model that allowed us to keep the lights on and grow our business. Organically, whereas Good Magazine was started by a guy named Ben Goldhirsch. And Ben's father founded Ink Magazine. And so Ben had had resources to actually invest in the business.

• 19:37Speaker 02

  And we were able to kind of grow without, you know, kind of bootstrapping the business. And having the experience of both of those efforts, I think, was was very valuable. So I look at our investments today and knowing when to kind of focus on your unit economics and, you know, how to build a budget and where to cut burn and how to build a team that's aligned around spending and all of the kind of core financial metrics is critical. But also knowing when to kind of invest in the business ahead of where your balance sheet can and knowing how to utilize outside capital is also very important.

• 20:21Speaker 02

  And so, you know, those two experiences were super valuable kind of to the experience that I have today. And I would layer on, you know, the just the ethos and the kind of the sensibility behind Good Magazine. And certainly Ben and Casey and Max and the whole team there, you know, just the thinking was inspirational to some of the stuff that we're doing at Collaborative Fund.

• 20:47Patrick O'Shaughnessy?

  So cool. The whole story really makes me think of, to use maybe a venture, since we're talking venture, use a startup kind of idea that you want to gain as wide a berth, you know, users, their attention as possible, maybe before monetizing, which is how a lot of these massive firms have been successful. Of course, there's lots that haven't been successful, too. But it's a really compelling idea that there's, you can build like an exponential, almost like cumulative advantage before putting it to use. I even think of this podcast as an example. I've been friends with Morgan for years. And if I hadn't been friends with Morgan, I wouldn't be sitting here, you know? It's a neat idea that you just want to... Good is an appropriate name for the magazine, just do good, cultivate good relationships,

• 21:32Patrick O'Shaughnessy?

  and then who knows what will happen. Really neat idea. I love the idea of LPs as roots themselves that really shape the fund. So maybe we can get into that middle part now, which is, okay, you've got lots of stuff coming your way, early stage. I don't know if you focus more on seed, or on A, or B, maybe we can get into that. But how do you, what's the evaluation look like? How do you, do you have a checklist? Do you have, you know, consistent, repeatable methods for evaluating either the founders or the ideas? Which one's more important? I love this middle stage, so maybe talking through how you evaluate opportunities.

• 22:11Speaker 02

  Yeah, so I guess maybe, starting out, we do, we kind of focus in or around the seed stage. And so, you know, we're not so dogmatic that we won't look at things that are slightly beyond seed, but our favorite is kind of right when it's getting started. It's the most creative, it's the messiest, you know, and it's the most formative. And so that's kind of where we aim most of our efforts. You know, and in terms of how we evaluate, you know, we do, we do a lot of the kind of traditional work that, you know, what I would imagine most venture capitalists do.

• 22:53Speaker 02

  We evaluate, you know, their business savvy, we evaluate kind of the business model, and the size of the market, and the competitive landscape, and a lot of the, you know, kind of checklist that one might imagine. But I think the part that I enjoy most, and that I think is somewhat unique to Collaborative Fund, goes back to that original investment thesis around kind of this intersection between kind of, you know, what's, what is best for me and what's best for the world. And I think that that's a really... That tension is, can be transformative. And I do, I credit some of this to Ben Goldhirsch from Good Magazine.

• 23:38Speaker 02

  He shared with me a term called the villain test, which I just, I hold dear, I love. Which is, you know, there's this notion of doing good and what's best for the world. It's something that I think a lot of people are engaging with. Like, it's a sensibility that has emerged a lot over the last decade. But I think as it relates to investing, if not done well, it can really impair returns. Burn cash. That's right. Because we're human beings and by nature, we're self-interested.

• 24:18Speaker 02

  And so finding the balance between what's best for me and what's best for the world is really where we like to evaluate startups, right? So there's a couple of examples that I give that kind of illustrate this tension. You know, one might be in the transportation space, right? So you've got the Ford Mustang or Ferrari, right? So it kind of scratches that itch of like sexy, bold, fast. Like, you step into that car and you feel like you're, the whole aura changes. I mean, it just is, it's so dominant, right? But you have the Toyota Prius.

• 25:03Speaker 02

  And stepping into a Prius gives you a different set of feelings and emotions. Like, you feel good about that decision. You feel like you're a part of a community that kind of cares about the world. And so those two inherently...

• 25:21Speaker 02

  Unfortunately, are at odds until an entrepreneur like Elon Musk comes along and creates something like Tesla, which kind of allows for both of those emotions to exist, right? So Tesla is every bit as fast, beautiful, the industrial design is world-class, but it's also electric. And so it allows you to kind of, you know, scratch the itch of like feeling dominant and bold and sexy, but also caring about what goes on in the world and about your community. And I think that's where the transformative kind of businesses are going to be born, is

• 26:02Speaker 02

  at that intersection and you can see it and the returns from that. And so, you know, that's what we really look for is like, is this too heavily skewed towards one of those ends of the spectrum, right? So if we have an entrepreneur that comes in and they're talking about, you know, they're creating a product that, gosh, is going to make the world a better place and, you know, this sweatshirt is, you know, it's made with, you know, cotton that is, you know, fair trade and, you know, the, you know, all of the kind of, you know, better-for-the-world metrics, but I look at the sweatshirt and think, you know, I wouldn't be caught dead in that thing. Like, I'd be embarrassed to wear it. It doesn't, then it doesn't work.

• 26:45Speaker 02

  As much as my heart would want to support it, that's just not what we do at Collaborative Fund. Whereas if somebody comes in and they are at the other end of the spectrum, right? Like, look at this sweater, it's so beautiful, the way that it sits on your shoulders and it makes you look proud and sexy and, you know, but you ask them about...

• 27:04Patrick O'Shaughnessy?

  Twenty animals die and make...

• 27:05Speaker 02

  Yeah, exactly. Then, so it's kind of finding that balance. And I don't know if that's helpful, but that's really how we evaluate startups is around kind of that tension.

• 27:15Patrick O'Shaughnessy?

  I love the idea of a villain test, right? To keep yourself honest. I heard a funny expression one time where as you move down the body from head to heart to groin, the profit margins go up.

• 27:25Speaker 02

  I like that, yeah.

• 27:27Patrick O'Shaughnessy?

  And I think that that's, you know, the Tesla example is a good one. Do you have a, maybe a portfolio company now that you could use as an example or that exemplifies this kind of intersection that's, that gets it, gets both right?

• 27:40Speaker 02

  Yeah, you know, I think there's a couple that immediately pop to mind.

• 27:46Speaker 02

  I think Kickstarter is one, you know, where, you know, selfishly, you know, people need capital for their creative projects. Sure. Whether it's a- Where did you invest in Kickstarter? We were, we were about one of the earliest investors in Kickstarter, so it was probably around 2010. And just, you know, the idea that, you know, again, kind of stepping back to this kind of collective effort, it was so clear that having multiple stakeholders lift up kind of creative projects was just a wonderful way to transform that. And, you know, prior to Kickstarter, you know, something like the National Endowment of the Arts and applying for a grant, you know, was, was really the, the sole means

• 28:29Speaker 02

  of, of trying to accomplish that, or asking friends and family. And, and with Kickstarter, it kind of opened, opened things up in a way that like, you know, I, I, you know, I remember when, when Kickstarter was first getting started, subsequent to our investment, even some of our own investors were saying, who in their right mind would give money to a project to get nothing, you know, no tangible reward? Right? So you, you're telling me you're gonna give money to an entrepreneur who's creating an independent film or a new product, but yet you get no equity in that product? You get no financial benefit? It's just you're, you're kind of like contributing to it?

• 29:14Speaker 02

  That seems crazy. And it's, it, in fact, not only did it work, I mean, they've now, you know, over $2 billion has, has gone on Kickstarter. And so it's, uh, has been raised on Kickstarter. So it's, you know, it, it, it clearly scratches an itch, both from, you know, what's, what's, you know, best for me as an individual, kind of enabling me to, to achieve my potential. But also this broader community of feeling like they're contributing and lifting somebody up. Another that I want, you know, that I think is, is very different from Kickstarter, a more recent investment is in a food company called Ripple Foods. Oh, they make the milk? Yes, that's right. My son has a dairy allergy, so I've heard of it.

• 29:59Speaker 02

  Oh, really? Yeah. So I think, you know, food is a very interesting one because it's, it's universal and it's, it's consumable and it's, it's something that everybody can relate to. Right? So, so Ripple has a number of benefits, right? If you, if you go back to those kind of different buckets and you think about like, well, how is Ripple Foods better for the world? You know, they're using pea protein to create a dairy alternative, a milk alternative. So Ripple uses a fraction of the water and resources that dairy milk uses and, and even more so, in addition to using significantly less water and resources than a lot of the

• 30:43Speaker 02

  other dairy-free milk alternatives, so almond milk, cashew milk, other, other milk alternatives. It just is less resource-intensive. So it's, it's just better environmentally, just hands down. It also happens to be better nutritionally, right? So it's, it's got more, more protein than almond milk or, or the other kind of nut-based milks. And so it, it checks a lot of boxes in terms of like better for the world, right? Uses less resources, it, it, it's higher in nutritional value and, and at scale, it can, it can even be less expensive. And so, so it checks a lot of boxes. But guess what? Tastes better. If it doesn't taste good, it doesn't work.

• 31:28Speaker 02

  And so, you, you know, if, it, that's, that is in its clearest sense, like if you drink the milk and it just tastes better, then it, it's that Tesla example. It's like even if you want to be using less water and less resources and more environmentally friendly and more sustainable, if it doesn't pass the villain test, forget it. Because it's, the, the market, the market size for people that are willing to be sacrificial to do the right thing, there is a market that exists there, by the way, but it's very small. Right. But the market size of people. Who kind of want to do the right thing, but not at the sacrifice of what's better for them.

• 32:12Speaker 02

  Their self-interest is massive and growing.

• 32:15Patrick O'Shaughnessy?

  Have you read Spent by Jeffrey Miller? Oh, my God. So this book is going to blow your mind. It is like an evolutionary psychology look at why, you know, why we, basically why we behave the way we do as consumers. And there's this sort of, he doesn't use this, this dichotomy, but I, I've taken it away from the book, which is this like looks good or feels good. Kind of dichotomy where looks good is kind of signaling. So it's the, the Ferrari that, that tells women something about your sexuality or whatever. Um, the, the feels good is just selfish, right? That you just, you buy or something because it's just, it's just better. It's just good. And so it's the, maybe the villain test is, captures both, right?

• 32:59Patrick O'Shaughnessy?

  That it's, you can, as long as it does something, either looks good or feels good. It's a, what a, what a neat test. I love that. Are there negative screens, um, things that, let's say they pass the villain test. Things about founders or ideas, um, that, that would cause you to pass. That could be something as simple as, you know, you're not going to invest in another milk company. Um, I, I love negative screens because sometimes I think they're even better than, than things to look for. So anything.

• 33:27Speaker 02

  Yeah, yeah, actually. So the thing that immediately comes to mind, um, when asking that is kind of the origin of the idea or the business. And the negative screen for, for me is, uh, is when it doesn't come from, uh, kind of a pain point. And so oftentimes we'll meet with entrepreneurs that, uh, that have, you know, read about this emerging market. Uh, in a, in a recent McKinsey study or, uh, or some other kind of, uh, you know, industry publication.

• 34:05Speaker 02

  And they see, gosh, you know, the on-demand economy, uh, is, is, you know, today a $7 billion market and set to explode to a $24 billion market. And so they think, what could I do in the?

• 34:19Patrick O'Shaughnessy?

  Give me my piece of pie.

• 34:20Speaker 02

  Yeah. And, and, and therefore they come in, they have all the right statistics. It's compounding at X rate. It's growing. It's underserved in the U.S. There's no other competitors that are doing it. But guess what, they're not really doing it for the right reason. Their genesis behind the business was born out of something that was opportunistic. And startups are just hard. I mean, I've never, I've yet to invest in a startup business that hasn't gone through some struggles. And it's during those difficult periods where that really matters. Because the people that got into it opportunistically are the first to give up, right? They're the first to say, gosh, this was really...

• 35:01Patrick O'Shaughnessy?

  Because they're at a new McKinsey survey.

• 35:03Speaker 02

  Exactly. They didn't talk about this part, the hard part, in the McKinsey study. It only talked about, you know, kind of the upside. But it's the folks that came in there that, you know, they come in, they kind of talk about the personal struggle. You know, I've been, I've had an allergy or a family member and I just, you know, I looked at the options of what was out there and nothing really great existed. And I just, I've decided to like make this my mission.

• 35:34Patrick O'Shaughnessy?

  Solve my own need, yeah.

• 35:35Speaker 02

  Oh, and by the way, there's a couple of studies who kind of talk about this as being a growing market. Maybe they're right, maybe they're wrong. Doesn't matter to me. And so the negative screen there is really kind of like, what is the driving force? Because that tends to really play a key role during the down periods, during the difficult periods of a startup.

• 35:58Patrick O'Shaughnessy?

  What other, that seems like the perfect piece of advice for an entrepreneur is, don't do something for money. That can be part of the motivation, but do it because it's something you're deeply passionate about. That seems like easy advice to give, but it's hard to follow. What other advice for entrepreneurs would you have, and maybe even specifically those that are trying to engage with the venture world, with allocators that might fund their business? What are things that they can do to improve their options?

• 36:30Speaker 02

  Yeah, you know, one thing that comes to mind is, most people that I've had the opportunity to either meet or learn from or even read about, who have been massively successful, share one characteristic, which is...

• 36:50Speaker 02

  They pursued something and became great at it before it was mainstream. And so, one piece of advice I would give people or folks is kind of what is that passion point that you have that's not necessarily popular or hot, like once McKinsey writes a report about it. It's too late. It, I don't know if it's too late, but it's, you know, I think it's your, your opportunity set is actually somewhat smaller. It's kind of, it's the folks that like, you know, I mean, to be provocative. You know, it's, it's the, it's the trombone player who, you know, just loved it.

• 37:35Speaker 02

  And like went so deep into the trombone and the history of the trombone. And despite like, that was not the cool instrument. Everybody was into the jazz saxophone and like, you know, and that was the hot instrument. But, you know, the young man or woman, you know, just trombone was their thing. And then low and behold, the world shifts to looking at like trombones. All of a sudden trombones are the big mainstream hit. And you're, you've been for the last decade practicing the trombone because that's your passion point. So I almost think like finding the things that, you know, kind of energize you that may not be popular.

• 38:20Speaker 02

  Like if, if what we're talking about in today's investment world is the sharing economy or on-demand economy or fintech or fill in the blank. Like I, I would almost force yourself to try and think about what are the things that really interest you that aren't, aren't there? And to like, and push you into that territory. I think that's, if I was starting a new business today, I would really be thinking a lot about kind of what could I be the best at? That isn't necessarily like the sun hasn't shined on it yet.

• 38:57Patrick O'Shaughnessy?

  You know, that that seems like it could be also applicable to people that that are not. Not everyone can be an entrepreneur. It's a huge risk to take. But even within an established business or career, there's going to be, you know, 15 elements of your job. And it seems like that applies there, too, that if there's, you know, some aspect of whatever it is that you do, that may not be the, you know, the hot dot, but but you're really good at, it probably works out the same way. There's this writer who will be on the show, who I've already taped the interview with named Kevin Simler, who's a really wonderful, wonderful essayist. He used to work for Palantir, so, you know, early engineer at Palantir, tons of experience there, and he writes a lot about startups as a frontier,

• 39:41Patrick O'Shaughnessy?

  like a what like a Westward Ho frontier, where you're at the edge of something and sort of feeling it out without any rules. And that that seems like it's only possible with that with that passion. What a what a great bit of advice. What what's your biggest miss ever?

• 39:59Speaker 02

  Another investor named David Shen, who was an early Yahoo employee, an angel investor, showed me Uber at their seed round. And ironically, I had I had written a business plan for a car sharing business years earlier. And and and the round was was closing relatively quickly, and I hadn't met the founders yet. And so I told David, you know, thanks, but no thanks. But, yeah, that's certainly from a financial perspective. Yeah, that that was that's that's turned into an interesting business.

• 40:38Speaker 02

  But, you know, missed a lot. I mean, you know, have have been fortunate to to see, you know, so so many businesses early on, you know, that it's it's almost hard and painful to like dredge those things up. But, you know, you learn from those, right? So we we, you know, then became an early investor in Lyft and and have been a big supporter of theirs. And, you know, so, yeah, that one that one's probably the one that

• 41:03Patrick O'Shaughnessy?

  That's a headline one.

• 41:04Speaker 02

  Slipped away.

• 41:06Patrick O'Shaughnessy?

  Your new website, which is really cool, I recommend people check it out, we'll link to it, has some categories of kind of themes that you're looking at, and those are cities, money, consumer, kids, and health, which is a neat, neat collection. Maybe pick one of those and describe what that category means. Specifically, obviously you've identified maybe something that you think is changing, where startups can benefit from that, from that changing landscape. But I'd love to hear kind of how, I love that idea of the categories, maybe just understand one of them.

• 41:40Speaker 02

  Yeah, yeah, so the categories, so kind of maybe two things. One is, the categories was essentially a, an evolution of collaborative funds thesis, right? So we talked a bunch about this intersection of for-profit and for-good. But you know, since starting the fund roughly six years ago, you know, the world has, has evolved, and just kind of that very broad lens of that intersection, you know, felt almost too broad, because more and more I think businesses are, are mission-driven and, and kind of articulating their values. And so it, it was, it was no longer kind of a, a small subset of startups, but you

• 42:25Speaker 02

  know, almost every startup we're seeing these days really, really kind of touts that as being a key element. So it's like, well, shoot, you know, how, how do we make our filter a little bit tighter? And, and we ultimately arrived at like, where, where are the areas that we're most passionate about, that we, we think have the greatest opportunities? And that's how we arrived at those categories. So, so yeah, so that's kind of, you know, a, a small baby step in collaborative funds evolution. You know, the category that I would probably, you know, I don't know, speak to first is, is consumer. And by consumer, really talking about consumer product, goods, and retail.

• 43:04Speaker 02

  And so, you know, we've, we've, we've just seen a big shift, you know, in, in the CPG space, you know, over, over the last several years, that I think we're still at the very kind of early stages of, we're at the onset of, of this tidal wave, which is a shift from the kind of mega corporation, industrialized, produced goods, to smaller, more independent, craft, authentic brands and products.

• 43:35Speaker 02

  Which, you know, consumers are demanding. You know, we talked a little bit about milk earlier. You know, it's, it's, it's a space that is so large. I mean, the CBG space is just orders of magnitude, larger than even the technology space. It's just, and it's, it's growing. And so every single category within CBG, from, you know, fashion, hygiene, food, beverage, etc., is going through a, a large change. And you're seeing that the, the big monolithic organizations are having a hard time growing. And so they're, they're using kind of investing as well as mergers and acquisitions to kind of fuel their growth.

• 44:19Speaker 02

  And whether it's, you know, brands like Honest Tea, which, you know, Coca-Cola ended up acquiring, or it's, gosh, I mean, there's, there's so many, Crave Jerky, Plum Organics, you know, you name it. You know, if, if you're able to, to show the right amount of traction and, and, and kind of consumer mind share, you become a, a very attractive acquisition target to these large organizations. And we're seeing the size of those acquisitions increase, right? So, you know, most recently, you know, Dollar Shave Club was acquired for a billion dollars by Unilever. And so these, these businesses are able to utilize kind of existing technologies to,

• 45:03Speaker 02

  you know, I like to use the term scratch and itch with the kind of younger consumer and start to, to take, to take market share. And that's just, that's changing the dynamics of that industry. So that's a category we're, we're really interested in. We've invested, you know, pretty heavily in it. We, you know, Ripple Foods, invested in Good Eggs, invested in Simply Gum, invested in Hampton Creek Foods and, and a whole host of others. And, and even on the retail side, invested in Sweetgreen, which is a kind of a salad chain. We invested in Blue Bottle Coffee. So kind of interested in this kind of next generation consumer product good.

• 45:45Speaker 02

  Or retail business, and so that's one of the categories that we're most interested in.

• 45:49Patrick O'Shaughnessy?

  To draw yet another public market analogy, the buy decision is often easier than the sell decision, or when to sell, and so it's interesting to hear you say that a strategy is partially informed by this phenomenon outside of the business, which is these big companies maybe getting a little scared and being very acquisitive, right? What a neat environment to pass that villain test in. Pretty neat. So last couple of questions. The first is something I ask everybody, which is what I'm most fascinated with about people, which is your daily routine. So thinking about this as sort of like a wax on, wax off type approach, what are the things that you feel important to do, it doesn't have to be every day, but most days, that kind of makes up your daily routine?

• 46:33Speaker 02

  Yeah, I would say, so, exercise is the first thing that comes to mind. I just, fundamentally, I'm a believer in kind of strong body, strong mind, and so whether it's pushups, or it's a simple jog, or walk in the park, or it's, you know, a really rigorous workout routine, I try to find time to exercise every single day. I just think it's critical to mental health, and every other facet of life, you know, and I would say more recently, kind

• 47:12Speaker 02

  of, you know, meditation, and that's a word that I think for a period of time, I thought, oh, you know, I don't even know what that means, and ironically, where I first kind of felt the benefits of it was during exercise, and so, you know, going for a run, giving kind of my brain a chance to just decompress, and think about how we're doing as a business, and as a team, and... What are the things that I want to achieve on a personal level as well as our group? You know, that kind of, that opportunity to just slow down and breathe and, and think is, is so important. So I think it's, you know, the, the, the two things that I find, you know, critical

• 47:57Speaker 02

  almost on a daily basis is making sure that there's some time for exercise and, and, and meditation, um, you know, in, in whatever form kind of works for you. But those, those two are the, the ones that immediately come to mind.

• 48:12Patrick O'Shaughnessy?

  Sometimes certainly working out, you know, having a trainer can help. What about meditation? How did, how do you do it? And how did you get into it? And did you have help? Did you, whether it's just reading about it or actually, you know, going to, to lessons? How did you get into it?

• 48:26Speaker 02

  Yeah. Uh, you know, I got into it, I think, you know, kind of two ways. One, one actually is my wife and I think she's, she's encouraged me to read about it and learn about it and she's, um, you know, she's, she holds me accountable. And so that element, you know, I, I think it's so different for each of us. Um, you know, I think that there's a number of new mobile apps that Headspace and others that are kind of creating a framework for people to find time to meditate and providing some, you know, kind of instructions. Um, there, there are some kind of universal elements to it, um, such as breathing, but I, you know, I find that it, it really is different for everyone.

• 49:11Speaker 02

  Um, you know, what's, what's meditated for me is probably different from, you know, from others. And so it's, it's, it's learning kind of how to listen to yourself and what, what kind of, you know, they, people talk a lot about being introverted versus extroverted and what are the things that kind of re, re-energize you or recharge your battery versus what are the things that are extractive? I think that's, that's the key to finding, you know, what I think of as meditation or, or what are the things that are going to enable you to kind of recharge your battery? Um, and that, that's going to be different.

• 49:45Patrick O'Shaughnessy?

  Yeah. Yeah, so different for each person. What is your most memorable individual day as a venture capitalist?

• 49:54Speaker 02

  Interesting. Well, gosh.

• 49:58Speaker 02

  I think maybe the day that we got started, you know, my background, as I mentioned previously, I'd never managed other people's money and don't have a traditional background in finance. And so, we were kind of the, you know, the venture fund that, you know, was despite the odds, kind of the scrappy underdog. And just the day that we closed our first fund, which was actually in November of 2010, so we're coming up on our six-year anniversary, you know, felt like just a huge milestone. And so, just of that feeling

• 50:39Speaker 02

  of complete and utter gratitude that anyone would kind of trust me and us to have a shot at this, I think outweighs almost anything else I can think of. I mean, I do think the job of a venture capitalist is to serve entrepreneurs. And so, first and foremost, and I think if you do that well, you can generate fantastic returns for your investors. And I, you know, there's countless, you know, examples of that along the way of the, you know, 70-plus investments we've made where we've just had the opportunity to work with

• 51:23Speaker 02

  some incredible entrepreneurs. But I think that initial, that first page of our, of our, you know, of the book that we're writing is the one that jumps out.

• 51:34Patrick O'Shaughnessy?

  You mentioned the word gratitude, so maybe my favorite question is, what is the kindest thing that anyone's ever done for you?

• 51:41Speaker 02

  Yeah, I think outside of the just very tangible way of trusting me with their capital, I think supporting, supporting us through challenging times, right? So, you know, one of our investors told me early on, you know, actually prior to him investing, said, Craig, I'm gonna make an investment in you with one condition.

• 52:08Speaker 02

  And I said, okay, what's that? He said, don't shine the turd. And I said, what, what, what does that even mean? And he said, if something, can I use bad language?

• 52:18Patrick O'Shaughnessy?

  Oh, yeah.

• 52:19Speaker 02

  If, if something shitty happens, I'm a grown up, I've been there, done it, I've been successful in business, I know how these things go, tell me, because if it's shitty, it's eventually gonna smell. And you can only polish that for so long. So hiding it, you know, treating us with white gloves, or treating me with white gloves, like, is not gonna work. I want you to make a pledge that when something doesn't go right, like, I, I want to be the first to know about it. And I think that was incredibly, that was maybe the best gift, because it gave me then, permission, frankly, to be totally transparent

• 53:00Speaker 02

  about not just the ups, which is what you want to share with your investors, right? You want to tell them, gosh, you know, this company is doing fantastically well, and we're on track to create really positive returns. But in reality, there's ups and downs. And so having the permission to, to kind of share the downs and, and the insecurities that come along with it, I think is probably the most generous thing that any of, any of our group has done.

• 53:30Patrick O'Shaughnessy?

  Well, an episode filled with fantastic advice, I think, don't shine the turd is, is my favorite. So, thank you. We'll end there. I really appreciate all your time. This has been a blast.

• 53:39Speaker 02

  Awesome. Thank you so much.

• 53:43Speaker 03

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter, at Patrick underscore Oshag, O-S-H-A-G.

• 54:11Speaker 03

  If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.

• 54:32Speaker 03

  You