20VC Firstmark's Rick Heitzmann on The Rise of PreEmptive Rounds, His Biggest Learnings From The Pinterest Board, 2 Things VCs Can Do To Prepare Their Companies For The Downturn and Why Now Is A Good Time to Be Contrarian and Invest In Consumer

In this episode of "20 Minutes VC," host Harry Stebbings interviews Rick Heitzman, founder and partner at Firstmark Capital, a leading venture fund with investments in companies like Airbnb, Pinterest, and Shopify. Heitzman shares insights from his journey from entrepreneur to top VC, emphasizing the importance of capital efficiency, empathy for founders, and strategic board involvement. He reflects on the evolution of venture capital from an artisanal craft to a more structured industry and discusses the challenges of consumer space investing amidst rising customer acquisition costs and exit environment concerns. Notably, Heitzman highlights the significance of authentic relationships with founders, the value of pre-meeting board preparation, and the impact of proactive investing in an increasingly competitive landscape.

• "20 minutes VC" is a podcast hosted by Harry Stebbings.
• Harry Stebbings is known for his venture capital insights.
• Rick Heitzman is introduced as the guest of the episode.
• Rick Heitzman is a founder and partner at Firstmark Capital.

You are listening to the 20 minutes VC with me, Harry Stebings and now back from San Francisco.

Harry Stebbings introduces the podcast and mentions his return from San Francisco.

• Rick Heitzman is a respected figure in the venture capital industry.
• He founded Firstmark Capital, a leading east coast venture fund.
• Firstmark Capital has a portfolio with companies like Airbnb, Pinterest, Shopify, and Discord.
• Rick led the seed round for Pinterest and deals for other major companies.
• Prior to Firstmark, Rick was an entrepreneur and a founding member at First Advantage.
• Rick is recognized by CB Insights and the New York Times as a top 100 VC globally.
• The show acknowledges contributors to the episode's questions.

Rick is a founder and partner at First Smart Capital, one of the leading east coast venture funds of the last decade, with a portfolio including the likes of Airbnb, Pinterest, Envision, Shopify and Discord, just to name a few.

Harry Stebbings describes Rick Heitzman's role and achievements in venture capital.

• Carter, Brex, and RankScience are mentioned as sponsors.
• These companies offer services for startups, investors, and SEO optimization.
• Promotional details and offers for these services are provided.

But before we dive into the show today, I'm sure you've heard about it, but my word, this is a product I love.

Harry Stebbings transitions into discussing the sponsors and their offers.

• Rick's interest in investing led him to venture capital.
• He started in distress buyouts and transitioned to VC after realizing the potential of the internet.
• Rick spent time in VC in San Francisco and New York.
• He left VC to become an entrepreneur before returning to venture capital.

So there's probably two ways I got into venture. First, in the mid 90s when you were in the first grade, I was in distress buyouts, and out of college I became an investor.

Rick Heitzman shares his early career path and how he became interested in venture capital.

• Rick's passion for investing and working on diverse projects led him back to VC.
• He has a short attention span, which aligns with the variety found in venture capital.
• Rick enjoys working on the "hardest projects" with bright individuals.

My passion was always investing and I unfortunately have a very short attention span. So the ability to work with a lot of people on a lot of projects, on the hardest projects, probably suited my personality more.

Rick Heitzman explains why he transitioned back to venture capital from entrepreneurship.

• Rick gained a deep empathy for entrepreneurs after becoming one himself.
• He understands the human impact of decisions made in a company.
• This experience has influenced his approach to managing and advising companies.

You don't really understand, and I was not an operator before when I was first a VC and then became an entrepreneur, that you understand that you have to have a deep empathy for entrepreneurs.

Rick Heitzman discusses the importance of understanding the entrepreneur's perspective.

• Rick has witnessed various macroeconomic cycles in his career.
• Experiencing booms and busts has made him more conservative and focused on capital efficiency.
• He emphasizes the importance of controlling one's destiny in business.

It definitely made me more conservative in the bus. I was an entrepreneur in 2001, and you were kind of living hand to mouth.

Rick Heitzman reflects on how past economic downturns influenced his investment philosophy.

• Deciding when to invest heavily is based on unit economics and capital availability.
• Rick considers the risk of the company and the potential upside of investment.
• Companies with a cheap cost of capital, like Uber and Lyft, can afford to take more risks.

Yeah, I'm probably thinking about it in if capital is available, are you risking the company?

Rick Heitzman discusses the considerations for aggressively scaling a business.

• Preemptive rounds are becoming common, with companies often securing funding before announcing a formal raise.
• Investors must be proactive and assume every interaction could lead to an investment.
• The rise of preemptive rounds may indicate a thriving ecosystem or potential market inflation.

Amazing that. I would say most of the rounds we see are companies are never raising money.

Rick Heitzman comments on the trend of preemptive funding rounds in the venture capital landscape.

• Venture capital has become more professional over the last 20 years.
• Firms have evolved to resemble structured companies with a range of services.
• The community has expanded beyond Silicon Valley and Route 128 in Boston.

There's generally become a professionalism of venture as an asset class.

Rick Heitzman speaks on the maturation and professionalization of the venture capital industry.

• The venture economy has evolved from an artisanal approach to a structured business model.
• There are both positive and negative aspects to this formalization.

It's gone from being an artisan business on the whole, to being a structured business that looks more like a buyout group.

This quote emphasizes the shift in the venture capital industry from a craft-based, individual approach to a more formalized, structured process akin to that of buyout groups.

• The artisanal approach to venture capital is characterized by a craft-based partnership.
• Despite industry shifts, some investors and entrepreneurs still value the artisanal approach.
• Entrepreneurs have the option to choose between firms with an artisanal approach or a structured approach with more resources.
• Firms like Benchmark Capital are given as examples of those retaining an artisanal approach.

I don't think we're going to lose it because there's folks like you or I who really treasure that and they really view working with an entrepreneur as a partnership...

Rick Heitzman expresses his belief that the artisanal approach to venture capital will persist due to the value placed on partnership and individual attention by certain investors and entrepreneurs.

• There is a perceived oversupply of capital in the venture market.
• An oversupply of capital leads to increased competition and potentially higher valuations.
• This trend is not exclusive to venture capital but is seen across various asset classes due to low interest rates and a decade-long bull market.

I think there's definitely an oversupply of capital that might be a bit selfish in that I wish there was a lot less capital, a lot less competition...

Rick Heitzman acknowledges the presence of an oversupply of capital in the venture market and how it affects competition and investment valuations.

• Downturns are inevitable but unpredictable.
• Investors should focus on capital efficiency and mitigating financing risk to prepare for downturns.
• The ability to extend a company's runway by reducing burn rates is crucial during downturns.
• Temporal diversification in investments can hedge against microeconomic cycles.

So we always know that there's a downturn coming. We never know when it's going to be.

Rick Heitzman discusses the importance of preparing for economic downturns without focusing on their unpredictable timing.

• Investing over a three-year period allows for exposure to different economic cycles.
• The goal is to capture a broad range of opportunities without attempting to time the market.

We always look at it on the classic model of we invest over three years, and because of that, you're able to get multiple microeconomic cycles.

Rick Heitzman explains Firstmark's investment strategy of temporal diversification to mitigate the risks associated with market timing.

• Price discipline is crucial, especially when considering the impact of overpaying on portfolio construction.
• While being off on price by a small margin may not significantly impact outcomes, larger discrepancies can reduce the number of potential investments and thus opportunities for returns.

If we're off by 50% on price, it does matter and 100% price matters more.

Rick Heitzman discusses the importance of maintaining price discipline and its effect on the ability to invest in a larger number of companies.

• The strategy for reserve allocation should focus on supporting winners in the portfolio.
• Allocating funds for downside protection is less valuable than investing in companies with high growth potential.

You want to continue to invest in the winners.

Rick Heitzman emphasizes the importance of supporting companies in the portfolio that demonstrate strong performance and potential for significant returns.

• Investors' approaches evolve over time, often moving from a hands-on to a more strategic role.
• Experience leads to a better understanding of the appropriate level of involvement and the importance of asking the right questions at the right time.

Your job as a partner, to the founding team and the CEO is to be able to provide that perspective across your portfolio...

Rick Heitzman reflects on how his role as an investor has changed, highlighting the shift towards providing strategic perspective rather than getting involved in operational details.

• Time is a valuable resource, and investors must prioritize where they spend it within their portfolio.
• While supporting winners is important, helping entrepreneurs through the process of exiting less successful ventures is also a responsibility that requires empathy and time.

So we go through, and my partners and I think about, on a biannual basis, where are you spending your time on boards...

Rick Heitzman discusses the biannual review process that he and his partners undertake to allocate their time effectively across their portfolio companies.

• Focus on strategic issues that will move the needle for the company.
• Prepare by reading materials ahead of time and identifying key issues.
• Offer thoughtful questions and perspectives rather than diluting the discussion with less important matters.

"Pick out before the board meeting, read the materials ahead of time. Be thoughtful of where you think the most important issues for the company are and your perspective on those, and patiently wait for a time to ask a thoughtful question or lend a subtle perspective to really focus on those things instead of defocusing the board and wasting time on things which aren't really going to be the strategic element that the company needs to do to move the needle."

This quote emphasizes the importance of preparation and strategic focus in board meetings to contribute effectively and avoid wasting time on non-critical issues.

• Establishing a culture of safety allows entrepreneurs to share openly with the board.
• Authenticity and transparency are key to a productive board-entrepreneur relationship.
• Early relationship building with entrepreneurs can set the stage for open communication.
• Recognizing shared problems and solutions fosters a collaborative atmosphere.

"How do you think about creating an environment of safety for the entrepreneur? That they can really come to the board with anything down sales numbers, head of sales that just left, whatever the good or bad thing that's happened."

This quote highlights the importance of creating a board environment where entrepreneurs feel comfortable sharing all aspects of the business, good or bad.

"I think the best boards realize that you're all stakeholders in the company, that you're all shareholders in the company, and any problem that exists in the company is everyone's problem."

This quote underlines the collective responsibility of board members and entrepreneurs to address company issues together.

• Consumer business space is not in a bubble despite the influx of VC dollars.
• Opportunities exist in how AI impacts consumers and changes their web interactions.
• Both the infrastructure and the brands in e-commerce are of interest.

"I think there's a lot of on both the consumer enterprise side, me too. Companies or companies that are super segmenting the market, and therefore you're never going to build a big company without perfect execution because the market size isn't that big."

This quote points out the challenges of building large companies in niche markets without perfect execution.

• Customer acquisition costs are escalating, and finding economically viable distribution channels is challenging.
• Differentiation on a product basis is essential to gain a competitive advantage.
• Companies with proprietary backends or specialized supply chains can avoid front-end competition.

"I think that's a real problem. I think there's two things is that to a certain extent, the duopoly of Facebook and Google has been broken in that they were not only the biggest but also the fastest growing customer acquisition channels, and therefore you're getting perfect pricing in those methodologies."

This quote discusses the challenge of customer acquisition costs and the need for alternative channels beyond the traditional duopoly of Facebook and Google.

• Owning the customer experience is ideal but difficult for early-stage companies.
• Finding clever, non-scalable ways to acquire customers early on can set a foundation for growth.
• Viral growth and proprietary distribution channels can be advantageous.

"It's obviously important if you completely own that customer experience. It's improbable, especially when you're starting out at the season Series A, that you could own that full stack of customer experience."

This quote acknowledges the value of owning the customer experience while recognizing the challenges for early-stage companies to achieve this.

• Companies with commodity products may face lower exit multiples.
• High growth and market leadership can lead to higher exit multiples.
• Proprietary elements and exclusive market positions can enhance company valuation.

"But then my concern is you get bought for 1.8 x EBIT and for the vc as an asset class, it maybe just doesn't work for the model."

This quote expresses concern about the exit environment where companies might not achieve high enough multiples to satisfy VC investment models.

• The investment in Pinterest was made during the global financial crisis.
• Being a judge at a business plan contest led to the discovery of Pinterest.
• Early-stage investments can be uncertain, but thoughtful product development and market understanding can indicate potential.

"So the early story is, again, this was the trough of the global financial crisis beginning of 2009, where not many people were interested in entrepreneurship and not many investors were interested in writing checks."

This quote provides context for the investment in Pinterest, highlighting the challenging economic environment at the time.

• Not all successful companies are competitive to invest in from the start.
• Understanding the path to a billion-dollar exit and scaling is critical.
• Building relationships and demonstrating experience can be key to winning competitive deals.

"Oftentimes are not very clear at the earliest stages, but there are a fair amount of companies that have great teams, have a clear market, and come out of the gates hot, and are just always fantastic companies."

This quote suggests that while some companies may not seem competitive initially, those with strong teams and clear markets can quickly become attractive investment opportunities.

• Rick emphasizes the value of having references tell his story to entrepreneurs.
• He maintains transparency by encouraging entrepreneurs to contact anyone from his investment history.
• References can authentically describe what it's like to work with Rick and First Mark.

"And with every entrepreneur I meet, I tell them I'm 100% referenceable. There's a long list of companies I've invested in. Feel free to call anybody who's worked at any of those companies and ask them anything."

This quote highlights Rick's approach to building trust with entrepreneurs, showcasing his openness and the importance he places on reputation within the industry.

• Harry acknowledges the positive feedback from founders about Rick.
• A high response rate to reference checks indicates Rick's good standing with his founders.

"I spoke to four of them, including, yeah, sorry I stalked you, but listen, they all gave me 100% incredible references."

Harry's statement confirms the effectiveness of Rick's strategy to use references, as the feedback from founders has been overwhelmingly positive.

• Rick learned the importance of receiving extensive information before board meetings.
• Access to management for questions and CEO memos helped the board assist in strategic thinking.
• The structure remained consistent as Pinterest grew, allowing for efficient and focused board meetings.

"So no one was ever taught having a member of the management team read them a slide."

The quote illustrates Rick's takeaway from the Pinterest board experience, emphasizing the value of preparation and direct communication in board meetings, rather than passive presentations.

• Rick suggests a board dinner for warming up relations followed by a structured three-hour meeting.
• The three P's—people, product, and performance—are critical for discussion.
• Board meetings should focus on strategic issues, not rehashing read materials.

"But it's structured in what I call the three P's of people... product... and then performance."

This quote outlines Rick's recommended framework for board meetings, focusing on the core aspects that drive a company's success.

• Honesty, especially when providing negative feedback, is crucial for building trust with founders.
• Founders value truthful and experienced perspectives when seeking advice.

"And if something is wrong or something you disagree with being honest and say you disagree with that..."

Rick's response emphasizes the importance of honesty in building a relationship where founders feel comfortable seeking guidance.

• Individual conviction followed by consensus building is key.
• The partnership's role is to challenge assumptions and pressure test convictions.
• Once a decision is made, universal support for the company and entrepreneurs is given.

"At first mark is individual conviction. So myself or one of my partners really believes in an idea..."

Rick describes the investment decision-making process at First Mark, highlighting the balance between individual belief and collective scrutiny.

• Attribution is considered less important than one's reputation.
• Over time, the individual managing the company becomes the focal point.

"I think attribution matters over time because there is a single person who largely manages that company..."

Rick acknowledges the role of attribution but places greater emphasis on the overall reputation of the venture capitalist.

• New York is a central hub for commerce, industries, and talent.
• The city's growth as a venture market and its desirability for young professionals are highlighted.

"New York's always been important. I think you're able to look at New York as the center for commerce in the world."

The quote reflects Rick's view on New York's significance in the global venture capital landscape, emphasizing its centrality in commerce and talent attraction.

• First Mark aims to be a collective partnership.
• The firm focuses on collective decision-making and mutual support.
• Generational transition is managed by building a culture that transcends individual importance.

"So I think that over time, any individual becomes less important as we build a collective culture that helps us succeed."

Rick discusses the approach to generational transition at First Mark, stressing the importance of a shared partnership culture.

• Rick's recent investment in Crisp is driven by previous successful collaboration with the founders.
• Crisp addresses food waste through technology, aligning with sustainability trends.
• The potential global impact and value creation of Crisp are significant factors.

"And it's the same team coming back and looking at food waste. And if you look at the food supply chain, almost half of all food is wasted..."

Rick expresses his reasons for investing in Crisp, focusing on the team's track record and the company's mission to tackle food waste.