20VC Ribbit Capital's Nick Shalek on How To Think Through Ownership and Price Sensitivity, When More Money and PreEmptive Rounds are Good vs Bad & Investing Lessons from Yale's David Swensen

In this episode of 20 vc, Harry Stebbings interviews Nick Shalek, General Partner at Ribbit Capital, a venture firm with a successful track record in fintech investments such as Robinhood and Coinbase. Shalek shares his journey from Yale Investments to venture capital, emphasizing the importance of unexpected introductions and luck in his career. He discusses Ribbit's approach to investing, focusing on backing remarkable people and building rapport to identify and support transformative financial services companies. Shalek also reflects on the challenges of maintaining relationships and making investment decisions in a fast-paced, remote work environment. Throughout the conversation, he stresses the significance of conviction, adaptability, and the ability to reassess one's perspective in the dynamic landscape of tech investing.

• Nick Shalek is a General Partner at Ribbit Capital, a venture firm specializing in fintech.
• Ribbit Capital has a successful portfolio including Robinhood, Coinbase, Revolute, and Newbank.
• Nick began his career at Yale Investments office and later worked at Vern Global.
• Thanks were given to Mickey Malka at Ribbit and Frank Rotman at QED for their question suggestions.

"I'm thrilled to welcome Nick Shalek, general partner at Ribbon Capital, specializing in fintech." "I'd also want to say huge thank you to Mickey Malka at Ribbit and Frank Rotman at QED."

The quote introduces Nick Shalek and acknowledges the contributions of Mickey Malka and Frank Rotman, setting the stage for the discussion about fintech and venture capital.

• Nick's journey into venture capital was not planned but involved unexpected introductions and luck.
• He initially aspired to be an entrepreneur, influenced by his mother.
• Nick's background includes investment experience at Yale Investments and incubation focus at General Catalyst.
• His partnership with Mickey Malka at Ribbit Capital began through a mutual connection and shared interest in fintech.

"It's really been a series of unexpected introductions and some serious luck." "So I had no problem telling him all the things I thought were wrong about his thesis for a new firm."

Nick reflects on the fortuitous nature of his career path and his initial skepticism about Mickey Malka's strategy for Ribbit Capital, which later proved successful.

• Ribbit Capital focuses on sector-specific, international investments.
• Nick initially disagreed with the concept, citing traditional venture wisdom that sector-focused funds do not work and venture is local.
• Despite initial doubts, Nick was convinced by Mickey's vision and joined Ribbit Capital.

"Sector focused funds don't work, and that venture is a local business."

This quote captures Nick's initial disagreement with Ribbit Capital's investment strategy, which he later embraced after seeing its success.

• Nick worked with David Swensen, a legendary investor, at Yale Investments.
• Key lessons include the importance of incentives, relationships, and backing people.
• Swensen emphasized first principles, liquidity being overrated, active management in inefficiencies, and long-term equity orientation.
• Swensen's intellect and heart left a lasting impact on Nick, highlighting the importance of making people feel valued.

"The foundation of great investing is really about getting the incentives and relationships right." "Ignore the received wisdom and try to approach investment problems from first principles."

These quotes summarize the investment philosophy Nick learned from David Swensen, emphasizing relationship-building and innovative thinking in investment.

• New funds face significant challenges due to competition with established firms and the need to work with top entrepreneurs.
• Nick advises caution when joining new funds due to the high risk of not encountering great companies and founders.
• However, new funds can be unencumbered by technical, strategic, and structural debt, offering agility and relevance.

"I just think the odds of a new fund working are extremely low." "Will great entrepreneurs consider working with you?"

Nick expresses the difficulties new funds face in the venture capital industry and the crucial question of attracting top entrepreneurs, which was a key factor in his decision to join Ribbit Capital.

• Establishing a venture capital firm with a lasting presence is challenging and requires luck, good timing, and hustle.
• The success of Rivet Capital is attributed to having the right team and backing successful entrepreneurs early on.
• Backing entrepreneurs like Fred and Brian at Coinbase, Ken at Credit Karma, and Vlad and Baiju at an early stage allowed Rivet to play further and find the next set of great founders.

"So my comments are really about trying to build a firm that establishes a presence and lasts. And I just think that's a really hard thing to do. It requires a lot of luck and a lot of good timing and hustle."

The quote explains the difficulty in creating a venture capital firm that not only succeeds but also endures over time. It emphasizes the importance of having the right team and the fortune of backing successful entrepreneurs early in their journey.

• Being thesis-driven is crucial for being a great investor, which involves developing strong beliefs about the future based on available data.
• Conviction provides an advantage when deciding to invest in a founder's vision, as it allows for pre-negotiated enthusiasm for the company's potential.
• However, excessive certainty can be detrimental, as it can lead to missed opportunities and a failure to adapt to changing market conditions.
• It's beneficial to have conviction about what to invest in but be wary of having too much conviction about what not to invest in.

"Conviction is critical, but certainty will kill you."

This quote highlights the balance that investors must strike between having strong beliefs (conviction) and being adaptable enough to change when those beliefs are challenged (avoiding certainty).

• Investors must maintain both optimism and skepticism to avoid being swayed by past successes or failures.
• Confirmation bias can lead investors to seek information that supports their beliefs, but it's important to challenge these beliefs with actual data and consumer behavior.
• The key is to constantly examine and compare beliefs against data to maintain mental flexibility and avoid being influenced by previous investment outcomes.

"You just have to train your mind to constantly be paranoid."

The quote suggests that investors should always question their beliefs and assumptions to prevent past experiences from unduly influencing current investment decisions.

• Pricing is always a concern in investing, but the potential size of a company is a critical factor in determining investment attractiveness.
• The focus should be on whether a company can become a significant player in its industry rather than strictly on the entry price.
• Being contrarian and having a non-consensus view can lead to exceptional returns.
• Continuously updating one's perspective on the potential size of a company is essential for successful investing.

"Actually, Harry, I'm always concerned about pricing. I always have been since the start of the firm."

This quote acknowledges the speaker's consistent concern about investment pricing, highlighting that while it is a consideration, the focus should be on the potential growth and impact of a company.

• The COVID-19 pandemic and the shift to virtual interactions have made it more challenging to build meaningful relationships with founders and understand a company's culture.
• Despite these challenges, it's essential to adapt and find ways to establish strong partnerships, which are seen as a cornerstone of being a great investor.
• The shift to virtual interactions requires investors to make quicker decisions, often with less information than they would have in a traditional, in-person setting.

"100%. I think that's the biggest challenge for us."

The quote expresses agreement with the concern about the difficulty of building relationships and assessing companies in a predominantly virtual environment due to the pandemic.

• Ownership is an important consideration for venture capital firms, as it relates to the time and resources they can allocate to their investments.
• Investors should focus on backing the best companies rather than settling for a larger ownership stake in less promising ventures.
• The challenge lies in balancing the desire for significant ownership with the imperative to invest in the highest-quality companies.
• The ability to hold two opposing ideas about ownership and still make effective decisions is likened to a test of intelligence.

"Ownership definitely matters to me, that's like almost immutable law."

This quote underscores the speaker's belief in the importance of ownership in investments, which is a fundamental principle in their investment strategy.

• Rivet Capital focuses on aligning their investment desires with the founders' objectives for business success.
• They prioritize backing founders they believe in and work towards convincing them of the value of partnership with Rivet.
• The firm is willing to provide more funding over time if the returns are asymmetric and meet their standards, which they view as the best use of their time and resources.
• Rivet Capital does not envy stage-focused generalists due to the complexity of investment decisions in the current market.

"One, you don't back the founders. Two, you just shut down your business. Or three, you try to find ways to align your desire to own more with their objective to make the business successful."

This quote outlines the three options Rivet Capital considers when founders offer less equity than the firm typically desires. It emphasizes their strategy of aligning interests with founders and the challenges that come with investment decisions.

• Rivet Capital reevaluates every deal, including follow-on investments, and takes into account the importance of maintaining relationships with companies.
• They believe that proper upfront work leads to better support for companies over time.
• The reinvestment decision-making process involves assigning team members to re-underwrite the deal, using a similar approach to initial investments.
• Rivet Capital does not follow a consensus or partner-led decision-making model but instead relies on conviction-driven processes.

"We re underwrite every deal, including follow on decisions."

This quote explains Rivet Capital's approach to reinvestment, highlighting their thoroughness and consideration of ongoing relationships with companies.

• Rivet Capital avoids labeling deals with individual names to foster a team-based approach and eliminate internal politics.
• The firm values brutal honesty and open debates over supporting individual investment leads.
• They believe in a collective success model where all team members are available to founders, promoting a unified firm identity.
• Rivet Capital acknowledges the cost of not using deal attribution, as it is a motivational factor in the venture industry, but they prioritize the team's collective success and enjoyment over individual accolades.

"Meaning somebody on the team needs to pound the table. But we try not to attach that investment decision to a person."

This quote captures Rivet Capital's conviction-driven approach to investment decisions, emphasizing the importance of team consensus without attaching decisions to individual reputations.

• Rivet Capital has remained consistent with its core thesis and approach, which is to work with the best people changing finance, regardless of the stage of investment.
• The market for fintech has evolved, with fintech companies gaining significant value over traditional banks, and Rivet has adapted its tactics while staying true to its core principles.
• The firm has witnessed a shift in the fintech landscape, with a decrease in companies identifying as fintech and an increase in those considering fintech integral to their operations.
• Cryptocurrency has also seen a dramatic increase in value, affecting the market dynamics that Rivet operates within.

"Fintech's gone from being this sort of ignored backwater to one of the hottest sectors in tech last year."

This quote reflects on the dramatic shift in the fintech sector's market value and relevance, which has influenced Rivet Capital's approach and market position.

• Rivet Capital believes in allowing their work to speak for itself rather than actively promoting their brand.
• They focus on supporting the brands they back and trust that successful partnerships will naturally enhance Rivet's reputation.
• A core metric for Rivet is whether founders they've backed would invest in Rivet, which has proven successful as many have done so.
• Rivet advises founders to stay focused on their business rather than being swayed by excess capital, which can be as detrimental as it can be beneficial.

"We've always believed that the brands that matter the most are the ones that we back."

This quote encapsulates Rivet Capital's brand strategy, which prioritizes the success of the companies they invest in over their own brand promotion.

• Rivet Capital encourages founders to focus on their business rather than the allure of additional funding.
• They offer perspective and examples to founders, allowing them to make informed decisions about funding and valuation.
• The firm views the influx of capital as a potential advantage in sectors like fintech, where incumbents hold significant advantages.
• Rivet acknowledges the challenge of adapting to the rapid pace of deals in the current market.

"It's rarely the case that more money will make the business successful."

This quote advises founders on the potential pitfalls of accepting too much funding too quickly, emphasizing the importance of focusing on business fundamentals.

• Rivet Capital led a multibillion-dollar fundraising round for Robinhood within 24 hours, drawing on their long-standing relationship and knowledge of the company.
• The firm's experience and deliberate investment thesis in brokerage enabled them to move quickly on this opportunity.
• The speed and decisiveness of this fundraising effort reflect Rivet's confidence in their investment process and relationship with Robinhood.

"In that 24 hours, I'd say it was very busy. It went by in a flash."

This quote describes the intensity and swiftness of the fundraising process for Robinhood, demonstrating Rivet Capital's capacity to act quickly on significant investment decisions.

• Ribbit Capital was able to quickly provide Robinhood with half a billion dollars during a collateral issue.
• Ribbit's prior relationship building with banks, LPs, and co-investors enabled them to act swiftly.
• The investment was not just seen as a good financial opportunity but also as a chance to support a company during a critical time.
• Ribbit Capital aims to be a steady and supportive partner in financial services, especially during challenging moments.

"Robinhood had a collateral issue and needed an impossible sum of money right away...we were able to figure out terms and get the liquidity to wire them half a billion dollars that day."

This quote illustrates Ribbit Capital's ability to mobilize a significant amount of capital rapidly to assist Robinhood during a financial crisis, emphasizing their commitment to being supportive partners in the industry.

• Ribbit Capital prepares for potential crisis scenarios by pre-negotiating ideas and imagining different situations.
• Previous experiences with similar situations help maintain composure and provide steadfast partnership.
• Being sector-focused allows Ribbit to understand businesses deeply and remain steady investors over time.

"We'd been to this movie before, so I think when you've done that, you don't overreact."

Nick Shalek explains that familiarity with crisis scenarios helps Ribbit Capital remain calm and make sound decisions without overreacting, due to their previous experiences and deep sector focus.

• Ribbit Capital's investment strategy involves doubling down on winners and maintaining focus.
• They acknowledge that being sector-focused can lead to missed opportunities but also provides deep insights.
• The firm's biggest regrets involve not investing more heavily in companies they believed in and armchair underwriting without engaging directly with founders.

"I would have done more of the things that we knew we should do."

Nick Shalek reflects on the importance of acting on strong convictions and insights, suggesting that greater investment in companies they had confidence in would have been beneficial in hindsight.

• Ribbit Capital initially chose not to invest in the payment sector, which led to missing out on opportunities with companies like Stone and Adyen.
• They later realized the importance of being open to data and insights rather than strictly adhering to preconceived ideas.

"The biggest miss has been in payments... we had an idea and we wanted to stick to that idea rather than just really go and listen and look where the data would take us."

Nick Shalek discusses how a rigid adherence to their initial stance on the payments sector resulted in missed investment opportunities, highlighting the importance of flexibility and openness to new information.

• Early in his career, Nick believed he needed to have an opinion on everything to provide value.
• He now understands the importance of listening more than speaking and challenging entrepreneurs without pretending to have all the answers.
• Nick also humorously notes that he would advise his younger self to buy more Bitcoin.

"You have two ears and one mouth, and you should use them in proportion."

This quote emphasizes the importance of listening over speaking, particularly in the venture capital industry where understanding entrepreneurs and their customers is crucial.

• Ribbit Capital invested in Bitcoin early on, influenced by the founders' experiences with hyperinflation in Latin America.
• They communicated their unconventional investment strategy to LPs, setting expectations for potentially unexpected moves.
• Ribbit's investment in Bitcoin is seen as one of the best risk-adjusted bets in the world.

"Very early at Ribbit, we were working in the office for Mickey's old company, and it was me and Mickey and Wensis, Mickey's longtime business partner. And Mickey and Wensis just wouldn't shut up about bitcoin."

Nick Shalek describes the early influence that his partners had on Ribbit's decision to invest in Bitcoin, demonstrating the importance of diverse perspectives and experiences in investment decisions.

• Ribbit Capital recently invested in Adam Nash's seed round and a Mexican company called Cavac.
• They make exceptions to their typical investment stages when they have a long-standing relationship with a founder or see significant potential.
• Ribbit missed investing in Cavac for years due to a lack of thesis on the used auto market but recognized the upside potential later on.

"We recently backed Adam Nash... in his seed round... We also recently backed a mexican company called Cavac, which we're convinced could end up being one of the largest companies ever built out of Latin America."

Nick Shalek highlights Ribbit's recent investments, showcasing their willingness to break their usual patterns for founders they believe in and companies with high potential, regardless of initial hesitations.