20VC Why Every Successful Company Pivots and Good Companies Get Funded in Good & Bad Markets with John Frankel, Founding Partner @ ff Venture Capital

In this episode of the 20 minutes VC, host Harry Stebbings interviews John Frankel, the founding partner at FF Venture Capital, a prominent early-stage investor in New York. John shares his journey from an Oxford graduate to a 21-year tenure at Goldman Sachs, to becoming a seed funder with investments in companies like Cornerstone on Demand and Indiegogo. They discuss the macro VC market, the impact of economic conditions on startup funding, and the strategy behind follow-on funding. John emphasizes the importance of lean startups, the timing of scaling, and the potential necessity of pivots. He also introduces Wade and Wendy, a recent investment leveraging AI in the recruitment space. The episode touches on the balance between growth and burn rate, and the significance of portfolio companies as a branding tool for VCs. Throughout, there are nods to the changing landscape of company creation costs and the distribution of capital in the seed funding environment.

• John Frankel is a prominent seed funder based in New York.
• Born in England and educated at Oxford University.
• Founding partner at FF Venture Capital.
• Early-stage investor since 1999 with board positions in over 35 companies.
• Led investments in over 80 companies, including Cornerstone on Demand, Indiegogo, and Skycatch.
• Worked at Goldman Sachs for 21 years, collaborating with top hedge fund managers.

"He is England born, Oxford educated, and now one of New York's leading seed funders."

This quote introduces John Frankel and highlights his background and current role in the venture capital industry.

• Graduated from Oxford with no clear career direction.
• Became a chartered accountant but quickly moved to Goldman Sachs.
• Worked at Goldman Sachs for 21 years in various roles and moved to the U.S. around 1990.
• Began angel investing in December 1999 while at Goldman Sachs.
• Left Goldman Sachs in February 2008 and started FF Venture Capital with partner Alex Katz in November 2008.
• FF Venture Capital has grown to 30 people and $150 million AUM, with a distinctive approach to venture capital.

"Wow. Well thanks for describing me as one of the leading vcs origin story is very simple I graduated from Oxford too many moons ago than I really want to think which year it was and with no idea what to do and like most people who graduated from Oxford no idea what to do ended up going down the route of becoming a chartered accountant quickly qualifying realized that was not the best place for me to be spending my time was hired by Goldman Sachs in London which was an unknown firm in London back then somehow was at the firm for about 21 years doing various roles helping build various businesses for the first half of my career there for the last eleven years was on the sales and trading floor covering hedge funds and got to work with some of the smartest money managers during the period I'd moved from the UK to the US I've been in the US pretty much since 1990 or so in fact December 99 I started angel investing and was fairly successful at it was something you could do whilst at Goldman and it was diversified away from all of the market risk that everything you did as being salesman on the trading floor would involve and I just felt I had a knack for it it didn't take up much of my time but when I left Goldman in February 8 I decided to sort of take things professional Alex Katz, one of my partners here and I we started the firm in November 2008 and we're now I guess in our 8th year about 30 people 150,000,000 aum really enjoying what we're doing we've got a certain sort of pace and style to our approach to venture capital is a."

This quote provides a detailed account of John Frankel's career path, from his time at Oxford to his current position at FF Venture Capital.

• Drop in company creation costs to nearly the level of unemployment, particularly affecting millennials.
• Decrease in operational expenses (opex) due to reduced capital expenditures (capex) in starting a business.
• Costs of starting a company have likely bottomed out, with people costs and real estate remaining stable barring another significant recession.
• Seed funding is a small fraction of investable assets but has a significant impact on headlines and economic growth.
• The growth in seed funding is notable in a world with otherwise low economic growth.

"I think there's a couple of things there firstly yes, the costs of starting company approach the cost of being unemployed, which is pretty good because a lot of millennials are unemployed. I think it's pretty much bottomed out. I think we pretty much taken most of the opex, or rather most of the capex involved in starting a business, making an opex. I'm not sure it goes down much from here, because now you're down to people, costs and real estate, and unless we have another significant recession, those things aren't going to move. The secular drivers are pretty strong, so I think it's bottomed out."

This quote discusses the reduction in costs associated with starting a company and the shift from capital expenditures to operational expenses, suggesting that these costs have reached a minimum level.## Economic Environment and Startups

• The current rate environment is perceived as normal but is actually unusual.
• Central banks and governments avoid addressing the issue directly.
• The economy is characterized by zero growth and uneven distribution.
• Low cost of capital allows startups to bring efficiencies to various industries.
• Advanced technology enables startups to create high growth, disruptive companies.

"People have become to believe that the rate environment we're in is normal, but we're really through the looking glass."

This quote emphasizes the misconception about the current economic rate environment being typical when it's actually atypical.

"In the interim, they've created a world with zero growth overall that's unevenly distributed."

This quote describes the current economic situation with stagnant growth and unequal distribution of wealth and opportunities.

"And startups and entrepreneurs, because of very low cost of capital, are able to bring efficiencies to many industries, and the technology has advanced to a place where those efficiencies can be applied into creating very high growth, disruptive companies."

This quote highlights the role of startups in driving efficiencies and growth in various sectors due to low capital costs and technological advancements.

• The decentralization of capital makes it challenging to find promising startups.
• Successful entrepreneurs actively seek the best sources of capital.
• Intellectual capital is as important as financial capital in venture capital firms.
• Building a strong portfolio is a branding tool for venture capital firms.
• A slow, traditional investment approach is favored for long-term success.

"Well, I mean, the funny thing is, needles are passive, entrepreneurs are not."

This quote draws a comparison between the passive nature of finding needles in a haystack and the active nature of entrepreneurs seeking capital.

"So you put the two together and it becomes self reinforcing."

This quote suggests that combining intellectual and financial capital creates a positive feedback loop that attracts quality entrepreneurs and startups.

"You can do it quickly or you can do it slowly. We like to do it slowly."

This quote indicates a preference for a measured, long-term approach to building a venture capital portfolio.

• High-quality startups have always been present, regardless of market conditions.
• Some companies raise money at unjustifiable valuations, leading to poor risk-reward scenarios.
• Value-oriented investors avoid getting caught up in momentum-driven investments.
• Market corrections can create opportunities for investors to find better deals.
• Good companies are funded in both good and bad markets, while bad companies can sometimes pivot to success.

"We've seen consistent, high quality companies throughout our existence, and we think we've invested in some great companies throughout our existence."

This quote asserts that consistently high-quality companies have been available for investment, independent of market fluctuations.

"This notion that everything is very clear at the get go and you can tell the best outcomes in that first round, it's a very tough proposition and it's not necessarily obvious."

This quote acknowledges the difficulty in predicting a startup's success from the initial investment round.

"And often the companies that find their first round tough to put together have the ideas that are enduring and build businesses that last."

This quote suggests that startups facing difficulties in early funding rounds may have resilient ideas that lead to lasting businesses.

• Raising too much money at high valuations can create challenges for future funding rounds.
• Each case is unique, and advice varies depending on the situation.
• The goal is to build enduring businesses, and valuation strategies should align with this objective.

"It's funny, there are certain things that become very evident in the business, that you can raise too much money at too high valuation and then box yourself in for the next round."

This quote warns about the dangers of raising excessive funds at inflated valuations, which could hinder future fundraising efforts.

"And if you're looking to build enduring businesses, there are ways to optimize that."

This quote implies that there are strategic ways to raise capital that support the long-term vision of building a sustainable business.## Capital Raising Strategy

• The optimal time to raise significant capital is after solving major problems, avoiding premature scaling.
• Raising capital at the seed stage can be strategic for capital-intensive businesses, creating a barrier to entry.
• Companies like Slack raised substantial funds early to dominate their space and attract top talent.

"The best time to raise a lot of capital is once you've solved a lot of a problem so you don't prematurely scale, but you scale into a business with known numbers."

This quote emphasizes the importance of understanding your business metrics before scaling, to ensure capital is used effectively.

"If you look at a company which we're not investing like slack, raised enormous amount of money out the gate and have continued to raise money at higher valuations, and they see that as part of basically saying we are the 800 pound gorilla in this space and you got to be very well capitalized to compete with us."

This quote illustrates how Slack used aggressive fundraising to establish market dominance and deter competition.

• Successful companies often pivot from their initial ideas.
• Pivots typically occur too late, usually out of desperation when easy options are exhausted.
• Early-stage companies should envision future consumer behavior and demand over several years.
• The speaker advocates for giving companies resources and time for problem-solving.

"Every successful company pivots."

A succinct statement highlighting that adapting the business model is common among successful startups.

"Usually companies pivot too late. They stayed with the wrong model too long."

This quote points out a common mistake startups make, emphasizing the importance of timely pivoting.

• Startups should consider increasing their runway beyond the traditional 18 months due to funding constraints.
• However, raising too much capital can lead to excessive dilution of ownership.
• The challenge is to use available funds to decrease risk and set the stage for higher valuation in the next round.

"Well, in an ideal world, I'll be two inches taller, but I'm not sure I can achieve that."

This quote humorously conveys the limitations startups face when trying to extend their runway, likening it to an unchangeable personal trait.

• It's important to start lean and understand the business model before scaling.
• Reducing burn can impact growth, but premature scaling can lead to challenges at the next fundraising round.
• The speaker supports a cautious approach to growth to maintain manageability and flexibility.

"We're great believers of starting off lean, iterating, getting a really good sense of your model before you start to sort of pour serious fuel on the fire."

The quote advises startups to refine their business model before accelerating growth, to avoid missteps and waste.

• The speaker's firm believes in concentrating capital in winning companies.
• They engage in follow-on funding as part of their investment strategy, differing from other firms that may not.

"We like to concentrate capital and winners because we believe that we can have some sense of which companies are doing better than others and there."

This quote reveals the speaker's strategy of investing additional funds in companies that show promise, in contrast to a one-time investment approach.## Investment Strategies

• Different investors have varying strategies for capital concentration.
• Some investors are highly successful with their chosen strategies.
• John Frankel and his firm have a distinct approach to investing.

But look, they're very successful investors and I think they have a valid strategy. We just have a slightly different one.

This quote emphasizes that while acknowledging the success of other investors' strategies, John Frankel's firm employs a strategy that is unique to their investment philosophy.

• John Frankel's favorite book is "The Accidental Superpower."
• The book discusses the potential dominance of the U.S. in the 21st century.

Oh, gosh. It's the accidental superpower. And it talks about the US in the 21st century and how the US is likely to dominate.

This quote reveals John Frankel's interest in geopolitical and economic trends, particularly the influence of the United States on the global stage.

• Indiegogo and Kickstarter are two prominent crowdfunding platforms.
• John Frankel's firm is an investor in Indiegogo.
• Crowdfunding is seen as a revolutionary way of connecting people with ideas to those with money, without mediators.
• The crowdfunding industry is still in its early stages, with potential for significant growth and the emergence of substantial businesses.

It's not necessarily a winner take all space... Both of these companies and others in the crowdfunding space are revolutionizing funding between people have ideas and people have money without mediators.

This quote suggests that the crowdfunding market is large enough to support multiple players and highlights the industry's transformative impact on how projects and ideas receive funding.

• John Frankel does not have a single favorite blog or newsletter.
• He regularly reads a variety of sources, including Hacker News, Fred Wilson's blog, and Mark Suster's blog.
• His reading list is dynamic, with new sources added and irrelevant ones removed over time.

I tend to open about 20 tabs at the same time. Hacker News is my default open page.

This quote indicates John Frankel's broad approach to consuming information and staying updated with diverse viewpoints within the tech and VC community.

• The biggest mentor in John Frankel's career was Dick Groper, a former colleague at Goldman Sachs.
• Dick Groper's personality and approach to life had a lasting impact on John Frankel.
• Mentorship provided John with valuable life lessons and professional guidance.

He was a really good mentor and friend of mine at Goldman Sachs, Dick Groper... He really taught me that you just can't take life too seriously.

This quote highlights the importance of mentorship in shaping one's career and personal philosophy, emphasizing the value of humor and adaptability.

• John Frankel's most recent public investment is in a company called Wade and Wendy.
• The company uses AI to improve the recruiting process by matching candidates with suitable job opportunities across departments.
• The investment was made due to the company's innovative approach and strong team.

Wade talks to candidates who are looking for jobs and helps build candidate profiles. And Wendy talks to recruiters.

This quote explains the functionality of the AI systems within Wade and Wendy, illustrating the company's solution to a common inefficiency in the recruiting process.

• Harry Stebbings encourages listeners to follow him on Snapchat and sign up for the newsletter for behind-the-scenes content and updates.
• The 20 Minute VC podcast is sponsored by Lisa, a mattress company with a socially conscious business model.
• Lisa offers an online mattress buying experience and donates mattresses to shelters.

You can follow me on Snapchat at htebings with two B's to see behind the scenes of the show... the 20 minutes vc is brought to you by Lisa.

This quote serves as a promotional message for the podcast's social media presence and acknowledges the sponsorship that supports the podcast, while also highlighting Lisa's unique business approach and social impact.