20VC Why You Have To Raise $100m+ If You Want To Go Big Today, The 5 Fundamentals To Starting and Scaling A Successful Marketplace & Why Female Founders UnderPromise and OverDeliver with Paul Hsiao, Founding Partner @ Canvas Ventures

In this episode of "20 Minutes VC," host Harry Stebbings interviews Paul Sao, founding partner at Canvas Ventures, discussing marketplace dynamics and investment strategies. Sao, who previously partnered at NEA and co-founded Mazu Networks, shares insights gained from backing companies like Houzz, Thrive Global, and Zola. He highlights the importance of differentiating supply, leveraging existing distribution, and building trust within marketplaces. Sao also emphasizes patience, as growth often appears in step functions, and the necessity of substantial funding, noting most successful tech companies raised significant capital. Additionally, he touches on the accidental trend of investing in female-led startups, advocating for bias removal in VC funding. The conversation also explores Sao's analysis of the 500 most valuable tech companies, revealing that most founders started young, and many ideas initially seemed small or insignificant.

• Harry Stebbings hosts the show and invites interaction on Instagram.
• This week features a thematic focus on marketplaces.
• Paul Sao, a founding partner at Canvas Ventures, is the guest, with a background in VC and entrepreneurship.
• Acknowledgment of those who facilitated the introduction to Paul Sao.
• Promotion of Ring and Cooley as sponsors of the show.

"Hello and welcome back to the 20 minutes VC with me, Harry Stebbings, and I'd love to see you on Instagram at htebings 90 96 with two B's where you can message me, and it'd be great to hear your thoughts and feedback on the show."

This quote is Harry Stebbing's introduction to the show, inviting listeners to engage with him on Instagram.

"But before we dive into the show today, our new sponsor, Ring first made a splash when they were on shark Tank a few years ago."

Harry Stebbings introduces Ring, one of the show's sponsors, explaining their product and its benefits.

"And speaking of providing security and comfort, that's what happens when you work with a firm like Cooley."

Harry Stebbings introduces Cooley, another sponsor, highlighting their legal services for startups and VC firms.

• Paul Sao's career began as a biomedical engineer at Medtronic.
• He co-founded a network security company, Mazu Networks, with friends from MIT.
• After Mazu Networks was acquired, Paul wanted to learn how to build large businesses from the capital side.
• He joined the venture capital industry through the Kaufman Fellows program, mentored by Scott Sandell at NEA.

"So I was a biomedical engineer by education and started my career at a medical device company called Medtronic."

Paul Sao describes his initial career path before entering the world of entrepreneurship and venture capital.

"But I always wanted to build my own company and had the fortune to co-found a network security company called Mazu Networks."

Paul Sao shares his entrepreneurial aspirations and the founding of Mazu Networks.

"So thanks to Kaufman foundation, they were worrying there weren't enough interest in venture capital at that time and structured a mentorship program."

Paul Sao explains how he entered venture capital through a mentorship program designed to boost interest in the field.

• NEA has a broad perspective, covering various innovation sectors and geographies.
• Canvas Ventures focuses on select areas, allowing for deeper engagement and faster movement.
• Paul enjoys having more time with entrepreneurs at Canvas Ventures.

"NEA covers almost all the innovation sectors and many geographies around the world as well."

Paul Sao compares the broad scope of NEA to the more focused approach of Canvas Ventures.

"And I love canvas now because we're just very focused on a few select areas and allows us to go deep, move fast, and frankly, have a lot more time with our entrepreneurs."

Paul Sao expresses his preference for the focused and in-depth approach at Canvas Ventures, which enables closer relationships with entrepreneurs.

• Small exits can still significantly impact a fund, especially at a focused firm like Canvas Ventures.
• The size of the exit relative to the fund size matters in venture capital.

"It does, right. I think one realization coming since joining canvas a few years ago is that a small exit, like 10"

Unfortunately, the transcript is cut off, but it implies that Paul Sao was discussing the impact of small exits on a venture capital fund.## Operating Freedom in Venture Capital

• Different venture capital funds have varying thresholds for what constitutes a significant exit.
• Larger funds like NEA require much larger exits to "move the needle" compared to smaller funds like Canvas.
• Smaller funds may provide more operating freedom to pursue ideas that may not initially seem big but have the potential for meaningful exits.
• Entrepreneurs should still chase ideas that may appear small as they can turn into big companies.

"0 and 5300 million, easily moves the needle for a fund like canvas. Whereas we used to joke, when you don't have an exit more than 800 million, it doesn't move the needle at NeA. And it's like, get back to work. It's just people barely notice it."

This quote highlights the difference in impact that an exit can have on smaller funds like Canvas versus larger funds like NEA. While a smaller exit may be significant for Canvas, it would hardly be noticed at NEA.

• The relationship between entrepreneurs and venture capital firms is often with a single individual, not the entire firm.
• Entrepreneurs are advised to choose the right general partner (GP) that suits them rather than focusing solely on the firm's reputation.
• The personal connection and compatibility with a GP can be more important than the firm's brand.

"My suggestion, taking up my hat as a VC to entrepreneurs is always about picking the right GP."

Paul Sao emphasizes the importance of selecting the right general partner for entrepreneurs seeking venture capital, suggesting that this relationship is crucial for success.

• Marketplaces are valuable but difficult to build due to the chicken and egg problem of attracting both buyers and sellers.
• Key lessons in building marketplaces include focusing on differentiated supply, leveraging existing distribution for early demand, and being patient with growth.
• Supply differentiation, offline activities, and strategic partnerships are crucial for early marketplace demand.
• Growth in marketplaces often appears as a step function rather than linear, requiring patience and a robust supply to drive demand.
• Stubbornness can be beneficial in marketplaces, but founders must reassess if their supply is not unique or transformational.
• Curation and trust are essential for marketplace success, helping users find what they want quickly and ensuring quality and safety.

"Know I define marketplace broadly, is whenever the company can attract and aggregate buy and sell site together, they are very valuable and long endearing enterprises."

Paul Sao defines marketplaces as platforms that bring together buyers and sellers, stressing their value and longevity when successfully built.

"The easy answer is both, but that's not a very satisfactory answer."

This quote reflects the complexity of solving the chicken and egg problem in marketplaces, indicating that simply focusing on both supply and demand is not a sufficient strategy.

"You see it when the users start using your product. That's probably a simple answer."

Paul Sao suggests that the right distribution partnership for a marketplace becomes evident when users naturally integrate the product into their usage flow.

"It takes the growth curve looks more like step function versus a linear curve."

The quote describes the non-linear growth pattern of marketplaces, which requires patience as demand may plateau before jumping to new levels.

"I think the stubbornness in marketplace helps a lot."

Paul Sao values persistence in marketplace founders, indicating that it can be a key factor in overcoming challenges and achieving success.

"You have to question whether what you do is truly making your supply size business better."

This quote emphasizes the need for marketplace founders to critically assess whether their platform significantly improves the businesses of their suppliers.

"Trust in payment, in quality in safety."

Paul Sao highlights trust as a fundamental component of a successful marketplace, ensuring users feel confident in transactions, product quality, and safety.## Marketplace Scaling and Capital Allocation

• Assessing the right time to scale marketplace businesses involves analyzing monthly repeat cohort data.
• Cohort data reflects user retention and frequency, which are vital indicators of a marketplace's health.
• The data informs decisions on when to significantly invest in growth.

At that level, when deciding whether you put a lot of capital to work, we look at the monthly repeat cohort data. It really tells you a lot how often they come back and all the things we just talked about play into and contribute to that cohort data.

The quote emphasizes the importance of monthly repeat cohort data in making informed decisions about when to invest heavily in a marketplace's growth. Cohort data is crucial for understanding user engagement and retention.

• Different marketplaces have varying transaction frequencies, which affects how repeatability is measured.
• Even with infrequent transactions, there are strategies to keep users engaged.
• The product team is responsible for creating features that maintain user engagement over time.

Totally. Those you do look at the monthly cohort, the frequency of them come back using on a monthly basis, even for lending club and others, you'd be surprised how many people come back and check for their opportunities to refi or for house looking for inspiration.

The quote explains that despite the inherent differences in transaction frequencies among various marketplaces, it is still important to track how often users return on a monthly basis. This data provides insights into user engagement levels.

• Female founders are underrepresented in venture funding, receiving only a small percentage of total funds.
• Some investors have a more balanced portfolio with a significant representation of female founders.
• Female entrepreneurs are often perceived to under-promise and over-deliver.

It was an accident, Harry, I did not purposely seek out female entrepreneurs. We didn't really have a bias either way. I just wanted to partner with the most exceptional entrepreneurs, and I've been very fortunate that they are female entrepreneurs.

This quote reveals that the speaker's investment in female entrepreneurs was not intentional but rather a result of seeking exceptional entrepreneurs regardless of gender. It highlights a natural outcome of unbiased investment practices.

• There is a need to address the biases affecting venture funding distribution.
• Changing perceptions and removing biases could lead to more equitable funding opportunities.
• The industry needs to focus on the potential of entrepreneurs to build great companies, regardless of gender.

My suggestion is just remove the bias. I think some of the common criticism that you hear are true, right? When a female entrepreneur presents the confidence is viewed as negative, as being too aggressive.

The quote suggests that removing biases is essential for creating a fair venture funding landscape. It acknowledges the challenges female entrepreneurs face due to biased perceptions.

• Assessing product-market fit is often an intuitive process for investors.
• The lack of data at early investment stages makes it necessary to rely on intuition.
• Investors may try and immerse themselves in the product to gauge its potential.

Yeah, it's more an intuitive process for me. I try the product, I use it, I try to immerse in it, and I try to understand what is magical about it.

The quote explains that understanding product-market fit can be an intuitive process involving personal engagement with the product to identify its unique value proposition.

• User surveys are used to gather qualitative data, especially regarding users' emotional responses.
• Understanding how users emotionally interact with a service can inform product development.
• Surveys help identify usage scenarios that attract users to a new service.

So what we do is we run these surveys through a few different services as wonder and others. And what we're looking for are not necessarily quantitative data, but qualitative data on how the users respond, particularly emotional response to these things.

The quote underlines the importance of qualitative data from user surveys, focusing on emotional responses to understand user engagement and inform product strategy.

• A study of the most valuable tech companies revealed that many founders started young.
• A significant portion of successful tech company founders were under 35 years old.
• The data suggests a trend among successful founders starting companies at a young age.

One commonality, the most striking one, is they are mostly started by young people.

The quote points out a common trait among the founders of the most valuable tech companies: starting their ventures at a young age.

• Historically, companies went public earlier and raised less capital pre-IPO.
• The current trend shows that raising significant capital is common among successful startups.
• Entrepreneurs should be prepared to raise substantial funds to build a large company.

As an entrepreneur, one should plan to raise at least $85 million if you want to have a decent shot at building a large company.

This quote suggests that there is a correlation between the amount of capital raised and the success of a startup, with a benchmark figure provided for entrepreneurs aiming to build large companies.## Privatization Concerns

• The extended window of privatization is a concern for limited partners (LPs).
• Over $600 billion is trapped inside large private enterprises.
• There is a fiduciary responsibility to return capital to LPs and foundations.
• The current structure of the industry presents an intrinsic problem.

Yeah, I think for the lps, for the limited partners who have trusted their capital with us, there's more than $600 billion currently trapped inside these large private enterprises.

This quote highlights the concern regarding the amount of capital held within private companies and the responsibility to return investments to LPs.

• Large successful businesses often started as small or seemingly terrible ideas.
• They were frequently dismissed by incumbents and capital sources.
• Being contrarian and lucky or right is crucial for building valuable companies.

I think both perhaps Paul Grunt and Clay Christensen have said it well, many of these large business looked like small idea or even a terrible idea when they first got started.

This quote reflects on the surprising beginnings of now-large businesses and emphasizes the unpredictability of success.

• "The Innovator's Dilemma" by Clay Christensen is highly recommended.
• It is considered a seminal book that forms the foundation of many business strategies.

The book I would recommend, Mills, is perhaps the innovator's dilemma, being a seminal book by Clay, and it's just really well written and forms the foundation of a lot of these really interesting business builds.

This quote suggests "The Innovator's Dilemma" as a must-read for understanding foundational business concepts.

• Scott Sandell is highlighted as the best board member worked with.
• His unique approach to foreseeing problems and guiding CEOs through challenges is valued.

Scott Sandell, my mentor at NEA, having had the privilege to work with them for ten years at NEA and been on many boards with them, he has a unique way of understanding the really critical problem around the corner for a fledgling company and helping the ceos entrepreneurs navigate through those difficult times.

The quote explains why Scott Sandell is considered an exceptional board member, focusing on his mentorship and problem-solving skills.

• There has been a change in belief regarding the importance of capital efficiency.
• Winning the capital arms race by raising significant funds is now seen as critical.

I would say going back to the study and also seeing my own data points, the capital efficiency. Well, actually simply it is important to win the capital arms race that raising $100 million is critical to the success of new companies.

This quote indicates a shift in perspective, highlighting the importance of raising substantial capital for the success of new companies.

• There is a current lack of free and viral distribution channels for consumer markets.
• This situation is recognized as temporary and can change with new technological developments.

I think so, yes. But that can change quickly. I think about Alexa or Google home. Those could all emerge or become an important new distribution channel.

The quote acknowledges the current challenges in consumer distribution and the potential for rapid change with new platforms.

• Paul Graham's blog is identified as a valuable learning resource.
• It is recommended for insights and writings on various topics.

I have learned a lot from Paul Graham's writing on his own blog. Highly recommended.

This quote suggests Paul Graham's blog as a must-read for valuable insights and knowledge.

• Roofstock and Thrive Global are the most recent publicly announced investments.
• These companies address unsolved opportunities in the rental home marketplace and health tech.
• The potential impact on consumer well-being is a driving factor for the investments.

Yeah. The two companies, Roofstock and Thrive global. Roofstock is this marketplace for single family rental home. Thrive global is targeting a lot of the device addiction and sleep problems that we have. Both represent really important new opportunities that haven't been solved and we're excited about the potential of both and that making an impact in all the consumers world.

The quote provides insight into the reasons behind the recent investments, emphasizing the untapped opportunities and potential consumer impact.

• Paul Sao expresses enjoyment and appreciation for the podcast and conversation.
• Harry Stebbings also thanks Paul Sao for his participation and time.

Harry, I love your podcast.

The quote is a direct expression of enjoyment and appreciation for the podcast from Paul Sao.

• The podcast invites listeners to engage behind the scenes via Instagram.
• Ring and Cooley are introduced as sponsors, highlighting their products and services.
• Ring offers home security products, and Cooley is a law firm supporting startups and VCs.

We'd love to see you behind the scenes at the 20 minutes vc. You can find us on Instagram at hdebings 1996. [...] And now Ring has a great new product called Ring Floodlight Cam. [...] Cooley is a global law firm built around supporting startups and the venture capital firms that fund them.

This quote encourages listener engagement on social media and introduces the sponsors, detailing their relevance to the audience.