In this episode of the 20 Minutes VC, host Harry Stebbings interviews Nicholas Charles, the founder and partner at Notation Capital, a New York-based pre-seed investment firm. Charles shares his journey from starting his first company in 2008 to becoming the head of investments at Betaworks, where he led investments in startups like Electric Objects and Grand Street. He details Notation Capital's strategy of investing in the early stages of startups, with a focus on highly technical, motivated teams with unique insights, and an average check size of $150,000. Charles emphasizes the importance of being close to founders for early-stage investments and mentions how Notation Capital differentiates itself in a crowded market by focusing on New York City-based companies. He also discusses the firm's approach to deal sourcing, avoiding demo days in favor of direct interactions with founders, and the structure of Notation Capital's fund, which is under $8 million, with a mix of individual and institutional LPs.
Hello and welcome to the 20 Minutes VC with your host, Harry Stebbings. And this week, the 20 Minutes VC is heading across the pond. Yes, we are interviewing the latest and greatest investors in New York. And for today's show, we welcome Nicholas Charles, founder and partner at Notation Capital, one of New York's genuine precede funds looking to invest in pre growth ventures.
The quote introduces the podcast episode and its guest, highlighting the focus on pre-seed investments in New York.
I've been building and investing in startups here in New York since 2008... I joined Betaworks in 2011... I spent the bulk of my time running the seed investing business...
Nicholas describes his career trajectory, emphasizing his experience with startups and investment at Betaworks.
I think number one, by doing so... I learned from surrounding myself with folks that had been making and doing investments and had been working in venture for a lot longer than I have.
This quote explains how Nicholas learned the venture business through direct experience and mentorship.
Wow, that's a great question... Andy Weissman has been a mentor to us who's a partner at Union Square Ventures.
Nicholas acknowledges the importance of mentors in his career, specifically naming Andy Weissman.
So I left Betaworks about a year ago to start notation capital which is a venture firm based in Brooklyn, New York, with another partner. His name is Alex Lyons.
Nicholas introduces Notation Capital and mentions his co-founder, Alex Lyons, providing context for the firm's establishment.
"New York, we believe, has now shown that it consistently can produce billion plus dollar exits. And so that's companies like Etsy and Mongo and Tumblr and a bunch of others, a bunch of e commerce companies."
This quote emphasizes the successful track record of New York in generating companies with high exit values, indicating a maturing ecosystem.
"New York now has a critical mass of talent in many ways for the first time. So real engineering and design talent that in many ways has grown up in those companies."
The quote highlights the development of a strong talent pool in New York, which has emerged from within successful companies in the region.
"Many of the best vcs in New York have moved up the stack."
This quote indicates that established VCs in New York are now managing larger funds and are less focused on seed-stage investments, leaving room for newer firms to fill the gap.
"We write on average $150,000 checks into what we consider pre-seed rounds."
This quote specifies the average investment size the firm commits to startups, focusing on the earliest stages of funding.
"Our belief is that in the very early days of building a product in a company, you don't need millions of dollars to show real traction and to build out a great team and to show the early signs of product market fit."
The quote conveys the philosophy that startups should not raise large sums too early and instead should focus on demonstrating traction and product-market fit with more modest funding.
"The team and the people are everything. So we look for really top notch, typically technical teams that are in the very early stages of building a product."
This quote stresses the importance the firm places on the quality of the startup team, particularly their technical expertise, when considering investments.
"We really look for a reason or some sort of unique insight into why that team is building what they're building."
The quote highlights the firm's interest in the motivations and unique perspectives that drive a startup team's product development.
"I think if you look at some of the biggest, most important companies over the last ten years, they're first time founders, including Mark Zuckerberg at Facebook."
This quote challenges the assumption that repeat founders are inherently better, citing examples of successful first-time founders to support this view.
"I don't think repeat founders or serial entrepreneurs that can raise these very large initial rounds of funding will always choose to raise as much money as they can."
The quote reflects the observation that experienced founders may opt for smaller, more disciplined funding rounds, aligning with the firm's investment strategy.
"I think that what we've seen in terms of seed and pre-seed and even series A in New York is much more practical valuations."
The quote suggests that, in contrast to other markets, New York's startup valuations are more grounded, particularly at the early stages of investment.
"As a small fund we are somewhat more valuation sensitive than some of our peers. And the reality is that hasn't really been a major hurdle in terms of us trying to come to terms with founders that we want to partner with."
This quote illustrates Notation Capital's cautious approach to valuation, emphasizing their ability to still effectively engage with founders despite a more conservative stance on investment valuations.
"So every single one of our companies that we work with will be primarily based in New York. [...] having that network of founders all based locally here in New York City, we think will provide a lot of value to them and then a lot of value to us as we build the firm over the course of the next years and decades."
This quote highlights Notation Capital's strategy of concentrating on New York-based companies to create a supportive local network, which is expected to be beneficial in the long term for both the startups and the venture firm.
"I do think it's more important to be able to meet with and interact with on a somewhat regular basis [...] those conversations, interactions and relationships are just that much stronger when we can work in person."
This quote conveys the belief that face-to-face engagement enhances the quality of interactions and support provided to startups, especially at the early stages of investment.
"Our approach in terms of meeting founders is basically, we have an open door. Anybody can email us at any time [...] we respond to basically every single email we get sent."
The quote explains Notation Capital's personalized approach to deal sourcing, which involves open communication channels and a preference for one-on-one meetings over public pitching events.
"I do think that because there is so much capital available today [...] it is really hard to legitimately differentiate yourself as an investor."
This quote acknowledges the difficulty of standing out as a venture capital firm in a competitive landscape, but also implies that Notation Capital's unique focus provides a competitive edge.
"We're focusing on having initially relatively high ownership in the companies that we work with. That's usually high single digit percentage."
This quote reveals Notation Capital's strategy of securing significant ownership stakes, which suggests a preference for influence and potential returns over a larger number of smaller investments.
"Strategy is to find ways to do follow on investments and prorata outside of the fund, either through spvs with our lps, or at some point we might raise a follow on fund separately."
This quote explains Notation Capital's approach to investment strategy, highlighting the use of SPVs and the potential for a dedicated follow-on fund.
"Yeah, so the LP universe is really in many ways hard to navigate because it's so opaque."
This quote emphasizes the challenges faced when engaging with the LP community, particularly for new entrants in the venture capital space.
"So we have about 30 lps. Half of those are, or I'd say in terms of dollar amounts, about half the fund is individuals, many of whom are founders and partners that are at other VC firms and folks that we've worked with in the community for a long time. And then half of the fund is institutional."
This quote provides a breakdown of the types of LPs that make up Notation Capital's fund, highlighting the diversity between individual and institutional investors.
"Yeah, we want to build a top tier firm in New York City that is the best place for highly technical founders in New York to go for a first check and to go for a first."
The quote outlines the long-term vision for Notation Capital, emphasizing their commitment to supporting technical founders in New York.
"I prefer reading fiction reading, for me, I view as pleasure as not work. So I try to read books and topics that take me far away from technology and venture capital."
Nicholas expresses his preference for fiction as a form of escapism from his professional life in technology and venture capital.
"I don't, but I've thought about it."
This quote reveals that Nicholas has contemplated meditation, indicating an interest in mindfulness practices.
"Sure. I've been loving this blog called, it's been profiling recently, Elon Musk and Tesla. And I think the SpaceX post just came out and previously had a series on artificial intelligence that was mind blowing."
Nicholas highlights his interest in a blog that covers topics related to Elon Musk's ventures and artificial intelligence, suggesting these are areas of interest for him.
"Our most recent public investment was in a company called Ziptrug. They are fundamentally rethinking how prescription drugs in New York and ultimately the United States are delivered."
This quote details Notation Capital's investment in Zipdrug and the reasons behind their support, showcasing the firm's investment philosophy and criteria for choosing companies.
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