[Top Venture Capital Series] Fundraising to Reduce Friction at Scale With Martin Tobias

John Corcoran 13:02

Yeah, for sure. What were so during that period of time loud I 97. And 2000. You went from three people to foreigner 50 employees?

Chad Franzen 13:13

Yeah. What were some of

Martin Tobias 13:15

the recommend that to anybody, you know, three years from start to IPO is really too fast. Yeah, yeah. Thing is seven or, you know, five to seven years.

John Corcoran 13:26

Looking back on it, what were the biggest peaks and valleys biggest highs and lows of that experience, that period of capture in your life?

Martin Tobias 13:34

Well, the highs were that we were in this hot category, and everybody’s throwing money out of the sick crazy valuations, but and also our customers, you know, loved us there, we couldn’t do the work fast enough, everything was great, you know, until they turned off the spigot. And then everything was not great. But that’s part of it. You know, you can’t take the highs, if you’re not willing to take the lows, probably the biggest mistake that I did, in that was basically, you know, I like the beginning phases of companies. I don’t like running big companies. And I told the board that after the IPO, I wanted to be chairman and hire a CEO, you know, this sort of professional management thing. And, you know, I didn’t want to have 450 employees, it’s too many employees. So I did that. Unfortunately, the market had changed radically. And, you know, the CEO who replaced me didn’t have the same greediness that I would have, and ended up you know, blowing the $120,000,000.90 8% of the stock price in like a year and a half. And if I had been running it, I think I would have done things differently. I would have reacted differently to the downmarket. But I think handing over your baby to somebody else, especially if the macro invariant It has changed materially. I would not do that again.

John Corcoran 15:05

You want to your later stops was your chairman and CEO of Imperium renewables? Yep. Yeah. Tell us about that.

Martin Tobias 15:16

So basically, my foray into renewable fuels. You know, I was, you know, after loud I, I was at Ignition for a while doing investing. So I sort of gone back and forth between entrepreneur, investor, entrepreneur investor, I’m back in the investor seat now. And I was investing at Ignition, and we did a bunch of enterprise software deals, and they were sort of tripling down on the enterprise, anything Microsoft or Cisco might buy. And frankly, I thought the enterprise was a big yawn. It wasn’t that exciting. And I got interested in renewable fuels and clean energy and stuff like that. And I looked at the trends of, you know, peak oil and oil prices and stuff like that. And I’m like, Ah, I think there’s something there. And by the way, not a lot of people who come from technology have gone into that industry. And if you rethink that industry, like some people that technology might have, maybe there’s some interesting opportunities there. So I started talking to companies, I started an an angel group called element eight angels, which is still going on. In Seattle, they’ve deployed about $50 million to clean tech companies. But I started investing in companies pitching and data data. And anyway, I met this guy, John Plaza, who is running Imperium renewables. And his idea was to build a scale of a biodiesel refinery that could convert palm oil into diesel. And if at the time, if you had done a 20 year back test in terms of commodity correlation between food grade oils and diesel, there was no correlation, because these are two different markets. But you could make a machine that would convert those two and the margins and oil were much higher. Then the question was, how does it how, how much does it cost to build one of those machines? And the old way to build a refinery is a very custom one off engineering approach. Basically, like old enterprise software, like IBM developing software, you hire a bunch of consultants, you come in, you spend a bunch of money, you take five years, and you build something that’s really expensive, but it works exactly what he wanted. And I looked at that, and I said, Is there a way to build this thing? Like they built PCs,

John Corcoran 17:25

kind of more of a software approach to hardware software?

Martin Tobias 17:28

Could you take commodity parts from other industries, and screw them together, as opposed to custom manufacturing, every pump and every valve in every blog at blog, and we looked at how you would design a refinery using commodity parts instead of custom engineered parts. And it turns out, you could build a refinery for about 1/20 the cost if you use off the shelf parts. So we said let’s go build a refinery using basically the PC model as opposed to the mainframe model. And that was my insight that I brought to the refinery business. We built the world’s largest biodiesel refinery. We, you know, did very well made a couple 100 million dollars in revenue, and had that company on file to go public in March of 2000. Unfortunately, with that one, we missed the IPO window, the IPO window, closed on us before we were able to get final SEC approval. So in that one, you know, we were definitely one of the darlings of that wave of clean tech. And then the 2008 crisis closed before we were

John Corcoran 18:39

able to get it public. You said March of 2000. I think he meant 2008 Maybe in March,

Martin Tobias 18:43

but this is for Imperium for Imperium. Yeah, yeah. 1008. Yeah.

John Corcoran 18:48

That’s interesting, because, you know, you’ve done a lot of software before the very different type of challenges. And I just finished reading Ashley Vance, his great new book that’s kind of about all these different space companies, rockin companies, satellite companies that are part of this larger trend of using more off the shelf technologies in order to build things at scale, much cheaper, faster.

Martin Tobias 19:13

You see more people doing it now in industrial settings. And I think I was one of the first to bring that idea of, you know, to a large industrial project like a refinery. But, you know, you and you have seen some interesting technology people going into traditional manufacturing industries. I mean, I won’t tell you I’m as smart as Elon Musk, but that’s Elon Musk’s approach, right? Yeah. For sure. Yeah, definitely. Powell, two cars. Right. Yeah. And but he rethought fundamentally how you build a car from first principles. And I rethought how you build a refinery from first principles and other people in industry. They simply didn’t do that. Yeah. And there’s a lot of other companies that are now bringing in space people are rethinking space. He Did that was SpaceX? Right? Yeah, yeah, everything from first principles, which is very much a software engineer type approach. And when applied to another industry, it can be successful.

John Corcoran 20:10

Yeah, Rocket Lab and a bunch of other companies that are doing this as well. But I want to flash forward to present day. So as I said, we’re recording this in middle of summer of 2023. There’s a lot of doom and gloom right now, there’s a lot of kind of pessimism in the economy. But as you pointed out, you know, some of the biggest companies out there, you know, Link, LinkedIn, Facebook, Google, stuff like that have come have have launched in downturns. And another. Another thing is that a lot of company, a lot of people that are getting laid off by these larger companies are even starting companies right now. So talk a little bit about what you’re observing in the marketplace right now.

Martin Tobias 20:50

Yeah, you know, I’ve been through three or four major corrections, the 2000, crash, the 2008, crash, the 2020 20 crash. And the interesting thing is that company formations always explode after that to your point. Ziff ZDNet, did a study a couple of weeks ago, they interviewed a bunch of people that had been laid off from Microsoft and Google and Twitter, 63% of them said, they’re going to start a company. And you know, that’s a huge number. So company formation goes up. And also, every year, tech, the cost of starting a company goes down. And this year, we have something that is a little bit unique, a new step function, improvement in productivity, and that’s all this AI stuff, AI copilots for developers and stuff like that. But you know, the, the wave that really kicked this off was like cloud computing, the minute you could start your business and just, you know, buy cloud resources, instead of having to set up a data center at Equinox yourself. You know, the, the the time to market for a new startup went down by this like, right. And so the cost and time keeps getting compressed. It’s actually interesting. I did a post about this called on this on my blog called The Great Asset Repricing. And if you look at the time to recovery of startup funding after every crash in 20, in 2000, it was approximately three years before the stock market return and VC funding return in 2008, was approximately a year and a half, in 2020, it was approximately three months. And so in every correction, the time to recovery is shorter than people think. And there’s more money out there than ever looking for investments. So more people available, the cost of starting a company cheaper, valuations have corrected a little bit, which is actually better for investors to invest more money. Frankly, if you look at the venture returns of venture capital firms that were started, in different years, the venture capital firms that started deploying their money after a correction 2001, two and three 2009. So unlike that, tend to be very well performing venture capital firms. And I believe that’s going to be the case for venture capital firms that were started in late 2020, to 2023 2024. Because great companies are going to get created, I’m most excited about the benefits of AI because basically every company I’ve ever funded, the constraining resource is development capacity, and time to every startup that I’ve ever invested in, has more that they want to build and not enough engineers, and with some of these AI co pilots like GitHub co pilot and this and that, you know, you can take a standard engineer and make them a 10x engineer, you can basically code ship faster. So all these people that are gloom and dooming about you know, AI is gonna take our jobs, I don’t believe it, it’s just gonna help us get more fucking shit done. Sorry, I don’t know if I can say that on your pad. Right? But all right, you know, the problem is, is Dev ticket backlog. And these things help you do faster. So, you know, let’s say I give a company a million dollars, they can probably get two or three times done with that million dollars than they could have even two years ago. So my money goes farther, they get farther into the market, they get more features written than they would have before. That’s a huge accelerant for innovation. Now, the question is still are you building the right thing? Will customers pay for it? But you can build what you want to build cheaper and faster than ever, which is great for innovation. 

John Corcoran 24:42

So your thesis is this idea of reducing friction looking for ways in which scale at scale at scale? 

Martin Tobias 24:48

So I came up with this basic idea. By you know, when the pandemic started, I looked at all the 200 companies I’d ever invite I stood in, and I tried to figure out which ones had done the best and what was similar about them. And they all had this idea that they were software technology that was reducing friction and scale. And, you know, one of the perfect examples of that is when I was a venture partner at Ignition Partners, Ignition led the series A of DocuSign. And if you think of what DocuSign was doing signing things on your phone instead of a fax machine, so it’s technology that actually replaces a manual process. And there’s millions of signatures a day, there’s the scale, right? Yeah. So then the big question of DocuSign was, Is this a feature? Or is this a company, because it looked in the beginning, frankly, was hard to raise money for the company, because it looked like, you know, Adobe, could write this in five minutes. And you know, it looks like a feature. But what they were able to do is to create the signing order and the email and integrate with workflow with document management systems for real estate and things like that. So that it became a brand and a platform instead of a feature.

John Corcoran 26:00

Where a platform never existed before because it was different things. Right. Yeah.

Martin Tobias 26:04

You know, look at another one. I was not an investor, but something like Uber, right? How big was the rideshare? Market before Uber? Right, right. But the friction was that you’d call a phone, and you talk to a dispatcher, and he’d radio to a bunch of people and try to find you. I mean, it was

John Corcoran 26:23

friction. Or you stand in the rain on a corner trying to win

Martin Tobias 26:27

the reins waving at somebody, right. Like, now you push a button five minutes later, there’s somebody there.

John Corcoran 26:34

Yeah, yeah. And here in San Francisco, there are driverless cars driving around with literally driverless cars driving around now.

Martin Tobias 26:42

Exactly. So that just so you know, I read a study once that the number of people taking, you know, ride rides, including taxi is something like 20x More than it was when we only had taxis. Here. There was a latent demand for people mobility that nobody knew because the system we had from a mobility was so inefficient. Mm hmm. Yep. That it constrained the demand.

John Corcoran 27:11

Yeah, yeah. I remember after Uber been around for a couple years, I went on vacation to Hawaii, where for some reason they didn’t have Ubers. On this island, forget which island it was, of course, yeah. Well, they’re trying to hold back the yes, yeah, a bunch of cities were like that. And you had to do this old system, they literally had had a taxi stand where these pegs were in like different boards, it looks so antiquated. Been there, at least like 50 years. And it blew my mind at that point, because I’d seen the light. And it’s funny to see. Now you are in the quote unquote, land of unicorns. In fact, I’m going to a conference in Seattle in September, that Entrepreneurs Organization is putting on and they’re literally calling it the land of unicorns. That’s the name of the conference, you’ve invested in a number of different unicorns. Looking back, if you look back on the unicorns you’ve invested in like you did on those 200 investments you’d made? First, can you unpack a couple of them that you’ve made? And is there any commonalities that are something that you saw that led to them reaching this, you know, Hallowed billion dollar valuation?

Martin Tobias 28:15

Well, first of all, I’ve only talking about four and four companies that made unicorns in the last three years that are on the thesis that I’m investing in my new fund. I’ve invested in more companies that were unicorns but not, you know, hardware companies or fuel companies or something else that I’m not going to do. But basically, you know, every unicorn that I’ve invested in where it was doing what I was talking about, which is reducing friction at scale, in some particular market, and preferably if they have a platform, and usually they’re competing against some traditional way of doing things that is just outdated, and those people can’t move fast enough. So one of them was Jeeves, which is a credit card company in Latin America, they’re basically doing kind of the brecks of Latin America. And the reason why Brex I think brex was one of the fastest companies to unicorn ever. But the reason what they did is they looked at credit cards, and I experienced this problem personally, in America as a CEO, when the credit card companies were all underwriting the personal credit for a company credit card. So if you’re the CEO, you have to sign a personal guarantee for the credit card and your credit balance is only related to your personal income. So what ended up happening is, it was really hard to get a big credit balance to run a company on and you couldn’t use any of the company’s finances. And what Breck said is, well, that’s stupid. Let’s underwrite the company instead of the individual. So they changed the underwriting criteria. And that’s what Jeeves did for Latin America. They said, We’re going to underwrite the business, not the individual. And that was something that was very hard for existing credit card companies to do to change their underwriting model. And in fact, most of them still haven’t. And but they what they did is it increased access, gets back to Doc To sign right, there were a whole category of people and companies that wanted access to credit could not get it given the old underwriting model. And so what Jeeves and Jeeves was, I think, one of the fastest growing or the fastest growing credit card company in Latin America ever, because they basically started issuing credit cards, all these companies that could never get them before, another company that I invest in. And I saw that in the beginning, and the CEO was an amazing guy, too, you always increase, you’d have to have a, like, really onpoint amazing person to back.

John Corcoran 30:32

Yeah. And another piece about that that happens a lot is you see a model that works really well, maybe in the United States or in a different market. And then people just kind of, you know, rip off and duplicate and put it into another. And there was some

Martin Tobias 30:43

of that when I was investing in Jeeves in Latin America, because Brex had already proven the model in America. And then you’re doing in a geographic thing. Then, the second one was a company called DL, which is basically an employer of record International. And there were others in the US that tried to do that. But if you looked at all the traditional employers of record like try net and paycheck Corporation, they had written their software, like in the 80s. It was like archaic, shitty software that then the customer service. Anytime you find an industry with a really low customer service rating, you can find an interesting opportunity opportunity. Yeah, so So they said, We’re gonna write on modern software, we’re gonna have mobile first, we’re gonna make it super easy onboarding, change the UI, blah, blah, blah. And they just crushed it, especially also, where a lot of people were looking for outsourced people, American companies, hiring developers in Pakistan or Vietnam, and wanting more access to international employees from a US based company, they really capitalized on that, you know, hiring the best person anywhere in the world. And making it easy to do it’s, it was hard to do prior to deal. Because you had to if you were a company, you know, set up a whole bunch of stuff to hire somebody in freakin Pakistan. And now you can just have dill, hire them for you. And that person can be working, you know, within one day, which was frankly never possible. Again, they increased the opportunity, the supply of these kinds of employees to companies in America in a way that simply did not exist before the platform did.

John Corcoran 32:26

Yeah, yeah. Now, I think you’re on second or third fund for insight, Incisive,

Martin Tobias 32:32

second fund, okay. The first fund was a two and a half million dollar fund I did on AngelList. My current Fund is a $10 million precede fund, I just invest precede 150 to $500,000 first institutional check, I define precede as having an MVP in the market. So if you just have an idea, and you’re trying to write the MVP, I want you to get money to do that from angels, or individuals. And most institutional investors are going to want to see until you engage with some customers a little bit. Yeah, so that’s what I’m doing precede investing.

John Corcoran 33:10

And those any companies that are listening to this, that are interested in knowing more, what what exactly are you looking for right now?

Martin Tobias 33:20

Again, the same thing, you know, companies that are, you know, trying to, basically, with software, automate, you know, something that’s hard to do without the software, I tend to look at a lot of vertical market software in old industries, for example, deal, you know, the employer of record industry was an old industry that had old technology. So I see a lot of interesting opportunities in industries that are under it, or even industries that were early adopters of technology that have not changed for a long time, like health care, like FinTech like insurance, right?

John Corcoran 33:57

Yeah. Yeah. And these are big problems. So I’m imagining this, since you’re obviously just one guy, one fund, you know, $10 million is a lot of money by any measure. But, you know, we’re talking about like, these are industries that are probably going to require 100 million 200 million to make a big dent in the problem.

Martin Tobias 34:16

Well, absolutely. But, you know, that’s why like, I’m personally an LP in 17 funds, and I know like 300 GPS, I’ve raised over $500 million myself, so I know a bunch of people in the later stages. And frankly, you know, that’s why a lot of entrepreneurs come to me or take the first check from me is that I have a network to get them the next check. And you know, in precede, you’re almost never creating a profitable company, you almost always have to raise more money. So one thing entrepreneurs should consider, instead of just taking money from their friends or whoever the fuck they know, am I taking money from somebody who can help me get that next let’s assume I hit all my KPIs like, do they know Andreessen Horowitz or index or any a some of these bigger funds that can write the bigger checks when we need to really start growing. And in my portfolio, the in a standard precede funded company, approximately only 30% of them received seed or series a financing 70% of pre seed companies fail, because they don’t achieve follow on financing. In my portfolio, 74% of the investments I’ve made have received follow on financing. That’s two and a half times better. And so I think that if you are a pre seed type company, you want to get investors on your cap table that have a proven record of helping their companies raise more money.

John Corcoran 35:44

Yeah. What do you say to founders who say that, you know, it’s, it’s raising money is become a full time job? In today’s market out? What’s your perspective on it compared to you know, when you were raising money in the 90s? Today,

Martin Tobias 36:01

it’s always been hard. And if you don’t want to do anything hard, you should go to work for Microsoft, which you did, which I did go to work for somebody else. I mean, that’s the job. I really, you know, go do something else if you don’t want to do that. Now, the other advice that I give it, and I’m finding more CEOs taking it, you know, prior to q3 of last year, when money was free, you know, CEOs could pretty reliably be able to raise every six months. I mean, it was easy. It was it was an order of magnitude easier to raise money. And now 25 years ago, than 25 years ago, even Yeah, I mean, the last sort of five years was amazingly easy. I mean, if you look, I don’t know what the numbers are. But 20 years ago, when I was raising money, I mean, there were three VCs in Seattle. And now there’s 25. Right? I mean, there, there is an order of magnitude more money out there. But it is, what I tell CEOs is, I want you to don’t do these hand to mouth fundraisings, despite the fact that maybe you can every month meet somebody and get 100 $200,000 and just sort of, you know, rolling, close raise the money, then you are definitely raising money all the time, I encourage people to go back to what has traditionally 20 years ago. That’s not how people raise money, they raise money in rounds, like when we gave DocuSign, their first check, we gave them $4 million all at once, so that they had two years where they could just build the product and not worry about financing. Right. And I think that that we’re going back into an environment where VCs would rather do that, because you’re participating in a fully funded round. And companies would rather do that because they have, you know, a break between financings. Yeah, you if you’re always financing, it can be a problem for product development. Yeah.

John Corcoran 38:10

Martin, I’m a big fan of gratitude, especially expressing gratitude to those who helped you along the way, especially peers and contemporaries. others in your industry, which could for you could be other VCs could be other investors could be other founders. But, you know, if you had to do that, if you had to give a shout out to a couple of people who’ve helped you along the way in your journey, who would you want to mention?

Martin Tobias 38:34

Sure. And I love the concept of gratitude, actually, at every night at dinner with my family, rather than talking about, you know, TV, or sports or anything like that, we do a gratitude practice, we make everybody go around, say what they’re grateful for for the day. I’m a huge fan of gratitude. As far as related to my career, there’s two people that I’m very grateful for. And I think that really shaped you know, how I think about investing in entrepreneurship. And the first one was Ron Conway, who started Silicon Valley angels. He was the one of the original sort of angel funds in Silicon Valley. I was a limited partner in his first fund. And they invested in Google gave me some Google shares at the IPO, some of which I still own. My cost basis is like 50 cents on Google. And that’s been a really life lesson, not just because Ron’s a very top notch quality guy and helped. He always answers his email always answers his text, even 25 years later, he’ll answer a text from me. And you know, seeing how he was gracious with his time and also incredibly helpful to his portfolio companies. People like Google has given me a really interesting model to try to aspire for as a venture capitalist. The second guy is the first guy to ever write a check a big check for me, and that’s this guy named Stuart elmen, who’s the managing director of our E ventures. And he gave me the first big round at loud AI technologies. And it was kind of the weirdest pitch meeting ever said, he goes, I don’t want to see a deck, I just want you to tell me about yourself and what motivates you. And so we spent a lot more time talking about ourselves personally, and we become very good personal friends. I’m actually going to France with him to ride our bikes around the pier, and he’s our kids are born within two weeks of each other. And he’s become a lifelong friend. And that’s frankly, what you know, it should be in venture between venture capitalist and entrepreneur, you’re creating a at least a 10 year partnership. In this case, it’s been a over a 25 year partnership. And, you know, hopefully, you really get along with these people, because that’s what it should be is a true friendship. As opposed to, you know, here’s some money, you know, I’ll see you at the board meeting.

John Corcoran 40:58

Those are great lessons. Barton, thank you so much for your time here today. Where can people go to learn more about you and learn more about Incisive Ventures? I know you’re you’re very active on Twitter, which is how I first learned of your work. But where can people go to learn more about you?

Martin Tobias 41:09

Yeah, follow me on Twitter, Martin G. Tobias, or go to my website incisive.vc. And love to hear from you and hear what you’re building.

John Corcoran 41:20

Excellent. Thanks so much, Martin.

Chad Franzen 41:21

Thanks for listening to the Smart Business Revolution Podcast. We’ll see you again next time and be sure to click Subscribe to get future episodes.