20VC Ryan Caldbeck on Why The Business Model of VC is Broken, Who is To Blame, How The Best Funds Will Use Data Intelligently Moving Forward & Whether We Are In A Consumer Bubble Or Not

In a dynamic conversation on "20 Minutes VC," Harry Stebbings enthusiastically introduces Ryan Caldbeck, the founder and CEO of CircleUp, a platform revolutionizing the market for consumer brands. Caldbeck, a former investor in consumer products, shares insights on the venture capital industry's lack of innovation and the potential for data-driven investment strategies, especially outside of early-stage tech. He critiques traditional VC firms for their stagnant methods and large, fee-driven funds, predicting that future success will favor those who adapt by offering specialized or value-added services. Caldbeck also discusses the consumer space, emphasizing the necessity for capital efficiency and the pitfalls of overfunding, while advocating for a systematic approach to investing in consumer companies. The episode also touches on the importance of aligning with investors who share your vision and values, and the role of frameworks in team building and decision-making. Additionally, there's mention of corporate card service Brex, remote technical team partner Terminal, and people management solution Lattice, indicating the broad range of topics covered in the discussion.

• Harry Stebbings expresses excitement for the episode featuring Ryan Caldbeck.
• Ryan Caldbeck is the founder and CEO of CircleUp, a company focused on creating a market for consumer brands.
• Harry has notifications enabled for tweets from Fred Destin and Ryan Caldbeck.
• Ryan Caldbeck has raised over $50 million for CircleUp from notable investors.
• He has been recognized as a titan of retail by Bloomberg and included in the San Francisco Business Times' 40 under 40.

"I'm thrilled to welcome back on the show Ryan Caldbeck, founder and CEO at CircleUp, the startup creating a transparent and efficient market to drive innovation for consumer brands."

The quote highlights the introduction of Ryan Caldbeck and the purpose of his company, CircleUp.

• Ryan Caldbeck did not initially aspire to found CircleUp or work in technology and investing.
• He grew up in a small town in Vermont and was inspired by JetBlue's impact on the community.
• Caldbeck wanted to create something that made people happy, leading to the founding of CircleUp.

"It definitely was not, to be candid with you, I knew nothing about technology, certainly nothing about investing."

This quote reflects Ryan Caldbeck's admission that his early life did not point towards a career in technology or investing.

• Ryan Caldbeck believes that venture capital has significant problems.
• The operation of $100 million funds has not evolved in 20-25 years.
• VC firms have high profit margins, which he sees as an opportunity for innovation.
• Caldbeck predicts that new funds will offer the same product for lower fees or different products through specialization, data usage, or additional services like distribution.

"Venture capital has a problem."

The quote succinctly introduces the idea that the venture capital industry is facing issues according to Ryan Caldbeck.

• Both AUM-hungry managers and LPs (Limited Partners) are responsible for the current state of venture capital.
• LPs often choose established firms over innovation due to fear of job security.
• The LP mechanism may be flawed, as LPs may avoid investing in new, potentially successful funds to prevent personal risk.

"I don't get fired for investing into IBM."

This quote is used to illustrate the mindset of LPs who prefer to invest in established, well-known firms rather than taking risks on innovative ones.

• The LP mechanism discourages risk-taking due to the personal career risk for LPs.
• LPs may choose to invest in traditional firms to avoid accountability for potential failures.
• Changing the behavior of LPs may require altering their incentive structures.

"That is the risk. And so how do you change that behavior? Well, I think you have to start with changing incentives."

Ryan Caldbeck suggests that to address the issues in venture capital, it may be necessary to change the incentive structures for LPs.

• Traditional industries often have compensation structures heavily weighted towards salary, with minimal performance-based bonuses.
• In such industries, employees focus on job retention by investing in "safe" businesses.
• Limited Partners (LPs) in alternative assets should embrace higher risk for potential higher returns.

"The bonus based on performance doesn't really move the needle for them that much. Think of industries where it's almost all salary based."

This quote highlights the limited impact of performance bonuses in traditional salary-based industries, contrasting with the risk and reward structure in alternative assets.

• Ryan Caldbeck believes data and technology are the future of private investing.
• Data integration will likely begin outside of early-stage tech and Silicon Valley.
• Industries with abundant data and similar business models are prime candidates for data-driven investment strategies.
• Geographical areas with less visibility for investors and companies may benefit from data integration.

"I think data and tech will be used to find and evaluate companies and to help them post close in the private markets."

Ryan Caldbeck expresses his conviction that data and technology will revolutionize the way companies are discovered, evaluated, and assisted after investment.

• Early-stage tech companies often lack sufficient data for predictive models.
• Historical examples in tech are limited, making it difficult to train models on what success looks like.
• Data has more potential in industries like consumer and retail, where there are numerous examples to inform predictive models.

"I just struggle to see how data could be used to have predicted Uber in 2009, 2010."

Ryan Caldbeck expresses skepticism regarding the utility of data in predicting the success of unprecedented early-stage tech companies like Uber.

• Research suggests that investment returns tend to decrease as fund sizes increase.
• Investment managers are incentivized to raise larger funds due to the fee structure.
• There are notable exceptions of firms that maintain smaller funds for better performance and focus.

"There's a lot of studies that suggest that returns go down as funds get larger."

Ryan Caldbeck points to research indicating a negative correlation between fund size and investment returns, suggesting a potential trade-off between fund growth and performance.

• There is concern about tech VCs without consumer backgrounds entering the consumer space without proper diligence.
• Consumer businesses are generally more capital efficient and have smaller exits compared to tech companies.
• Overcapitalization by tech investors unfamiliar with consumer space dynamics can lead to inflated valuations and financial difficulties.

"What I'm seeing a lot of is tech VC firms putting a ton of money into companies in the consumer space that should be very capital efficient."

Ryan Caldbeck warns of the risks when tech VCs invest large sums in consumer companies, which typically require less capital to reach profitability.

• Consumer markets are characterized by fragmented tastes, leading to smaller market winners and exits.
• Founders must be disciplined with valuations and capital to avoid overvaluation and the post-money trap.
• The post-money trap occurs when companies raise funds at high valuations, hindering future acquisitions or fundraising.

"As tastes fragments, the winners are smaller. If the winners are smaller, the exits are smaller."

Ryan Caldbeck explains that the fragmentation of consumer tastes results in smaller market winners, necessitating caution in valuation and capital raising to avoid the post-money trap.

• Tech VC firms are currently overvaluing companies with disproportionate revenue to valuation ratios.
• A more reasonable strategy would involve deploying capital systematically across multiple early-stage companies at lower valuations.
• Successful exits do not require massive funding if the investment and exit strategy are aligned correctly.
• Investing at a lower valuation and selling at a higher multiple can yield healthy returns without necessitating massive downrounds.

"And we're seeing the Manny's company with a 900 million dollar valuation and $15 million in revenue. That math doesn't make any sense. It's offensive."

This quote highlights the current issue with tech VC firms overvaluing companies, where a company's valuation far exceeds reasonable expectations based on its revenue.

"You can invest at ten, sell it for 100, that's a great exit. As long as you can invest in a bunch of them and deploy it systematically."

The quote suggests a systematic investment strategy focusing on lower initial investments and reasonable exit multiples can be successful without the need for inflated valuations.

• There is potential for a significant investing business in consumer markets, but it requires a different approach than traditional tech VC strategies.
• Consumer market investments should be smaller in size and spread across many companies.
• The model should emulate systematic approaches to private investing, similar to public quant funds.

"It's a kind of controversial point, but I absolutely think that there is a huge investing business."

Ryan Caldbeck asserts his belief in the potential for a substantial investing business within the consumer market, despite differing opinions in the field.

"In consumer, you need to find a way to deploy one to $5 million into each of a lot of companies."

This quote outlines the strategy for investing in consumer markets, emphasizing smaller, more numerous investments rather than large singular ones.

• Consumer companies face challenges with acquiring customers due to high costs and competition.
• Retailers are increasingly seeking innovation for their shelves, reducing barriers for new consumer products.
• Direct-to-consumer (DTC) is not efficient for scaling but is useful for testing new products.
• Successful consumer companies often realize the need to expand into offline channels due to high online customer acquisition costs.
• The consumer market is omnichannel, requiring understanding and scaling both online and offline.

"It is an amazing time to be a consumer entrepreneur and to be a consumer investor."

Ryan Caldbeck emphasizes the current opportunities in the consumer market, given the right understanding and approach to distribution channels.

"This market is not just a d to C market, it is an omnichannel market."

The quote clarifies the misconception about the consumer market being solely direct-to-consumer, highlighting the importance of an omnichannel strategy.

• Some view consumer companies as capital-intensive with low contribution margins, but this is a misconception.
• Consumer companies typically raise less capital to reach profitability compared to tech companies.
• The manufacturing process in consumer companies is often outsourced, reducing capital expenditure.
• Consumer companies tend to have higher net margins and do not require as much capital due to including the cost of goods sold (COGS).
• Valuations in consumer companies are generally lower and less volatile than in tech, providing steady investment opportunities regardless of economic conditions.

"Consumer companies raise on average about $5 million to get to profitability. Full stop."

Ryan Caldbeck compares the capital efficiency of consumer companies to tech companies, illustrating that consumer companies require significantly less capital to become profitable.

"People eat regardless of what's happening in the market."

The quote addresses the stability of the consumer market, implying that consumer needs are consistent and less affected by economic fluctuations, making for steady investment opportunities.

• The importance of introductions from CEOs when fundraising.
• Ensuring that the company's story is well-articulated to investors.
• Aligning with investors over the company's vision, mission, and values is crucial.
• Mistakes in alignment can lead to painful experiences.

"The most important thing I've learned in terms of fundraising is to make sure that investors are aligned with your vision, your mission, and your values."

Ryan Caldbeck shares his key takeaway from fundraising experiences, emphasizing the importance of alignment with investors beyond just financial aspects.

• CEOs can be successful with various approaches to leadership and team building.
• Circle Up, led by Ryan Caldbeck, focuses on smart, ethical, and hardworking individuals to build their team.
• A clear mission, values, and objectives are crucial frameworks for guiding team direction and empowering members.
• Circle Up uses a hiring framework based on five key traits: work ethic, integrity, intelligence, pride, and teamwork.
• Cultural fit is not solely about personal compatibility but alignment with the company's framework and culture.

"I think I'm a big believer that CEOs can be great with a lot of different approaches."

This quote emphasizes the belief that there is no single correct way to be a successful CEO; different styles and approaches can lead to success.

"We at Circle Up look for five things. We look for work ethic, integrity, intelligence, pride in what you do and teamwork."

This quote lists the five key traits Circle Up seeks in potential hires, illustrating their approach to assembling a team that fits their culture and values.

• Decisions to let someone go are typically clear when the thought arises.
• Circle Up has clearly defined values that are non-negotiable.
• Performance is measured against the company's mission, vision, and objectives.
• Frameworks help reduce personal bias and ambiguity in performance-related decisions.

"When you're thinking about whether or not to let someone go to fire someone, the decision is already made."

This quote suggests that by the time a leader is contemplating firing someone, the necessary decision has already become apparent.

"It helps to take out personal bias. It helps to take out not all, but a lot of the ambiguity that typically comes with those performance decisions."

This quote highlights the benefit of using frameworks to make objective decisions regarding hiring and firing, reducing the influence of personal biases.

• Favorite book: "The Hard Thing About Hard Things" by Ben Horowitz for its realistic depiction of entrepreneurship.
• Amazon vs. Instacart: Offline retailers need Instacart as a partner, while Amazon is seen as a threat.
• Career advice: Ryan Caldbeck would call his dad for guidance based on values and long-term considerations.
• The future of consumer companies: Many will fail, some will be acquired at lower valuations, and few will succeed.
• Fundraising and exit strategies: Raising less money can allow for successful exits without the need for extremely large outcomes.
• Disagreement with common advice: Networking excessively and sacrificing sleep is not as beneficial as some suggest.
• Circle Up's future plans: Developing technology to systematically find and evaluate private consumer companies for venture capital.

"The hard things about hard things. Ben Horowitz just did an amazing job of laying out what an entrepreneur's journey is actually like, without any kind of fluff or polish."

Ryan Caldbeck recommends this book for its honest portrayal of the entrepreneurial experience.

"Offline retailers need Instacart to work. Amazon is too much of a threat. Instacart is closer to a partner."

This quote explains why Instacart has an advantage over Amazon in grocery delivery due to its partnership approach with offline retailers.

"When you raise a lot of money, it requires you to have a bigger exit. That narrows your possibilities for outcomes, and it looks more like you're threading a needle."

This quote addresses the implications of raising significant capital and how it can limit a company's exit options.

• Ryan Caldbeck is recommended for his informative Twitter account.
• Harry Stebbings endorses services like Brax, Terminal, and Lattice for startups.
• The podcast aims to provide behind-the-scenes access and valuable resources to its audience.

"Now, if you only do one thing after listening to that episode with Ryan, go and follow him on Twitter. Do it now. It's at Ryan Underscore Cooledbeck."

Harry Stebbings encourages listeners to follow Ryan Caldbeck on Twitter for insightful content.

"Brax founders Enrique and Pedro built a payments business in Brazil, but found themselves rejected for a corporate card when they were in Y combinator."

This quote shares a success story of entrepreneurs who overcame challenges to build a valuable service for startups.