What was your path into Venture Capital? How did your investment thesis begin to take shape?
My path into venture atypical. I grew up in Nigeria, though I come from Ghana. I moved to the United States for my undergraduate education in 1997 because I did not want to subject myself to the frequent closures of universities in Nigeria and Ghana at that time. In my final year of secondary school for example, all the Universities in Ghana were closed for 9 months, and that was not the only closure. I was worried my 3-year degree could take much longer. Fortunately, I won a grant from Connecticut College that paid for one hundred percent of my undergraduate education — a bachelor of arts, with a double major in mathematics and physics. Perhaps another time I can tell you about my misadventures in computer science.
After college in 2001, I worked at Watson Wyatt — training to become an actuary. Then I worked at UBS AG in Stamford, CT. That was when I started my MBA — I was a part-time student. I joined Lehman Brothers in 2007, and was let go in a wave of terminations in March 2008. I graduated from Stern in May 2008. I had a front-row seat as the crisis of 2008 unfolded and I couldn’t find a job. At a certain point, I started sending out applications to bag groceries at Whole Foods, Shop Rite, and Stop N’ Shop — I needed to do something. Anything.
Eventually, Jeff Citron’s (founder of Vonage, Datek Online, and Island ECN) family office found me. After a series of interviews they asked me to join them in order to start a formal direct investing initiative — the family office had not established a consistent direct-investing program yet. But, initially, I had to help two small companies that the family office had invested in — a fine-dining restaurant company, and a private jet charter company. As you might imagine, in 2008–2010, those companies were struggling. Their competitors were folding left and right. They were racking up losses. Things looked grim. My assignment was to help them stay alive till the economy improved and they no longer needed my help. That period offered me the best, most immersive, lessons I have learned about running a startup, and trying to build a company. Coincidentally, while at Stern, I took every bankruptcy class possible. I intended to go into equity research, and then ultimately to join a value investing fund. I believed that if I could understand and analyze a company in distress — what is working, not working and how you can turn it around, bring back to a position of strength and health — then analyzing any company not in distress would be much much easier.
You began working with distressed companies that had been around for over a decade, how do you view startups through that lens while they are still in their infancy?
I think of startups and companies as existing on a continuum. A company in distress and a startup are at opposite ends of that continuum. In both cases, you’re doing whatever you can to prolong life. A mature company in distress has lost the trust of its customers, and the CEOs job is to win that trust back. The startup has not yet built trust with its customers, and the founders’ job is to build that trust. There will be similar tactics, the company in distress has to decide what to do with its limited resources. Ideally, the things you want to deploy the resources to should be the things that yield the most immediate benefits from a customer perspective. The startup also has to decide what they want to do with their limited resources, keeping in mind that activities that most immediately benefit the customer will yield the most advantage for the startup.
I boil this all down to the customer. If a strategy or move is not something that’s going to directly benefit the customer, then don’t do it. When I’m talking to founders, I am always listening to discern if they are focused on their customers. For example, “This is the problem our customers are facing, this is how we solve that problem, and right now we are focused only on that.” This singular focus on the customer, this customer-centeredness, so to speak — that is what becomes the brand. If customers have a negative experience with a startup’s product, that will become that startup’s brand. If they have a positive experience when they interact with a startup’s product, then that will become that startup’s brand.
Winning customers’ trust is hard. Founders can get distracted by other shiny things when things are not going as well as they have been led to expect. They start going to numerous conferences, talking on numerous panels, and things of that sort. If a founder cancels at the last minute for a meeting with me because they were dealing with a customer issue, they never need to apologize. I get it. If you didn’t take care of your customer, you could lose that customer, and losing that one customer could be fatal. Not a lot of people get that a customer is a lifelong asset. Capital from investors is great, but capital from investors will come if you’ve taken care of your customers.
The distractions are plentiful. It is fundraising, speaking, the temptation to try to become a startup celebrity. I think the reason is because getting customers is really hard, especially if you are doing something ‘disruptive’. Sometimes founders also want to be distracted because they aren’t able to take rejection. You have former bankers or McKinsey consultants that have always been successful and now they’re starting a B2B company and taking hits all the time. It’s one thing if you’re starting a consumer facing business, you do some growth hacking, online advertising through Facebook or Google and if it doesn’t work, you don’t take it personally. But in selling to enterprises, you’re making phone calls, hearing ‘no’ all the time. How many people want to do that, especially if they come from some vaunted pedigree before starting the company? It’s much more appealing to be sitting on a panel or speaking rather than dealing with a customer that might be difficult to understand. That’s when the problems begin. The great founders never lose focus on winning and keeping customers.
How do you spot founders that you’re excited about working with? You talk about startups with limited resources and training the startups to become self-sufficient. How do you look at Venture Capital and weaning founders off of venture capital?
There are founders that are great at the big picture things but can’t get into the details or just don’t want to. What I’m generally looking for is someone who can do both. Someone who can talk about the $13 trillion market potential, but can then tell me what their strategic plan is for the next 12 months and how they’ll reach the customers who are going to buy their product. They can tell me what these customers look like, talk like, where they live and what they do in their free time. Sure, the $13 trillion market is appealing, but if we don’t make it into the next 12 months, it’s going to be irrelevant. So, let’s focus on these 12 months, this is who we need to talk to. Second thing I want to know about is the vision. Everyone will have some kind of an answer to this question but have not given it enough thought. One big vision answer will be very vague and lacking details, another one will have the details. That’s how you know that this is probably someone that can do both. You obviously want to figure out that they know who the customer is today, how to sell to them, what the pain points are, why those people are buying.
Some people have read Clay Christensen’s book, The Innovator’s Dilemma, and they grasp the theory of disruptive innovation. Other people, most people, gloss over the idea and adopt the phrase because it sounds good, and everyone else is saying it, so — why not? I think there’s a belief that to be disruptive, you have to grow at all cost. So, that leads you to think that you have to raise a big round and that VCs have to be excited about what you’re doing, and if that’s not happening, then you’re probably not doing it right. Christensen wrote a second book called The Innovator’s Solution with the lesson that founders/disruptors should be impatient for profit and patient for growth. You have to get to break-even, know how to run your business sustainably. Only once you know how to do that, then you pour on the gas, then you step on the accelerator, because then you know what levers you need to put in place, and what knobs need to be turned to what degree in order to accelerate. A lot of people chase growth before they know how to run the business profitably. That’s where Venture Capital can often become a handicap because eventually that faucet of cash dries up when VCs realize that the probability of a profitable, repeatable, and scalable business model being discovered is zero..
Given that this book will be titled Finding Genius, do you think entrepreneurial genius is something that is trained over time, or do you believe it is a more innate ability?
I think it’s a mix of the two. I’ll use my mom as an example. While I was growing up, she tried a few different businesses and eventually started a school. She is passionate about, and great at getting children to fall in love with learning. So, she builds that into them early and it follows them throughout their lives. They do extremely well when they’re with her, and then they go to other schools and continue to outperform their peers. She enjoys it, and is also very persistent. That is why she is successful. Her persistence and her passion. Even though she has that knack, and it has enabled the school to grow, she is the first to admit that more formal training in accounting, management, or strategy would have been helpful and might have enabled her to accomplish even more than she has.
Maybe the genius some founders have that others don’t, is in the awareness to recognize when one lacks certain skills or knowledge, and then surrounding oneself with people who fill those gaps, and can become phenomenal at what they do, and then empowering them to execute based on their expertise and the team’s goals and mission.
That’s one of the things I noticed about the two turnarounds I was managing between 2008 and 2013, this distinction can separate startups that succeed from those that fail.
On one team, the founder would not empower other people to go do things. That turnaround was extremely difficult. The other venture had a main character who knew there are things he knew how to do really well, and there are things he doesn’t know how to do. That team agreed that managers should focus on the things they did well, and that they should empower other employees to do the things they are best at. Running that business became tremendously easier, even though the former case should have been more successful. It had bigger teams, more resources, etc. None of it mattered, because the inability to delegate was an insurmountable problem, and morale was chronically low.
In the case of my mom, one could argue that she did not have enough people around her. I think it’s a mix of both. It boils down to self awareness. If you’re the founder who came to it through formal education, maybe you need to find someone, could be a co-founder, or someone who is at least a thought-partner who did not necessarily come to it through book learning. And if you’re a founder who came to it with no book learning, then maybe you need to partner with someone who has.
I know you’re focusing on three areas this year, what about supply chain excites you? I know you opt to stay away from buzzword investing, but are the frontier technologies hitting supply chain in a way that is making you more excited about it or is it more that this is an untapped area that investors have not looked at, as you alluded to earlier?
The way I think about supply chains, the definition I’m working with right now is that a supply chain is a network of people, or companies, or machines, or entities, or processes, that enable you to get a good, a product, a service, or information, from point A to Z. Point A might be the supplier who created the product, and the supply chain is the network by which that thing is delivered to whoever wants to consume it. I think about two types of supply chains; one is a supply chain for information, and the other is a supply chain for physical goods. The supply chain for information facilitates business models like those that underlie companies like Google and Facebook. The supply chain for physical products facilitates business models like those that enable a smartphone to get into our hands.
Right now, and as I think about the future, I don’t think the supply chain for physical products functions effectively without being tightly interwoven with the supply chain for information. When I use the word “information” I am thinking very broadly about things like payments and other data required to facilitate financial transactions globally, between entities in different countries, security of IT systems to protect intellectual property from being stolen — What will the new iPhone look like? What components will it be made from? The infrastructure that enables this sort of information — the information on which all global trade is based — to be stored, transmitted, consumed, and secured, that’s the supply chain for information.
This is an issue I have been thinking about since 2014, in fact, I wrote a blog post about operations and how startups could gain a competitive edge from operations. People often think dismissively about operations, they see it as a cost, a waste of money. But, if you think about the small number of companies that dominate their market, they tend to be companies that know their operations inside and out.
I really like the operations class at Stern, when I was a student it was called Competitive Advantage from Operations. That’s what operations is. Your operations should allow you to gain a significant edge over everyone else. So in 2014 I started to think about supply chain in the same way, that if you really understand the ins and outs of your supply chain, it should allow you to get a significant edge over whoever you’re competing with.
Obviously, you’re now thinking; “Okay, Brian, this all sounds nice. What are some examples?”
Amazon obviously has a handle on their supply chain, They have come to the point where you can order something, and they can deliver it to you in two days. Two days! Then you start thinking; Why would I buy anything from anyone else if Amazon can get it to me in two days? My 10-year old son says; “Anyone who does not shop at Amazon is stupid.” So what happens? Other companies start to lose business while Amazon starts to gain business. Why? Amazon is winning the competition of the supply chains, and it has tightly integrated its supply chain of information with its supply chain for physical goods.
Even companies like Facebook — they don’t have a supply chain for physical goods, but they have a supply chain for information. And as far as I can tell, Facebook is focused on optimising it, making sure that the platform is fast. If you want to post a status update, it should be painless relative to the alternative, no matter what part of the world you’re in. They created their own server architecture, just to ensure that their servers are optimized for what people want to do on Facebook. This is true for Google too.
Apple, notorious for having a tight control of its supply chain has become one of of the supply chain masters. Toyota. Walmart. The companies that transform our world are companies that have mastered supply chain.
There are obviously parts of supply chain that are working fine, and others that could use some technological innovation, may be even disruption. My focus has to be on finding the things that aren’t working at all, trying to find if those things can be done better using new, cutting-edge technologies like distributed ledgers (e.g. blockchain), artificial intelligence, 3D printing, cloud computing, quantum computing, and so on and so forth — to do those things that are not working well, or at all, in a much more efficient way. I am excited about finding the startup founders working on that class of problems.
The global economy is built entirely on supply chains, or as we put it at The New York Supply Chain Meetup; “The world is a supply chain.” I am confident I have found the kind of problem that has always excited me, a problem so enormous, so malformed, so poorly defined, that many other people feel I have no hope of success. Perhaps they are right. We’ll just have to wait and see.