20VC Investing In Sectors That Were Cool 2 Years Ago, What Accel's Facebook Fund Taught a Generation of LPs & Why LPs Need A New Discovery Process with Paul Martino, Founding Partner @ Bullpen Capital

In this episode of 20 minutes VC, host Harry Stebbings interviews Paul Martino, co-founder and general partner at Bullpen Capital, a fund that specializes in identifying undervalued companies by recognizing biases in venture capital. Martino shares insights into Bullpen's investment strategy of targeting "post-seed" startups that are often overlooked due to their non-conformity to popular trends or geographical biases, despite demonstrating strong metrics. He emphasizes the importance of analytical rigor over herd mentality in venture investing, and the series A crunch where startups with potential need additional funding to reach the milestones for a larger series A round. Martino also discusses the challenges of raising a fund with a contrarian approach and the need for innovation in both venture fund structures and the LP community.

• Harry Stebbings introduces the podcast and himself, mentioning his Snapchat handle and the behind-the-scenes content he shares.
• Paul Martino is introduced as a co-founder and general partner at Bullpen Capital.
• Bullpen Capital is known for identifying overlooked companies by recognizing biases in venture capital.
• Paul Martino's key investments include Fanjule, Ipsy, Spot Hero, Classy, and AirMap.
• Paul was an active angel investor with investments in Zynga, Tubemogul, and Udemy.
• Before investing, Paul founded four companies, including Tribe and Aggregate Knowledge.
• Paul's innovations in online gaming are seen as precursors to modern social gaming.
• Harry shares a personal anecdote about an enjoyable dinner with Paul.

You are listening to the 20 minutes VC with your host Harry Stebings, and you can find me on Snapchat at H. Stebbings with two B's to see all things backstage with the 20 minutes VC. Now for the show today, I'm delighted to be joined by Paul Martino.

The quote introduces the podcast and the host, Harry Stebbings, and sets the stage for the guest, Paul Martino, highlighting his background and achievements.

• Harry Stebbings promotes Headspace, a meditation app, discussing its benefits for mental health and its scientific backing.
• Harry speaks about Luma, a surround Wi-Fi system that he personally uses and recommends for its seamless setup and network management capabilities.

And with headspace helping me manage the internal, Luma helps me manage the external.

The quote encapsulates the transition from discussing the benefits of meditation to the advantages of a reliable Wi-Fi system, both of which are endorsed by the host.

• Paul credits Mike Maples for his entry into venture capital (VC).
• In late 2009, Paul was stepping down as CEO of Aggregate Knowledge and was considering his next company.
• Mike Maples offered him a job at his fund, which Paul initially declined.
• Paul's interest in VC was piqued by the data on changes in the industry, particularly the rise of early-stage investing.
• Paul conducted a six-month data analysis project which led to the founding of Bullpen Capital with Duncan Davidson and Rich Melman.
• The "Series A crunch" was a key insight that motivated Paul to pursue VC.

Mike called me up. He know you've been a good angel investor. You're the first angel in companies like Zynga and Udemy and a couple things that are really kicking butt. You ever think about becoming a venture person?

This quote recounts the conversation between Mike Maples and Paul Martino, which played a pivotal role in Paul's decision to enter the world of venture capital.

• Paul discusses the difference between early-stage and later-stage investors' portfolio constructions.
• Early-stage investors, as pioneered by Josh Koppleman, Jeff Clavier, and Mike Maples, adopted an "option buying" approach.
• Late-stage investors focused on lifecycle investing, supporting companies through multiple funding rounds.
• Paul noticed a gap in funding for companies that needed a little more time to reach milestones.
• The number of micro funds exploded from 25 in 2009 to around 350, while larger funds consolidated significantly.
• The disparity in fund sizes presented an opportunity that Bullpen Capital aimed to capitalize on by playing the middle ground.

The early stage investors had created a new portfolio construction versus the later stage investors.

This quote highlights the fundamental difference in investment strategies between early-stage and later-stage investors, which was a critical piece of data that led to the creation of Bullpen Capital.

• The Series A crunch refers to the funding gap that occurs when startups need more time to prove their viability than their initial funding allows.
• In the "fail fast" culture, companies like Twitter and Groupon, which were not immediate successes, would have struggled to secure funding.
• The data from 2009 showed that successful companies often needed more time to pivot or reach proof points, leading to the realization that there was an unmet need in the venture landscape.

So what it really means is the following, is that in this new world of option buying and fail fast, what happens when your idea, you raise twelve to 18 months of money for, but you really get to your proof point in month 24?

This quote explains the dilemma that founders face due to the Series A crunch, emphasizing the need for a different approach to funding that allows for longer development times.

• The biggest outcomes often come from companies that pivot or take time to learn and discover.
• CEOs face a dilemma when they run out of money before reaching Series A.
• Post-Seed financing is a solution for companies that need more capital to reach Series A.

"So what do you do if you're a CEO and you're in month twelve and, you know, this thing works, but you're out of money in month 15 because you raised a really small seed?" This quote highlights the financial challenge CEOs face when they are close to running out of funds before reaching the next funding milestone.

• Jeff Clavier suggests raising 24 to 30 months of Runway initially.
• Paul Martino believes 36 months may lead to complacency, while 12 months is too little due to the Series A crunch.
• The optimal Runway is enough to progress without losing the entrepreneurial drive.

"I think 36 months is almost too much money, even for a seed stage endeavor." This quote reflects Paul Martino's belief that too much initial funding can dampen the urgency required for startup success.

• Founders are advised to raise funds incrementally as they hit milestones.
• This strategy helps navigate the Series A crunch and maintain flexibility.

"I can get my first six months on a cap note, and I can get my next six months on another note, and I can get my next six months on another note and bump the cap up each time." This quote describes a strategic approach to fundraising that allows startups to adapt to their growth and needs over time.

• Bullpen Capital has specific requirements around burn rates for postseed investments.
• They prefer companies with a net burn rate of less than $250k/month.
• The size of the round and the burn rate are key factors in investment decisions.

"We have very, very specific requirements around burn rate, revenues, et cetera, and we can go chapter and verse." This quote emphasizes the analytical approach Bullpen Capital takes when evaluating potential investments.

• Paul Martino embraces being a "spreadsheet investor" as it focuses on numbers and traction.
• This approach allows for discovering overlooked opportunities in various categories, founding teams, and geographies.

"I wear it as a badge of honor that I'm a spreadsheet geek when I'm looking at companies." This quote signifies pride in an investment strategy that values quantitative analysis over more subjective factors.

• Post-Seed rounds are typically priced at a 20% premium over the seed round.
• Bullpen Capital's statistics show that they never pay more than two times the post-money value of the previous round.

"On average, the valuation we pay is about 20% higher than the post money of the round in front of us." This quote provides insight into Bullpen Capital's valuation strategy in relation to the Series A crunch.

• Second seed rounds are not necessarily for distressed companies.
• Bullpen Capital looks for companies that are "up and to the right" but need more time to reach Series A milestones.

"These are by no means distressed properties." This quote clarifies that Bullpen Capital's postseed investments are targeted at promising companies that require additional time and resources to achieve significant growth, not failing startups.

• Seed investors often face a dilemma when companies need an additional six to twelve months of funding but aren't ready for a Series A round.
• Bullpen Capital identified a gap in the market for these companies and created a solution for seed investors.
• The solution provided by Bullpen Capital allows seed investors to maintain a high volume of investments without needing to provide additional funding themselves.

"So what in the world do you do with a company that needs that six or eight or twelve months of money but isn't ready for the series A? So in many ways, seed stage investors were very happy that bullpen came along because we solved a very fundamental portfolio construction problem for them."

This quote explains the issue seed investors face when their portfolio companies require more funding but aren't prepared for the next funding round. Bullpen's entry into the market offered a resolution to this problem.

• Venture capitalists often exhibit herd mentality, focusing on popular industries and teams.
• Bullpen Capital takes a contrarian approach by investing in companies with strong metrics that may have been overlooked by others.
• This strategy leads to superior deal flow as Bullpen focuses on quality rather than following trends.

"It is amazing that for a group of people that fund disruption to be so oblivious to disruption happening to their own business."

This quote criticizes the venture capital industry for being susceptible to herd mentality despite their role in funding innovative companies.

• Bullpen Capital's strategy involves looking for companies that are not the current focus of attention but have great metrics.
• They engage with incubators and find companies from past graduating classes that are performing well but aren't receiving attention.
• Bullpen's focus is on investing in fundamentally quality companies, rather than predicting hot new markets.

"We said, well, look, what if we stopped doing that? What if we said, let's go look at not what the cool kids are in YC's graduating class, but let's go look at those companies that have great metrics from three classes ago that nobody's paying attention."

This quote describes Bullpen's contrarian approach to investment, choosing to focus on strong-performing companies that may not be in the spotlight.

• There is a perceived paradox between adopting a traditional institutional fund structure and maintaining a contrarian investment strategy.
• Bullpen Capital decided to keep a traditional fund structure to facilitate raising funds while employing a contrarian strategy.
• The venture fund industry's mechanics make it difficult to innovate the structure of the fund itself.

"But once you get into the mechanics of how a venture fund works, in terms of the way limited partners give you money, the way that you deal with taxes, et cetera, it is very difficult to innovate at all on the actual underlying mechanics."

This quote explains the challenges Bullpen Capital faced when trying to innovate the structure of their venture fund while maintaining a contrarian strategy.

• Fundraising for Bullpen Capital's third fund was challenging due to their unconventional strategy.
• Despite having successful portfolio companies and a strong track record, many limited partners were skeptical of Bullpen's strategy.
• The fundraising process highlighted the difficulty of securing funds for a different approach in a conservative investment community.

"It was as painful as you can imagine. And I know you've had many other gps on the program. We had very solid, I mean, not only solid, but great numbers coming out of our first couple funds."

This quote reflects on the difficult experience of raising funds for a venture capital firm with a contrarian model, even when the firm has a history of successful investments.

• Paul Martino wishes to see more innovation in venture capital fund structures and a focus on different strategies.
• He advocates for venture funds that offer unique value propositions to entrepreneurs, rather than competing on the same strategies as numerous other funds.
• On the LP side, Martino notes that limited partners have been taught to fear missing out on the next big investment, leading to a hesitance to invest in new, innovative funds.

"I want to see more innovative funds. I want to see more funds structured different, focused on different things, et cetera."

This quote expresses the desire for innovation in the venture capital industry, with a call for funds that diverge from the standard strategies and focus on unique approaches.

• Limited Partners (LPs) need a discovery process to identify and invest in new, innovative funds.
• Established funds like First Round and Floodgate have become oversubscribed, making early investment crucial.
• LPs need to move away from poorly performing funds despite their brand reputation.
• There is a lack of sufficient discovery processes for new funds among LPs, similar to venture funds' process for early-stage investors.

So they almost need a discovery process for new funds in the same way that venture funds have a discovery process for early stage, first time investors.

This quote emphasizes the necessity for LPs to develop mechanisms to discover and invest in promising new funds, akin to how venture funds seek out novel early-stage investment opportunities.

• Paul Martino's favorite book is "The New Thought Police" by Tammy Bruce.
• The book discusses how groupthink can impact organizations.
• It serves as a model that encourages Martino to maintain a contrarian perspective.

It's a book from about 15 years ago called the new thought police by Tammy Bruce. It's about how groupthink can affect any kind of organization.

The quote explains Martino's preference for a book that challenges the concept of groupthink, which aligns with his contrarian approach to business and investing.

• Josh Coppelman is recognized as a true innovator in the venture ecosystem.
• Coppelman's model involves writing small checks to companies and allowing them to fail fast.
• This model is considered one of the most innovative in the last 60 years of venture business.

Josh truly innovated, and his, for lack of a better word, early stage option buying model, I don't know exactly the right phrase to use it, but to basically say I'm going to let these companies fail fast and write small checks to them.

Martino highlights Coppelman's innovative investment strategy, which focuses on early-stage investments and embracing rapid failure as a path to success.

• Martino does not have a new contrarian thesis but shares an anecdote about an ecommerce investment made by his third fund.
• The investment became highly sought after following major acquisitions in the ecommerce space.
• Bullpen Capital focuses on investing in sectors that are currently out of favor based on strong metrics.

Going into that category everybody hates right now and writing the check off of great metrics.

This quote reflects Martino's investment strategy of backing companies in unpopular sectors that demonstrate strong performance metrics, which can lead to successful outcomes when market sentiment shifts.

• Matt Ocko's posts are Martino's favorite source of information.
• Ocko's content spans social commentary, politics, technology, and deep learning.
• The format is not strictly a blog or newsletter, but the content is highly valued by Martino.

Anything that comes in from Ako, something I gotta read.

Martino expresses his admiration for Matt Ocko's insights, indicating the value he finds in Ocko's diverse and informative content.

• Bill Campbell was Martino's mentor and CEO coach.
• Martino was introduced to Campbell through the Kleiner Perkins family.
• Campbell's influence on company building and early stages of growth is significant to Martino.
• Martino continues to pass on Campbell's teachings to the entrepreneurs he backs.

I really feel like I am one of Bill's disciples.

This quote signifies the profound impact Bill Campbell had on Martino's approach to entrepreneurship and his desire to share Campbell's wisdom with others.

• CEO coaches often provide platitudes, but one-on-one sessions with Bill Campbell were different and practical.
• Campbell helped Martino with management issues and decision-making.
• The personal guidance from Campbell is contrasted with the public perception of CEO coaching.

There's no way to explain what the difference is other than to say there is no similarity whatsoever.

Martino emphasizes the unique and invaluable nature of Bill Campbell's personal coaching compared to the general expectations of CEO coaching.

• Cleanify is the most recent public investment by Martino's firm.
• The company is in the on-demand cleaning space, a currently unpopular category.
• Cleanify's founder demonstrates the attributes Bullpen Capital looks for: focus on numbers, revenue growth, and market strategy.
• Martino anticipates Cleanify to be a breakout success in its category.

He is now going to be the breakout success in the category and people are all going to go, I don't understand, why did all those other people in this category fail? This guy clearly figured it out.

Martino's quote conveys his confidence in Cleanify's potential for success and his firm's ability to identify strong investments in unfavored sectors.