How to find, reach out & convince LPs to invest in your VC fund? w/ Muieen Cader
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Dan Rosen is the founder & General Partner at Commerce Ventures. Commerce Ventures is a sector-focused VC fund, which invests in infrastructure and enablers for the Commerce Continuum: Shop (Retail), Spend (Payments), Save (Banking/Investing), Secure (Insurance).
My investing story starts in college. When I first learned about venture capital, I was on a college trip and got to visit Kleiner Perkins. An alumni hosted us there and I learned about what venture capital was. I also learned that it was apparently very difficult to get it into the venture industry. And even though it sounded super exciting and kind of a thrilling job to be so close to innovators and helping them, I didn't expect it was a career for me, at least not anytime soon.
But then as I graduated from college and I was working on tech consulting, actually putting large lending systems into large banks and this was in 199 when you know, kind of the world was going crazy with exuberance about in the .com era and I was just kind of bored out of my mind to be honest.
So I started working on a startup idea with a friend and as we were researching potential investors, I saw at one of those investors a job opening for kind of an entry level professional and kind of just on a whim I put in an application and I figured what could it hurt? And I ended up getting the job offer. And so as a result I realized, gosh, this was an unexpected kind of path into venture but it was an industry I was really curious about.
So I was excited to try and spoke with my friend and obviously decided to proceed into venture. So that was my pathway in a super kind of unusual one and then I never left.
So my path there, you could argue it started back in college and then after school when I was working on kind of fintech with banks. But truthfully, I was an infrastructure investor for most of my early career both at HarbourVest and then later at Highland Capital. I was hired to really focus on mobile investments starting with mobile infrastructure. As mobile data was exploding in 2006, 2007 time frame, I started looking at higher layers in the stack, the intersections of mobility and mobile data with traditional industries like retail and financial services, whether that be mobile couponing or next generation point of sale or mobile payments, mobile banking.
That got me super excited about the opportunity in payments. So just innovations in payments, but also in a number of these intersection points between mobility and retail and financial services. So at Highland I started building a practice in what was then called fintech which was really all about payments innovation and it was very early in the early stage investing area for fintech. So there were only a few of us who were investing in that area at that time. And over the course of several years I built out this practice and made a few investments in some early pioneers in fintech.
But I realized that my ambitions to invest in the category exceeded the appetite of a large more generalist platform firm like Highland to invest in the theme. And at the time there really weren't many sector focused funds but I believe there was an opportunity to build one. And I went to a number of the industry leaders and some of the corporates that had gotten to know by making these sector focused investments and many of them shared my enthusiasm about a sector focused investment firm and those were really the earliest investors in our funds.
And so the Commerce Ventures seed came from my focus in the areas that are now our focus areas which are really infrastructure and enablers for retail and financial services. We focus more on enablers and infrastructure because when I was investing in the early days of fintech I was excited about Challenger models but I realized that it was very difficult to build a startup financial services institution because the infrastructure was so difficult to work with.
In any event, I launched Commerce Ventures in February of 2013 after several months of fundraising of course. And our early focus was tech for retail and financial services and that's exactly where we focus today. So we've stayed pretty consistent.
It's difficult to compare the two. They serve very different functions as far as I can tell, which means they often work very well together. So in my experience, more generalist platform firms can serve a much more stage relevant focus. So they can focus on helping founders and entrepreneurs move through stages in ways that are very specific. The help is very specific to the stage. I think sector focus firms while they can also be stage focused, I think they tend to be most successful and most helpful when they focus on helping with access to or identification of trends within the sector.
So the two things actually are not mutually exclusive at all. It's possible that a sector focused fund firm can help with stage specific kind of areas of help like recruiting and finding additional investors. And it's possible that kind of generalist firms can help with sector introductions and kind of sector relevant knowledge. But that's generally the way that they split out is really kind of generalist firms seem to be more stage focused so they tend to be leading rounds if they are helping with kind of introductions on the BD or hiring front, they probably come from shared resources that are a benefit of economies of scale. Whereas in the sector focus side the help tends to be driven by economies of scope.
Shop is retail, Spend is payments, Save is banking and investing, and Secure is about insurance. So if you think about a consumer or a small business in the relationship with money, these are kind of the different aspects of that relationship. And so we think they're kind of inextricably linked.
Payments tends to be at the core for us. It links together retail and financial services. The biggest players in payments, whether they be incumbents like Visa and Mastercard or FISA or FIS or some of the more large at scale challengers like Stripe or Square, they have 1ft in the retail ecosystem and 1ft in the banking or financial services ecosystem. And so we see payments really being there at the core. And the same was true as we looked across many different types of incumbents across this commerce continuum. Whether they be large banks, whether they be wealth management and insurance companies. They tended to have involvement across multiple of those segments. And so we thought it was important to have coverage across the continuum in order to be able to identify important trends as well as kind of many of our investments fall right at the intersection of two of these segments.
If you think about something like kind of fraud prevention or various aspects of retirement planning or a number of different investments we've made over next generation bill pay and these are really interesting opportunities because they leverage kind of the focus that we have. But that continuum, the holistic view of the continuum.
I think lack of brand recognition is the biggest limiter. First people needed to know that we existed and what our focus was and we didn't have a lot of money. I didn't have a lot of money to kind of shout that from the rooftops. So I took every opportunity there was to kind of speak with somebody influential, whether that was to speak at a conference, whether that was to write content here and there. You kind of have to use whatever channels you can to build awareness. There also weren't that many startups actually focused on our sector back when I got started in 2013. It sounds silly to say that, but the number of startups in fintech and really commerce infrastructure have exploded over the last ten years.
So it was a little bit easier to know most of the startups, at least a lot of the credible ones, and our network of investors and just friends, I think, fed us a lot of great proprietary deal flow in the early days and so we were super fortunate to have that network and those sources of deal flow. But it took a while for people to recognize our brand and I think we're very grateful that today we get a lot of emails from friends, kind of where somebody requested an intro to us from them, which is the ultimate compliment.
So I'd say the majority of our deal flow for the first three or four years, maybe longer, was all network driven. It was from investors of ours, advisors or just friends from the industry. We'd known a while. Again, folks who knew what we were doing and understood where I or we had expertise.
The outbound driven sourcing was way less, only because there's only so many hours in a day and we have a pretty small team. It was me in the early days and then we had one other investment professional for the first four years. So pretty small team. There's only so many kind of folks we could reach out to where we did good work on outbound driven sourcing. It was all thesis driven.
So, looking at interesting areas in the themes we cared about of digitizing commerce, digitizing the retail experience supporting next generation ecommerce, different types of payments opportunities, whether it be B2B payments or card. Issuing and kind of that thematic research and speaking with those types of startups led us to several investments that we made in those areas.
Right now, I'm spending most of my time on things relating to credit and I'd say there's a lot of different areas within fintech to focus on. I spend most of my time on fintech, just to be clear these days. And we have a broader team, so we sort of divide up our focuses to make life a little bit more manageable. But within fintech, I've been spending a lot of time and investing around credit. And what I mean by that is the infrastructure that delivers kind of credit decisioning and credit products to the market, helping to broaden access to credit for the average consumer or small business. And then the servicing of loans once credit has been extended and a loan has been made, I think we're inarguably sort of a period of transition economically.
So interest rates are obviously rising. We were already in a state where most of the American populace didn't have a lot of savings and was living paycheck to paycheck. But thanks to stimulus and thanks to kind of a relatively low unemployment rate, people have had money. And many consumers, especially younger consumers, have chosen not to take out debt, not to access debt if they could. But with inflation on the rise and potentially with a downturn looming or a recession looming, I think that might change. And with interest rates going up, the cost of accessing debt will be that much more expensive. So you could imagine how you could see a financial crisis if inflation rises, unemployment rises, and interest rates go up and consumers just don't have any money.
The average consumer doesn't have any money in the bank. So access to credit becomes that much more important.
I think the cliche answer, which I believe as well is founders first. And I think about it as founders first, markets are close second. We care a lot about those two factors, especially at the very early stages. Typically, we're investing when a company has product built even if it's just some early kind of product and maybe some early signals of product market fit, but that matters to us. And I'm happy to explain why. But for sure at the early stages, the founder matters the most. So the quality of the founder comes first and then we care about is this a big market opportunity? Is it an opportunity to be disrupting, kind of a large incumbent or is there kind of an opportunity for rapid growth in the market? So those are the things we look at first and foremost.
And I'd say an A founder in a B market beats a B founder in an A market almost all the time because good founders find the opportunity. So that's the reason for that prioritization. But we do also care about signals of product market fit and customer demand. So we will look for those signals as well. And there are some metrics around that, but they vary obviously by company.
So I built the whole firm around this sector focus, which means our investors, many of them come with very specific kind of value to be contributed to our portfolio and to our investing practices, whether those be individuals or corporates. And we have a dozen Fortune 500 corporate investors.
So a big part of the value add is bringing that network to bear, whether that is making an introduction to a potential customer or a distribution partner or candidly just to an advisor or somebody who can give a little bit of informed kind of feedback on an idea or an opportunity. That helps us with due diligence, it helps us with thematic analysis. It helps our portfolio companies as they're making challenging decisions. That leads me to the second piece of value add, which is really thought partnership. So we've been investing kind of all the people around our investment group have been investing for many years in the sectors we're focused on and our broader team has been both investing and operating in these spaces.
And so we bring a lot of relevance, industry relevance, that hopefully creates kind of good thought partnership for those founders who are trying to figure out important decisions and trying to build products that customers will love. So I'd say thought partnership, network access and just generally being kind of good investment partners, doing the right thing, being supportive, encouraging those sorts of things. It's surprising how important that is and how often that gets overlooked.
Let me rewind a little bit. We've been investing in companies that are aligned towards financial inclusion for several years, and I personally, I think many people on our team have a passion for that opportunity. We think there's the opportunity to do good and do well at the same time by expanding access to financial services. And we had we've had the good fortune of being able to bring in kind of partners to help us make more of those investments, both initial investments as well as more investments into companies in our portfolio that were on that mission. And so as part of this habit or activity that we've been kind of executing on these last several years, we thought about with our friends at Money 2020, how we might run a pitch competition that looked different than every other pitch competition that Money 2020 had put on and that other conferences had held. And the idea that we circled around was, could we showcase companies that were focused on financial inclusion?
We have a dedicated vehicle, thanks to our partners, that's an investment vehicle focused on these types of companies. As a result, we have the ability to invest into companies that have this mission in a way that maybe not every firm is able to do. And so we thought it'd be great to be able to host a competition like this and have the prize at the end of it be a very company friendly investment like the one that we structured, we were originally targeting, making one investment. As we got towards the event, we decided, along with my 2020, that we were open to the idea of there being a second investment. We kept that kind of under wraps because we thought it would be kind of a more interesting and exciting experience if we could kind of, I guess, surprise folks with that at the end, which I think was a lot of fun to do.
I'm just super excited about the companies that we've gotten the chance to invest in through that competition. I'll tell you, the hardest part about the competition was we had kind of well north of 150 applicants. Very many of them were high-quality applicants, and we had to narrow that down to ten semifinalists to invite to the event. That was difficult.
And then from the ten, getting down to, you know, kind of five finalists was way harder, and I would have been I think we would have been very happy and proud to be an investor in any one of those five finalists. And so it was a difficult decision for the judges. It wasn't just myself. It was the judging group. It was a difficult decision to kind of get down to the final winner and we got some great audience participation as well. That helped us with selection of having a second, not just a first, but fantastic businesses.
So we're super excited to be working with those founders. So I think it was a success. I'm excited about it and hopefully we get to do it again.
There's two categories of strategic LPs. There are strategic individuals and corporate LPs. As I mentioned earlier, we have a dozen Fortune 500 LPs or investors in our funds and we have dozens and dozens of strategic individuals. The individuals have run companies like PayPal and CyberSource and Check Free and FISA and Global Payments and the list kind of goes on and on.
And so the experience of these successful founders and senior executives is invaluable as we try to decide interesting kind of themes to explore inside of the commerce continuum but also as we're kind of undergoing due diligence kind of in an area when we're looking for advisors. And candidly, some of them end up joining our companies either as executives, as board members or may even found companies that we invest in. So the strategic individual network is a gift that keeps on giving and I would say the corporate strategic side does so, but in different ways. They are a source of a very substantial amount of capital where we have fantastic more structured thought partnerships.
So we're talking with them routinely in a way that helps feed our knowledge of opportunities and drawbacks in terms of investment themes. So we work closely with them on themes. We gather kind of market requirements, if you will, of areas that are not being well served. They help us with due diligence and as we make investments they become really interesting potential customers and even partners in many cases to our companies. So when we say strategic, that's kind of what we mean.
We have close relationships with all of our investors and we are grateful for all of their support. But the way in which a corporate or a strategic individual help is very different than the way in which a financial investor helps.
What sectors and regions you invest in?
We invest in technology for retail and financial services. Broadly speaking, we invest in the US. A lot of our core investments go into the US. But we'll make investments in emerging markets. We've had several in Latin America as well as South Asia, Southeast Asia and a few in Africa. But by and large, the US has been the majority of our investments historically.
What's the typical stage of investment?
Most of our investments will go into Seed to Series A
What's the typical check size?
That ranges from on the low end $250k all the way up to $2 million. But the average probably is in the $500,000 to a million dollars for a first investment. Our subsequent investments can actually be substantially larger.
Where can founders pitch?
I think we have an email on the website that people can use, but I'm just firstname.lastname@example.org, so if somebody wants to send me information that's probably faster.
Where can our listeners follow you?
So I am @VentureDan on Twitter. You can reach me there.
Commerce Ventures website: https://commerce.vc/
Follow Dan on Twitter: https://twitter.com/venturedan
Pitch at email@example.com
Hosted by Prashant Choubey
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