20 VC 070 Do Investors in California Outperform The Rest of The World with Eric ver Ploeg @ Recursive Capital



In the latest episode of "20 minutes VC," host Harry Stebbings interviews seasoned investor and entrepreneur Eric Vaplu. Vaplu shares insights from his journey, transitioning from the CEO of a Kleiner Perkins-backed startup, Angara, to a venture capitalist with over $160 million in investments, predominantly in the mobile space. He debunks the myth of venture capital as a part-time retirement job, highlighting its demanding nature, especially post-dot-com crash. Vaplu emphasizes the importance of strategy in investing and the unique challenges of managing a board as a CEO. He also discusses the significant advantage San Francisco-based angels have over others, with a 37% success rate in funding Series A rounds compared to 21% elsewhere, attributing it to the local culture, network, and access to capital. The episode concludes with Vaplu's reflections on the importance of being open to serendipity in one's career.

Summary Notes

Introduction to Eric Vaplu

  • Eric Vaplu is a guest on the 20 minutes VC, hosted by Harry Stebbings.
  • Vaplu has founded two companies, including Angara and ad knowledge.
  • Angara was backed by Kleiner Perkins and ad knowledge was sold for $193 million.
  • He transitioned into venture capital, leading over $160 million in investments, focusing on the mobile sector.
  • Eric Vaplu is also recognized for his writing on Medium.

"We are staying firmly in the valley for today's show as we interview the phenomenal Eric Vaplu." This quote introduces Eric Vaplu as the guest of the show, highlighting his significant presence in the tech industry and his connection to Silicon Valley.

"Eric has exceptional experience on both sides of the table, having started two companies himself, including Angara, a Kleiner Perkins back startup, and the first Internet ad serving company ad knowledge, which was sold for $193,000,000." This quote summarizes Eric Vaplu's entrepreneurial experience and his successful exits, which add to his credibility and expertise.

"He then made his move into venture where he has led over 160,000,000 in investments, predominantly in the mobile arena." This quote details Eric Vaplu's transition into venture capital and his investment focus, indicating his strategic insight into the mobile technology sector.

Background and Transition into VC

  • Eric Vaplu holds a PhD in Electrical Engineering and an MBA from Stanford.
  • He founded two venture-backed companies, with Angara being the second.
  • After hiring a CEO replacement for Angara, he was approached about venture investing.
  • Initially, he perceived venture capital as a semi-retired role but was corrected after meetings with venture capitalists.
  • Vaplu joined Vantage Point and led investments in the mobile space, serving on 20 boards.

"I'm an engineer by educational backgrounds. I got my PhD in electrical engineering from Stanford and then got an MBA at Stanford as well and started two venture backed companies, the second of which was Angara." This quote provides background on Eric Vaplu's education and entrepreneurial ventures, establishing his technical and business foundations.

"One of my venture board members asked me if I'd ever thought of doing venture investing, and honestly, my first reaction... I don't know. I think I'm too young to retire into venture that looks like a 40 hours week job, and that's if you include the golf." This quote reveals Eric Vaplu's initial skepticism about venture capital being a full-time career, reflecting a common misconception about the industry.

"After I had a dozen of those meetings, I realized, oh, wait a minute, no, this isn't really a 40 hours job. It's very demanding." This quote captures the moment Eric Vaplu's understanding of venture capital changed, recognizing the demanding nature of the role.

"The guys at Vantage Point who had led the series B in Angara basically made me an offer to join the partnership there." This quote explains how Eric Vaplu was offered and accepted a position in venture capital, specifically at Vantage Point.

Early Investing Strategy

  • Vaplu did not have a clear investing strategy at the start of his VC career.
  • He joined the VC industry during the dot-com crash, which was a challenging time for making new investments.
  • The market conditions allowed him to develop his approach to venture investing and form a real strategy.

"At the very beginning I did not. And in some ways I was very lucky to arrive just as the.com crash was really becoming apparent as to how bad it was." This quote reflects on Eric Vaplu's initial lack of strategy in VC and the timing of his entry into the industry during a market downturn.

"Without a clear strategy, it's like getting handed an AK 47 and told to go shoot some stuff." This quote metaphorically describes the danger of investing without a strategy, likening it to recklessness.

"It was good that in the first year and a half or so that I was at vantage point, there was not a strong desire in the partnership to do new investments and there was sort of death and destruction all around." This quote indicates that the market conditions and the firm's cautious stance provided Eric Vaplu with the opportunity to thoughtfully develop his investing approach.

Impact of Founding Experience on VC Attitude

  • Eric Vaplu believes that personal experience significantly influences one's approach to portfolio companies and entrepreneurs.
  • Having both a successful and a failed startup has made him more empathetic towards the realities entrepreneurs face.
  • He acknowledges the expertise of CEOs in their sectors and advises them to discern valuable input from VCs.

"For sure? I mean, no human is not affected by their experience, I should say." This quote emphasizes the undeniable impact of personal experiences on professional attitudes and decisions.

"The two things that I always say to an entrepreneur or CEO after I've made an investment, the first one is I'm fully aware that the CEO who's been working 60 plus hours a week in a specific sector for several years knows a lot more about that sector than me as a VC board member." This quote highlights Eric Vaplu's respect for the domain expertise of CEOs and his awareness of the limits of his own knowledge as a VC.

"Part of the job of the CEO is to a, identify the good 20% and pursue that, and B to pretty directly explain why the other 80% is not worthy of vigorous pursuit." This quote outlines the responsibility of CEOs to filter VC advice and focus on what's most relevant for their company.

CEO's Ability to Challenge VC Perspectives

  • Vaplu believes that the best CEOs are those who can discern and challenge the majority of VC input that may not be actionable.
  • It's not about being confrontational, but about having the insight to identify and act on the valuable 20% of VC advice.

"The best ones do. And it's not so much a gun. It can be a quiet introvert." This quote suggests that the ability to challenge VCs is not tied to a CEO's personality type but rather to their judgment and understanding of their business.

"It has to be somebody who says like, so" This incomplete quote implies that a CEO must be someone who is willing to engage in a dialogue with VCs, to discuss and defend their perspective on the company's direction.

Effective Communication with Board Members

  • Clarifying understanding is crucial to effective communication.
  • Board members may raise concerns that need to be investigated.
  • A board is a group of smart, opinionated people with some control but no unified voice.

"My first concern would be x, but let me go look into that. And then they check in and they come back and after spending not too much time on it, say, as we looked into it, X really is kind of a killer issue, or that's not practical for reason y or whatever it is."

This quote emphasizes the importance of addressing concerns raised by board members and the process of investigating these concerns to reach a clear understanding.

Developing Skills for Managing a Board

  • Managing a board requires a separate set of skills not typically taught in corporate training.
  • Founders need to understand the structure of a board and recognize that it is not equivalent to having a boss.
  • The board has collective interests as well as individual member interests.

"There's nothing in the training of somebody know been in corporate America or in corporate anywhere in the world that trains you for dealing with a board of smart, opinionated people who have some control over your life but aren't speaking with one voice."

This quote highlights the unique challenge of managing a board, which is different from typical corporate management roles and requires specialized understanding and skills.

The Role of Venture Capitalists (VCs) in Providing Support

  • VCs are not typically responsible for providing emotional and psychological support to entrepreneurs.
  • Board members should maintain rationality and focus on achieving the best outcomes.
  • In personal crises, board members may need to offer human support beyond their standard role.

"Sometimes, if something really bad has happened, and sometimes bad stuff does happen that is personal in nature, well, then yes, that's a time to take sort of the robot gloves off and be a lot more human."

This quote indicates that while the primary role of board members is not to provide emotional support, there are exceptional circumstances where a more personal approach is warranted.

Understanding the Venture Industry Dynamics

  • The venture industry has a dichotomy between startups with high valuations and large fundraisings and those struggling to raise funds.
  • Historical data indicates that this pattern is consistent over time.
  • A small percentage of investments generate the majority of returns, leading to significant capital being invested in them.

"The three things that in looking at that data is like. First is, yes, that is absolutely the case. It is absolutely the case that a few hot companies are taking disproportionately large amount of capital."

This quote confirms the existence of a dichotomy in the venture industry, where a few companies receive a disproportionate amount of capital.

The Strategy of Raising Large Funds

  • Raising large funds depends on the stage of the company.
  • Early-stage companies are usually limited in the amount they can raise unless they have a proven track record.
  • Later-stage companies should consider raising more capital if it can be done without bad terms to accelerate growth and provide a buffer against economic downturns.

"If you can get that money, and you can do it in a way where you don't have to agree to bad terms, then why wouldn't you take it?"

This quote suggests that raising large funds can be beneficial for later-stage companies, provided the terms are favorable and it supports the company's growth and stability.

Anti-Dilution Terms and Valuation Expectations

  • Eric Vaplu advises founders to reconsider their valuation expectations if they need to agree to a full ratchet anti-dilution provision to achieve their desired valuation.
  • He suggests either relaxing valuation expectations for better anti-dilution terms or not raising the round at all.

"And if you need to agree to a full ratchet to get the valuation that you were looking for, then I think either a you should relax your valuation expectations and get better anti dilution terms or not raise that round."

The quote emphasizes the trade-off between valuation and anti-dilution provisions, suggesting that founders should be flexible or reconsider the funding round if the terms are not favorable.

Determining Fundraising Amounts

  • Founders should consider their business model and the funding needed to reach risk-reducing milestones or revenue traction milestones.
  • The amount to raise is also stage-dependent, with early-stage companies advised not to deviate too much from norms for valuation and amount.
  • Mid-stage companies are advised to aim for 18 months of burn rate to allow for progress and fundraising slippage.
  • Later-stage companies should evaluate whether additional funds will enable faster growth and consider market conditions for fundraising.

"You should look at your business model and what you need to get to risk reducing milestones or to get to revenue traction. Milestones."

This quote highlights the importance of aligning fundraising with specific business milestones related to risk reduction and revenue generation.

"The standard rule of thumb is something like 18 months worth of burn, right? That gives you enough time, generally speaking, to get something done and then have a little bit of Runway for slippage and for fundraising."

Eric Vaplu advises on a general rule for mid-stage companies to have enough funding for 18 months, which includes time for both progress and unexpected delays.

"And in that case, then it's sort of like, well, what will the market bear? And in a frothy environment like we have now, or at least we had until last week, then there's a lot of cash available."

For later-stage companies, the decision to raise more funds is influenced by market conditions and the availability of capital.

Impact of Interest Rates on Pre-IPO Growth Rounds

  • Eric Vaplu believes that the involvement of big players in late-stage private funding is more dependent on fundamental changes in the venture ecosystem than on interest rates.
  • The growth of unicorns and decacorns, which would have been public companies in the past, has changed the landscape for endowments and pension funds seeking high-growth equity.

"I think it's much more dependent on sort of more fundamental changes in the venture ecosystem."

The quote suggests that the dynamics of pre-IPO growth rounds are influenced by broader trends in the venture capital industry rather than just interest rates.

Success of San Francisco Angels

  • Eric Vaplu was surprised to find a significant disparity in the success of San Francisco angel investments compared to the rest of the world.
  • San Francisco angels have advantages such as a supportive culture for startups, access to experienced talent, and proximity to capital sources.
  • The Bay Area's ecosystem provides a natural advantage for both founders and investors.

"Yeah, I mean, that really surprised me. To be clear, I appreciate that was done was California versus rest of world, but most of the stuff that happens in California is in the Bay Area."

This quote expresses Eric Vaplu's surprise at the significant difference in success rates between San Francisco angel investments and those in other regions.

"It's partly the culture of it's totally acceptable to be working on a startup that nobody's heard of. And people don't roll their eyes and say, you're a loser. They all go, well, maybe this one is going to be great."

The quote highlights the supportive culture in San Francisco, which is conducive to startup success.

"Do you think there are two answers to that? The short and simple one is yes, in a way that you just wouldn't get any other place."

Eric Vaplu acknowledges the unique advantage of being in the Bay Area, where the concentration of venture capital and industry players is unmatched.

Preference for Local Investors

  • San Francisco startups may not have a strong preference for SF angels, but proximity and convenience play a significant role.
  • It's easier for startups to meet with local investors for practical reasons like having coffee with someone nearby.
  • Local investors in the valley often have experience and money from entrepreneurial ventures, which is beneficial for tech startups.

"It's just easier to have coffee with somebody who lives a half hour away from you than somebody who lives on many time zones away."

This quote emphasizes the convenience factor of working with local investors due to geographical proximity.

"I think you just have a larger fraction of people with money in the valley have money from being involved in entrepreneurial ventures."

This quote highlights the advantage of San Francisco investors having relevant entrepreneurial experience, which can be valuable for startups.

  • Eric Vaplu recommends "The Lean Startup" by Eric Ries for consumer-facing businesses due to its effective approach and methodology.
  • For enterprise startups, he suggests "Crossing the Chasm" by Jeffrey Moore, which provides insights on acquiring initial customers and leveraging them.

"The lean startup by Eric Reese. I think that's just a great approach and methodology for thinking, especially about a consumer facing business."

Eric Vaplu endorses "The Lean Startup" for its methodology, particularly for consumer-facing businesses.

"On the enterprise side, I would throw in Jeffrey Moore's classic crossing the chasm."

Eric Vaplu recommends "Crossing the Chasm" for its strategies related to acquiring and leveraging early customers in enterprise startups.

Perspectives on Successful Venture Capitalists

  • Jim gets is considered a successful VC by Eric Vaplu due to his track record, personal knowledge, and attributes like being bright, hardworking, and aggressive.

"Jim gets. He's got tremendous recent track record. I also know him personally, and he's bright and super hardworking and aggressive."

Eric Vaplu admires Jim gets for his success in venture capital, highlighting his achievements and personal qualities.

Overhyped and Underhyped Sectors

  • Eric Vaplu is skeptical about overhyping sectors without thorough research but doesn't see the defensibility in food meal delivery businesses.
  • He considers blockchain and distributed authorization technologies as underhyped, noting their potential to reduce transaction costs and trust issues.

"I just don't understand all of these food meal delivery businesses."

Eric Vaplu expresses his inability to comprehend the sustainability and competitive edge of food meal delivery businesses, suggesting they are overhyped.

"I think the blockchain distributed authorization type of based businesses."

Eric Vaplu points out the overlooked potential of blockchain beyond bitcoin, especially in reducing transaction costs and friction.

Go-to Resources for Industry Insights

  • Eric Vaplu frequently reads content from Thomas Tungus of Redpoint, appreciating the real analysis and data presented, not just opinions.

"The guy I like is, I don't even know how to pronounce his name. The guy at Redpoint, Thomas."

Eric Vaplu expresses his preference for Thomas Tungus's work, which provides substantive analysis and data in the venture space.

Reflections on Past Investments

  • Eric Vaplu's last investment was in 2009 with a company called Flip Swap, chosen for its defensible business model and real customer traction.
  • Flip Swap was successful and sold about 18-20 months later.

"It was three guys that I knew really well and liked a lot. And I thought they had a really defensible and good business model."

Eric Vaplu shares his rationale for investing in Flip Swap, emphasizing the importance of the team and the business model.

Advice for Aspiring Industry Professionals

  • Being open to serendipity is crucial, despite the benefits of focus and planning.
  • Eric Vaplu advises not to dismiss opportunities that don't fit into a specific plan, as they could be beneficial.

"I think, being open to serendipity, I think there's a really big advantage associated with focus and having a plan."

Eric Vaplu underscores the importance of being receptive to unexpected opportunities in one's career, balancing focus and openness.

Acknowledgment and Resources

  • Harry Stebbings expresses gratitude to Eric Vaplu for his advice and guidance post-interview.
  • Mention of resources discussed in the show being available on the Twenty Minute VC website.
  • Promotion of Hiring Screen's smart feedback option for recruitment processes.

"I would really like to say a huge thank you to Eric following the amazing interview we just had."

Harry Stebbings thanks Eric Vaplu for his contributions to the interview and the advice provided thereafter.

"All the items and resources discussed in today's amazing show can be found at www.thetwentyminutevc.com."

Harry Stebbings directs listeners to the Twenty Minute VC website for resources related to the show's content.

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