20VC Lightspeed's Alex Taussig on VC Risk Mentality, The Current State of Retail & The Mechanics of Cash Flow

In a dynamic conversation on the "20 minutes VC" podcast, Harry Stebbings interviews Alex Tausig, a partner at Lightspeed Venture Partners. Tausig shares his journey from academia to venture capital, starting at Highland Capital Partners and now at Lightspeed, where he focuses on the future of commerce and media. He discusses the evolving retail landscape, emphasizing the importance of product-channel fit, and how businesses like Zola and Daily Harvest have achieved rapid growth through innovative approaches to customer acquisition and retention. Tausig also delves into the significance of business models and cash flow management, using Amazon as an example of leveraging negative working capital for growth. The discussion touches on the value of MBAs in startups, the impact of Amazon on the market, and the strategic advantages of startups in negotiations with vendors.

• Harry Stebbings hosts the 20 Minutes VC podcast and invites listeners to follow his personal Instagram.
• He introduces Alex Taussig, a partner at Lightspeed Venture Partners, highlighting Alex's investment achievements and recommends Alex's newsletter "Drinking from the Fire Hose."
• Harry thanks Jeremy Liu and Nicole Quinn for introducing him to Alex.
• Harry also mentions Lisa, a mattress company, and Zoom, a video and web conferencing service, as sponsors of the show.

We are back on the 20 minutes VC and I'd love to see you behind the scenes here on Instagram at H debbings 90 96 with two B's. It's mostly health, fitness and mojitos these days, but it would be great to see you there. Now for the show and the 20 minutes vcs brought a huge amount to my life, and one element is the ability to build great relationships with some very, very special people.

Harry Stebbings introduces the podcast and his Instagram, emphasizing the value of relationships built through the show.

So Alex is a partner at Lightspeed Venture Partners, one of the leading firms of the last decade, with a portfolio including the likes of Snapchat, Mulesoft, Max Levchin's affirm the honest company and many more incredible companies.

Harry introduces Alex Taussig and his role at Lightspeed Venture Partners, mentioning notable investments.

I do also have to say a big thank you to both Jeremy Liu and Nicole Quinn at Lightspeed for the intro to Alex today. I really do so appreciate that.

Harry expresses gratitude to Jeremy Liu and Nicole Quinn for introducing him to Alex Taussig.

But before we dive into the show today, what are we without? A great night's sleep. And that's where Lisa comes in. Lisa is the warby Parker or Tom shoes of the mattress industry.

Harry transitions to discussing Lisa, one of the show's sponsors, emphasizing the importance of sleep.

And if you're like me and lose sleep worrying about the quality of conference calls and communicating remotely, then check out Zoom, the fastest growing video and web conferencing service.

Harry introduces Zoom as another sponsor, focusing on its utility for quality remote communication.

• Alex Taussig first learned about venture capital at a bar at MIT and was intrigued by the concept of matching capital with groundbreaking ideas.
• He began his venture capital education at Highland Capital Partners as an apprentice, eventually becoming a partner and making significant investments.
• Alex emphasizes the importance of mentorship in venture capital and his focus on the future of commerce and media at Lightspeed Venture Partners.

So I think I first heard the term venture capital at a bar at MIT where I was doing my phd. At the time. I think people were drinking some university subsidized beer, and a friend had described to me the process of raising venture capital for a company he was starting, which he was spinning out of a lab, and I just immediately fell in love with the concept.

Alex describes his initial fascination with venture capital, sparked by a conversation during his PhD at MIT.

So I joined Lightspeed about two years ago, and I generally focus on the future of commerce and media. I'm very interested in how retail is getting disintermediated by the Internet, as well as how the behaviors encoded in television will evolve.

Alex outlines his current focus areas at Lightspeed Venture Partners, highlighting his interest in the evolution of retail and television through the internet.

• Alex's biggest learning from his mentor at Highland Capital Partners was the analytical approach to evaluating companies and the importance of a strong work ethic.
• He emphasizes the value of intellectual analysis in venture capital and the need for tireless support for entrepreneurs after investment.

It's not the specific things I learned, but it was more just watching someone go through the process of intellectually analyzing companies and then once we'd made the investment, the tireless work ethic.

Alex reflects on the general approach and work ethic he learned from his mentor, rather than specific skills.

• Both Highland and Lightspeed have a deductive, analytical culture without a superstar culture, focusing on supporting entrepreneurs from behind the scenes.
• The main difference between the firms is their geographic focus, with Highland being Boston-centric and Lightspeed having a Silicon Valley mentality that is willing to take risks for potential high rewards.

But I think in both firms, we do have that deductive, analytical bent that's instilled in both cultures.

Alex compares the similar analytical cultures at Highland and Lightspeed.

Lightspeed is really a Silicon Valley firm, founded in Silicon Valley, but we invest globally. But everywhere we invest, we bring that Silicon Valley mentality and technological optimism.

Alex explains Lightspeed's global investment strategy and its Silicon Valley roots, characterized by a willingness to take risks and optimism.

• Alex discusses the balance between vision and realism in venture capital, acknowledging that while optimism is necessary, entrepreneurs and investors must be prepared for challenges and work together to solve problems.

Well, the realism piece comes into play when you just realize that stuff's going to go wrong, and you just have to get into these companies knowing that. And you can't be surprised when things don't go the way you think they're going to go.

Alex talks about the inevitability of challenges in startups and the importance of being prepared for them.

• Alex is more optimistic about the future of retail than the media's portrayal of a retail apocalypse, noting that while the sector is undergoing visible changes, there are also new opportunities emerging.

Yeah, the media kind of likes to gloss over what's happening in retail right now. I think in the retail sector, a lot of very visible changes are happening and it's causing a lot of people a lot of angst.

Alex criticizes the media's oversimplification of the changes in the retail sector and acknowledges the anxiety it causes.

(Note: The transcript provided was cut off and did not contain the full conversation. The notes cover the content available up to the point of the cutoff.)

• The retail industry is experiencing a transformation, not a decline.
• Certain formats of retail, such as department stores, are struggling due to changes in consumer behavior and the rise of online shopping.
• Other sectors within retail, like fast food and convenience stores, are thriving.
• Factors contributing to success in the retail sector include supply chain advantages, physical proximity to customers, deep value, and shopping experience.
• Retail is not a monolith; its health depends on the specific segment and how it adapts to modern consumer needs.

"Now we're having a lot of bankruptcies. I think there were about 19 or so in 2017, but gdps on an eight year growth. We're on the stock markets in its longest bull market. Unemployment is low by most measures. Consumer confidence is very high."

This quote highlights the paradox of the current retail landscape: despite economic growth indicators, bankruptcies in retail persist, suggesting a sector-specific issue rather than a broad economic downturn.

"It's not that retail is dying, it's that there's a few formats of retail that are no longer working, but those formats are highly visible."

This quote emphasizes that the perceived decline of retail is not uniform across the industry; it's more about the visibility of failing formats like department stores, which skews the perception of the entire sector.

• Digitally native brands are opening physical stores despite their online origins.
• E-commerce represents a small portion of total retail in the U.S., indicating room for growth in physical retail.
• Physical stores serve various strategic purposes for online brands, including customer acquisition, re-engagement, and enhancing lifetime value.
• The future of retail is seen as a seamless integration of online and offline experiences.

"Ecommerce is still only about 10% of total retail in the United States."

This quote underscores the dominance of physical retail in the overall market, suggesting that online brands have substantial opportunities for growth in the offline space.

"We see actually in the future looking forward is a merging of the best of breed online and offline to create a seamless cross channel experience."

The quote predicts a convergence of online and offline retail strategies, aiming to create a cohesive shopping experience that leverages the strengths of both channels.

• The concept of replatforming retail involves redefining the purpose of physical stores.
• Retail now serves multiple functions beyond just selling products, including customer acquisition, service provision, and personalized experiences.
• Physical retail is becoming more experiential and tailored to specific customer segments.

"If retail really served one function in the past, which was get inventory close to customers so they can go buy it. Okay. And maybe some element of service. Now it has a multitude of use cases."

This quote explains how the role of retail has expanded beyond mere product distribution to include various customer-centric services and experiences.

• Achieving breakout growth is more challenging due to the dominance of large companies.
• Product market fit is necessary but no longer sufficient for success.
• Companies must create products that resonate with consumers and encourage organic sharing.
• Screen to screen virality and product channel fit are key growth strategies.

"Nothing beats a product that users want to show off to their friends."

This quote implies that genuine consumer enthusiasm and word-of-mouth are crucial for a product's success in a crowded market.

"Designing your product to resonate within a specific channel to market."

The quote explains product channel fit as tailoring a product to effectively leverage a particular marketing channel, which can be a significant driver of organic growth.

• Product channel fit involves aligning a product's design with the most effective marketing channels.
• Some channels may not require significant investment but do require insight and product design.
• Once a product channel fit is found, the approach to scaling can vary based on the channel's nature.

"Once found, in terms of product channel fit, is it a case of pouring fuel on the fire and really raising that war chest to dominate that channel? Or is there a more conservative style recommended?"

This question addresses strategies for scaling once a company has identified a successful product channel fit, suggesting that the approach can range from aggressive investment to more conservative growth tactics.

• Companies need to find a balance between leveraging their product channel fit and preparing for its eventual decline.
• Masterclass is an example of a company that uses paid acquisition effectively due to celebrity followings.
• Product channel fit is often the first step in scaling, but companies need to plan for additional marketing channels.
• Additional funding may be necessary to explore new channels even after finding product channel fit.

"But what I will tell you is that even if you find that product channel fit, it's not going to last forever. And it's often the first thing you get right. And then you have to get a lot of other things right."

This quote highlights the transient nature of product channel fit and the need for a business to evolve beyond its initial marketing strategies.

"So it's almost always the case that when you hit product channel fit and you're scaling very quickly, you need to start thinking about what your second, third and fourth channels are going to be, and for that you often need the money."

Here, Alex Taussig emphasizes the necessity of planning for future growth avenues and the potential need for additional funding to support this expansion.

• Companies should heavily invest in successful marketing channels but also allocate funds for experimenting with new channels.
• Marketing strategy can be compared to managing a portfolio of investments, with a balance between established and experimental approaches.
• An 80/20 split is recommended early on, with the majority of the budget going to proven channels and a portion reserved for testing new ones.

"I would pour as much gas on it as you can, but I'd always still have an experimental marketing budget that you're using to figure out what the next one's going to be."

Alex Taussig advises that while it's important to capitalize on effective marketing channels, companies should also invest in exploring new opportunities.

• Incumbents in the tech industry are powerful, but they can't focus on everything, leaving opportunities for newcomers.
• Companies can build advantages by collecting longitudinal data on customers, which incumbents cannot easily replicate.
• Stitch Fix is cited as a company that has successfully built a defensible position through deep customer relationships.

"The key is what advantage can you build while you're still under the radar, such that when the incumbents do wake up and want to crush you, you actually have an advantage that they don't have."

This quote suggests that startups should focus on building unique advantages before they attract the attention of larger competitors.

• First mover advantage is beneficial but not always decisive in achieving market dominance.
• Companies that are first in collecting a particular data set on users often have an advantage.
• Facebook's success over Myspace and Friendster is attributed to its different product and distribution mechanism, not merely first mover advantage.

"But if you're referring to the same data set, if you're going after the same data set on users, oftentimes the first one to market is able to win."

Alex Taussig points out the significance of being the first to collect and utilize user data in a market.

• Business models, defined by how a company creates cash flow, are crucial for sustainability post-venture capital funding.
• Amazon's early success is attributed to its ability to manage cash flow effectively through favorable vendor terms and working capital.
• Negative working capital is advantageous as it allows companies to fund operations through vendor financing.
• Startups that manage cash flow efficiently, like Zola, are attractive to venture capitalists for their capital efficiency.

"And it's really like the way you define business model is basically how does the company create cash flow? And that cash flow is the thing that ultimately the business survives on once the venture capitalists stop writing checks."

Alex Taussig emphasizes the importance of a business model that generates sustainable cash flow beyond venture capital funding.

"So the ideal business is one where your customers pay you immediately, your inventory flies off the shelves and you don't have to pay your vendors for a long time."

This quote describes the optimal scenario for a business's cash flow, where money is received quickly, inventory turnover is high, and payments to vendors are delayed.

• Negative working capital occurs when the cash conversion cycle is negative, indicating that vendors are effectively providing financing to the business.
• Amazon's ability to maintain negative working capital was key to its growth and allowed it to conserve cash.
• The concept of negative working capital is important for startups as it can significantly impact capital efficiency.

"If that's a negative number, we call that negative working capital. And it is a good thing, because what it means is that effectively your vendors are floating you cash so that you can buy inventory and fund the operations of the business."

The quote explains the concept of negative working capital and its positive effect on a company's ability to finance its operations without immediate out-of-pocket expenses.

• Larger companies generally have better leverage in vendor negotiations due to their importance to the vendors.
• Vendors need to maintain a balance between offering favorable terms and ensuring their own business viability.
• Startups can also secure good terms if they represent meaningful business to the vendors.
• Vendors may offer better terms to new entrants to diversify their customer base and avoid dependence on dominant incumbents.
• The dynamics of vendor negotiations are complex and specific to the situation, not solely determined by incumbent status.

"I generally think that the larger and more important you are to your vendors, the better payment terms you'll be able to extract."

This quote emphasizes that the significance of a company to its vendors plays a crucial role in determining the payment terms it can negotiate.

"Sometimes you see the opposite effect. If an incumbent is really dominant, the vendor actually may have a greater incentive to give you better terms because they want to eventually diversify their customer base."

This quote suggests that vendors might offer favorable terms to smaller companies to reduce their reliance on a few large incumbents.

• Meaningful scale is considered relative to the vendor's business size.
• A company's importance to a vendor can shift the power dynamic in negotiations.
• The competitive landscape of the vendor market influences the ability to negotiate terms.
• The number of alternative vendors available affects the likelihood of obtaining favorable terms.

"Meaningful scale is relative to the size of that vendor's business."

This quote defines meaningful scale as a proportion of the vendor's overall business, indicating that negotiation power can change as a company grows.

• "The Divine Comedy" is appreciated for its depth and breadth of meaning, encompassing political, religious, historical, and allegorical themes.
• The epic nature of the story and its influence on culture and subsequent redemption narratives is highlighted.
• The beauty and pathos of the stories within "Inferno" are particularly resonant.
• The text offers new insights upon each reading.

"It's hard to sum up why it made such an impression for me. I've always been drawn to epic stories, and this is the template for nearly every journey of redemption that has come after it..."

This quote conveys the speaker's personal connection to "The Divine Comedy" and its foundational role in shaping epic redemption stories.

• Frustration with the limitations of social media discussions led to the creation of the newsletter.
• The newsletter serves as a platform for longer, in-depth exploration of issues and direct audience engagement.
• Regular content creation improves writing skills, a personal goal for the speaker who studied physics.

"I wanted a place where I could speak in longer sentences and I could explore issues in greater depth..."

This quote explains the motivation behind starting a newsletter, highlighting the desire for more meaningful discourse and audience interaction.

• MBAs have founded successful companies, contradicting the notion that they do not contribute to the startup ecosystem.
• An MBA does not necessarily qualify one for specific roles but also does not disqualify one from making meaningful contributions.
• The speaker's MBA class includes founders of companies with significant market capitalization, demonstrating the potential impact of MBAs in startups.

"There's many tens of billions of dollars of market capitalization that's been created just in the last ten years from MBAs."

This quote refutes the idea that MBAs are not capable of starting successful companies by citing examples of significant value creation by MBA graduates.

• Amazon is seen as making the market more accessible for startups rather than destroying it.
• The weakening of traditional retailers by Amazon allows startups to scale faster and capture market share.
• Amazon is focused on competing with major retailers, not startups, which can be an indirect benefit to new companies.

"I think they've made it easier for startups to scale faster and take market share away from those legacy players."

This quote suggests that Amazon's impact on traditional retailers has inadvertently created opportunities for startups to grow.

• Daily Harvest is a subscription service delivering superfoods, reinventing the frozen food category for millennials.
• Frozen food has operational advantages over fresh, leading to higher retention and margins.
• The company showed exceptional growth with limited capital, prompting the investment decision.

"The thing that we loved about it was that it's kind of unintuitive. But frozen has some inherent advantages over fresh food."

This quote explains the rationale behind investing in Daily Harvest, highlighting the unique benefits of the frozen food model for scalability and customer retention.