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VC10X - VENTURE CAPITAL PODCAST

Venture Capitalists (VCs) & Angel Investors share their investing thesis, screening process, value-add, exits, and more. Hosted by Prashant Choubey (@ChoubeySahab)

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Investing in Exceptional Founders Before Everyone Else w/ Brett Martin, MD, Charge Ventures

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Brett Martin is the Managing Partner of Charge Ventures. Charge is a NYC-based pre-seed/seed stage venture fund. They invest 200-500k at the earliest stages of company formation and then help founders take things from 0 to 1. When not working directly with startups, Brett spreads the startup gospel as an adjunct professor at Columbia Business School. His teaching focuses on product strategy and entrepreneurial finance. In his spare time, he's written for Harvard Business review, launched a little website called Vice, found a rock band, and sailed thousands of miles on a 30ft sailboat.

We talk about:

  1. Brett's story & how he started investing?
  2. What’s the investment thesis at Charge Ventures?
  3. Difference between Seed & Pre-seed startups
  4. On what basis is the investment decision made?
  5. Investing in founder more than idea or approach
  6. Why serial entrepreneurs find it easier to raise funds?
  7. Exciting Portfolio companies
  8. What does the value add look like for your portfolio companies?
  9. Rapid fire Round

Brett's story & how he started investing?

I started investing because after my second startup Switch, I wasn't sure exactly what the next thing I wanted to build was and I didn't want to rush into something and so I figured, well, if I'm not building, I might as well be investing. And the problem was that at that time I didn't have any money.

So I said, oh, I guess I need to find other people's money. And so at that time, my Fulbright advisor was this Greek guy named Thomas, popped to meet. I met him in Italy on a Fulbright scholarship and he had reached out to me and said, hey, there's a couple multibillion dollar family offices that were vesting off balance sheet. Why don't you go and help them kind of formalize their operation?

I was going to go over there for the summer. At the time, I had just gotten out of six and a half year relationship. My lease in New York and ended and summer in Athens sounded like a pretty fun thing to do. And then I got over there, I set up the office and they said, oh, why don't you do a couple of deals and show that song a couple of deals? And a couple of deals turned into 24 deals out of this first fund. It was really an angel fund, 25-50K checks, just really proving access. And then once I had done that, they said, well, wish we had put some more money into these companies.

We'll give you more money and now we'll bring in our friends. And so the first fund was really just kind of a proof of concept. And then the second fund, those family offices, ended up becoming my anchor vectors. And then they helped me and my partner, Chris Sabachi, bring in more, bring in other people. And that was became like a proper, dedicated venture fund.

What’s the investment thesis at Charge Ventures?

Our investment thesis is that it's kind of a stage based investment thesis. So Charge Ventures invests in pre-seed companies here in the US and Canada with a specific New York City focus and kind of an access focus. We occasionally will do a deal with SF, but really only if we know the founder from before or if it's a fund that we work closely with that's pulling us into a deal.

Otherwise we really stay in our lane focus on New York City, which has been kind of a very burgeoning ecosystem, and then we very focus on people funding people at the very inception of their startup journey. 

Difference between Seed & Pre-seed startups

Our thesis has really been that there's been kind of a dislocation in the seed and pre-seed markets. And so what I mean by that is maybe I should give a little exposition on what pre-seed versus seed means, because it means a little something different.

So in New York, a seed round, which once upon time, ten years ago when I started seed round was the first round of capital. A seed round was 750K to a million dollar round, led by a 300K check into companies just getting off the ground. That was 15 years ago.

Now, today, in 2022, a seed round is a $3 to $5 million round into a lead of two to $3 million into a company that already has traction, probably has somewhere between $10K in monthly revenue. And so to get to that level of traction, most people need some money and you can't just go out and raise a seed round today. So you need to raise some money before that. And that money is often called a pre-seed round. I like to say it's friends, families, and Charge ventures. That's an investment pre-seed.

And our thesis is that, you know, there's not a lot of traction, there's really actually not a lot of de-risking that happens between a pre-seed and a seed round. Any truly competent entrepreneur can scrap together $10 to 30K in MRR, $30-50K in transactional revenue without actually proving product market fit. And so since neither pre-seed nor seed has really validated product market fit, the only difference is that a seed stage deal in New York at the end of 2021, these seed deals were happening at $30 million post money evaluations, $40 million post money valuations.

The only difference was that Pre-seed was a lot cheaper. And so Pre-seed, maybe they don't have that revenue yet. Maybe they haven't built a product yet. Maybe it's just someone just rolling out of Google. Maybe it's a serial entrepreneur who hasn't built anything yet. Maybe it's a first time founder who's actually built a little widget and got a little traction. The only difference is that pre-seed routes are about a third of the cost. And so our whole thesis was really, okay, let's do an arbitrage.

We think we're good pickers of entrepreneurs. We think we can identify an entrepreneur who is going to be able to get this level of traction. He's going to be able to build a product and launch it and take it to market. We just invest in them beforehand, earlier, before they built a product, before they've gotten the traction, and we do it at a third of the price. So we were kind of doing a pricing arbitrage between institutional seed and pre-seed and being really early. That's kind of the thesis of Charge.

And I guess we fancy ourselves as good talent scouts and that's because we're all founders and entrepreneurs ourselves. We've all done it, gone zero to one, and so we think we can find the people who can do the same. 

On what basis is the investment decision made?

Founder market Fit, if we had to say, kind of what is the one criteria that really matters for us at the pre-seed level is founder market fit. Which is does this person have some sort of unique insight or even motivation or desire that gives them an advantage. And so we're often looking for people with deep domain expertise or some kind of unique personal motivation to attack a certain market.

And so if you look at one of the companies, we did a seed round in this company called Transfix. They're one of these sort of an Uber for trucking, sort of B2B kind of marketplace for freight. And they're now we did a seed round close to a billion dollars. The founder of that company is a guy named Drew McElroy. And I don't know if you've ever heard a name as American Pie as Drew McElroy, but Drew, he grew up, his parents ran a small trucking brokerage and he helped run that for a while. And then it's a sad story.

Unfortunately, his father passed away and he sold the business. He continued the business, he grew the business, he sold the business. And then he looked up and he said, I was going to be an investment banker, but now I've got a taste of this entrepreneurship and I don't want to work for someone else. I want to do my own thing. What should I do? Well, he looked around, he looked at his own business. He said, this could be way more efficient. How do we use information technology to make this routing more efficient, have less dead head miles. That's when a truck is driving across the country with nothing in it and we can use technology to make this better.

He started Transfix, was kind of tech and able brokerage. That is like the exact type of profile that we look for in charge because we're like, hey, this is a guy is deep, unique perspective on this industry he's going to have figured out. And so I think that's an example. 

Investing in founder more than idea or approach

While investing we ask ourselves 3 important questions –

Is this a really big market?

Is this an amazing founder?

Do we really believe in their approach?

Those are the three things we would really love to see. We really question whether the third one matters because we've seen so many amazing founders in big markets not have their first thing or the second thing work out, but then pivot into a good thing.

And sometimes we miss those because if we don't like the initial idea, we've passed. And then we've passed some great founders, watched them. Iterated into something good. We actually question like, should we even care this early if we agree with the approach? Because if they're good enough and it's a good enough market, they'll find something. 

Why serial entrepreneurs find it easier to raise funds?

Adam Neuuman, the founder of WeWork, he just got his new startup Flow funded. He gets out the gate with $350,000,000. And it hasn't even built anything yet. And so why is that happening? Even though he literally took $22 billion raised in WeWork and then turned it into 4 billion and paid himself a billion? I mean, I feel like anyone could do that, right?

And why is this guy getting more money? Well, he showed he's capable of raising $22 billion. And even if you just literally ran it in the ground, his ability to spin a story and paint a picture of the future is obviously amazing. And he's a master at that.

I think the narrative matters a lot, and there's a lot of lore about this kind of serial entrepreneur in venture capital. And so, yeah, those people are able to if you had a successful asset, it's so hard to search for outliers. And so if you've proven yourself an outlier once, then people are willing to give you another shot where I think it's more interesting.

And we do a lot of that. We've invested in a ton of serial entrepreneurs, and we're very fortunate to get to work with kind of the best of the business, where I think it's more fun is actually the first time founders that don't have this track record and who's willing to take a bet on that.

Exciting Portfolio companies

We love all of our portfolio companies, so I don't want to play favorites. I already talked about Transfix. A fun one we did from our last fund was a company called Bison Trails. This falls into the serial entrepreneur category. It's Aaron Henshaw and Joe Lewis. They sold the last company to Etsy, a harbor marketplace called Grand Street, and they were trying to figure out what they want to do next. They sell a crypto thing. They said, okay, let's learn about this. They're engineers. They want to get it at the bottom level. And so they actually built a mine, literally hardware servers on racks, geothermal Energy in Oregon, figuring out ventilation wasn't really a venture. Crypto mines aren't really kind of venture scale companies, but we said, these guys are so amazing, we want to just be in orbit of them. And so we participated in that mind. While they did that, they realized, man, this is really hard. There's so much work setting up this infrastructure. If anyone wants to stake their cryptocurrency, if there's a lot of work involved, maybe we should build kind of like a staking as a service, like kind of an AWS for crypto. And so out of that building the mine came this idea for really, like, infrastructure, software infrastructure for crypto. And that was the foundation of Bison Trails. And so we invested in that in the first round of capital. I mean, it was a pre-seed, but it was institutional seed round. These guys were serious guys. And couple years later, they sold Coinbase, and the transaction is undisclosed, but it's north of a billion dollar exit. Great outcome. These guys absolutely crushed it. We obviously made many, many times on our investment, and we also got to work with these just amazing, smart, kind people. We definitely have a no asshole rule, at charge. So that was one of our favorite investments out of our last fund.

I'll put that in contrast with another one of our best investments. So it's called Grin. It's kind of a CRM for influencer management, basically for the creator economy. This is now a billion dollar company. But very different story in the sense that I found Brandon the CEO. I actually found him on a newsletter, and he had amazing traction even from the beginning. I remember he was doing a million dollars in ARR and was frankly struggling to raise money. And I asked a bunch of people who are supposed to be experts in the space, I said, oh, this looks pretty interesting. I talked to VCs. He seems like a really smart guy, really top of his stuff. And they said, oh, influencer marketing, it's a dead space. Don't invest in that. And we lost a bunch of money there. And so, you know, I said, you know, alright, but Brandon had a pretty compelling story about why he wasn't building Marketplace, he was building CRM. This is going to be, this is a different approach to the market. And I said, okay, we're going to put some money into this guy. And six months later, he had tripled his revenue. And I said, okay. I went back to this VC, said, hey, we're gonna do another round. No, this isn't going to work. I said alright. Okay. So we put some more money in. Six months later, he had tripled his revenue. Again, this guy making close to $10 million. It was a struggle. He could not put together an A. You know, we scrapped together an A. We had a $4 million lead or a $10 million round, and then we did double down on our pro rata, and he raised this round at again, modest valuation. And then six months later, he had doubled his revenue. He was making almost $14-$15 million in ARR at this point. And still we couldn't get anyone into that. So we raised SVV, we put in three times our per rata into this company, and six months later, he had doubled the just why he's making tens and tens of millions of ARR. And it just became completely undeniable. And finally, one of these big crossover funds came in and gave him a $100 million. And this guy was validated. And all along the market just had such a struggle catching up to what he was doing. And I tell that story again, just to give all the entrepreneurs out there right now in a very difficult financing environment, struggling to raise money, like, believe in yourself, believe in what you're doing. Obviously, if it's not working, you got to change it. But if it's working, then just believe, because I think what's that quote, it says, in the short term, the market is a voting mechanism, and in the long term, it's a weighing mechanism.

And you know, in the long term, if you're really building value, the market will eventually come around to you and validate you. So believe in yourself. Believe in what you're doing.

What does the value add look like for your portfolio companies?

We actually actively operate companies. I'm also the co-founder of a company called Kumo Space. We just announced our Series A funding by Lightspeed raised $25 million. We're in the trenches with you. A lot of VCs have never operated, or maybe they operated ten years ago. Whatever marketing channels they were using, they were using putting out ads and newspaper circulars in the they're trying to tell you how to acquire users on TikTok. No perspective. Whereas we're actively running influencer marketing campaigns on TikTok, using Grin's software and driving millions of signups at less than a few cents apiece.

And so we can actively guide entrepreneurs tactically, I call it Pure Plus. It's like we're in the trenches with you. We just happen to be six to twelve months ahead of where you are. And so we have very relevant information for a pre-seed company. What we do is we invest in you and then we spend the next, now nine to twelve months, let's say, helping you get those first two or three key hires, helping you get your first product out and showing you how to ship quickly.

We help you build a recruiting playbook. We help you connect you with your first couple of customers, and then we'll take that whole story. We'll help you build a narrative, we'll help you put that tech together, will get you a designer to build that deck, and then we'll wrap it all up into easily digestible package.

And then we'll show you all of our friends at all the institutional seed funds where we know GP and every single one of them, instead of you, spend the next six to nine months doing that while simultaneously fundraising 50 to never having a moment. We capitalize you when we invest, we put in $500-750K, then we bring in another 750K from all of our homies. You know, you spend one month on raising, you have all the support, you don't have to think about it again. And then, you know, we help you go raise your next round in two to three weeks as opposed to two to three months at a much higher valuation because we get something competitive going. That's the value out of Charge.

That's the tactical I think fundamentally though, I think the most valuable thing we add is an empathetic ear. It's lonely at the top. It's lonely being CEO of these companies. And you're constantly you're default dead, and things don't always go well. Your financing contracts blow out, your one product that you're selling gets discontinued, and all of a sudden your margin goes to the crap and your burn way gets cut into a third overnight. And you want to have someone that gets it, that isn't a shaky hand, that doesn't get afraid and get stressed out and jump down your throat just because something isn't working, someone that literally is there to hear you out. And if all you need is someone to vent to and collect yourself with, we're good for that. We love people, we love entrepreneurs, and we can be an empathetic shoulder to cry on when you need to. And I think that's probably the most valuable thing, honestly, that we provide. 

Rapid fire Round

What sectors and regions you invest in?

We focus on we're basically generalist and we have a focus on creator, economy, crypto, and Bottoms up, PLG SaaS, and regions we focus on are New York City and anything outside of San Francisco in the US.

What's the typical stage you invest in?

We love pre-seed, so as early as possible.

What's the typical check size?

We write checks anywhere from $250 to a million dollars. And that's into rounds that are anywhere from $750K to $2 Million.

Where can founders pitch?

Founders can shoot me a message on LinkedIn or hit me up on Twitter. It's at@Brett1211.

Where can I listeners follow you?

At @Brett1211 on Twitter or hit me up on LinkedIn.


Charge Ventures website- https://charge.vc/

Follow Brett on Linkedin- https://www.linkedin.com/in/brettluca...

Follow Brett on Twitter- https://twitter.com/brett1211

Hosted by Prashant Choubey- https://twitter.com/ChoubeySahab

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