20VC Why You Should Not Invest From Patterns, Why No Good Business Was Built As An Analogy Of Another & Why The Rise Of The 'Celebrity Investor' Is Concerning with Emily Melton, Partner @ DFJ

In this episode of "20 Minutes VC," host Harry Stebbings interviews Emily Melton, partner at DFJ, known for her investments in consumer and mobile tech, healthcare technologies, and marketplaces. Emily shares her journey into venture capital, describing herself as a "reluctant venture capitalist" who began her career at DFJ by asking tough questions about company sustainability and market readiness. She emphasizes the importance of understanding an entrepreneur's motivations and the significance of building authentic, transparent relationships for long-term success. Emily also discusses the venture ecosystem, advocating for a return to long-term thinking and company building, rather than chasing rapid, unsustainable growth. Finally, she highlights the need for diversity in thought and approach within the VC industry, cautioning against simplistic pattern recognition that can overlook exceptional opportunities.

• Harry Stebbings introduces the 20 minutes VC podcast and his guest, Emily Melton from DFJ.
• Emily Melton is a partner at DFJ, focusing on consumer and mobile tech, healthcare technologies, and marketplaces.
• Emily has invested in companies like Betterup, Elation Health, Livongo, Redfin, Shift, Wellframe, Box, Meibo, Kudo, Rich Relevance, and Flux.
• She has also advised Pulse Network, HealthTap, and Poshmark.
• Harry thanks Kara Norman from Upfront Ventures for introducing him to Emily.

"I'm thrilled to welcome Emily Melton to the show stay. Emily is a partner at DFJ, where she focuses on consumer and mobile tech as well as healthcare technologies and marketplaces."

The quote introduces Emily Melton and her role at DFJ, highlighting her investment focus areas and her notable past investments and advisory roles.

• Harry shares his newfound love for writing on Mojitovc.com.
• He expresses a commitment to sleeping more in the new year with the help of the Simba hybrid mattress.
• Harry also aims to enhance productivity with Sirius Insight, a plugin for sales professionals that integrates with Salesforce.

"I also have a newfound commitment to sleep more this new year, and that's where the Simba hybrid comes in."

This quote reflects Harry's personal resolution to prioritize sleep and how the Simba hybrid mattress is a part of this goal.

• Emily describes herself as a "reluctant venture capitalist" since she didn't actively pursue a VC career.
• After graduating from Stanford in 1999, she received job offers from startups but was concerned about their lack of profits.
• Emily emailed venture capitalists for insights, leading to a meeting with Tim Draper of DFJ.
• She joined DFJ as an analyst before the market downturn in the early 2000s.
• The venture capital industry has since become more professionalized, with more structured roles like associates and analysts.

"I often refer to myself as the reluctant venture capitalist because it wasn't really a career that I actively pursued."

This quote summarizes Emily's unexpected entry into venture capital and her initial reluctance towards the industry.

• Emily is driven by the opportunity to meet entrepreneurs who are passionate about changing the world.
• She finds it thrilling to learn from these individuals and potentially invest in their visions.
• Emily enjoys helping entrepreneurs bring their products to market and make a societal impact.

"Every single day I get to meet with entrepreneurs who want to change the world, who are passionate and brilliant and see a different future."

Emily explains the rewarding aspect of her job in VC, which is the daily interaction with innovative and driven entrepreneurs.

• Emily reflects on how her view of the market and role as a VC has transformed over time.
• Initially, young VCs tend to see only opportunities without considering the risks.
• Over time, they learn that timing, market conditions, and team dynamics are critical for startup success.
• VC work involves recognizing patterns, managing risks, and supporting companies through challenges.
• Emily stresses the importance of diversity in experience within venture capital firms.

"After seven years in the industry, five years in the industry, you start to see, wait a minute, this is really hard."

This quote captures the realization that success in venture capital is complex and requires understanding various factors that contribute to a startup's success.

• Emily has mixed feelings about pattern recognition in VC, cautioning against simplistic thinking and analogies.
• She emphasizes the importance of first principles and understanding the unique context of each investment opportunity.
• Emily mentions Google as an example where DFJ had made previous investments in search companies before funding Google.

"I'm actually mixed on this one because I think there's some things that are useful in the pattern and then there's some things that you don't necessarily want to be making investment decisions based purely off of patterns."

Emily expresses skepticism about relying solely on pattern recognition for investment decisions, advocating for a more nuanced approach based on first principles.## Venture Capital Success and Pattern Recognition

• Success in venture capital often hinges on identifying unique opportunities rather than relying too heavily on past analogies.
• Firms may miss out on the full potential of a market if they base their decisions solely on historical successes.
• The real value of experience lies in understanding the company-building process and the needs of companies at different stages.
• Key decisions for growing companies include when to bring in executive support and how to structure direct reports.
• Leveraging past experiences can accelerate success without necessarily repeating history.
• Investors should continuously learn from each company they interact with to provide better support to entrepreneurs.

"And it was what specifically about this team going after? This particular opportunity is going to be different. So I think you want to break it down and make sure that you don't rely too heavily on analogies or the past to understand what's possible with this particular opportunity."

This quote emphasizes the importance of evaluating each investment opportunity on its own merits, rather than making decisions based on what has worked in the past.

• The lack of diversity in venture capital may be exacerbated by a reliance on pattern recognition.
• Traditional pattern recognition may favor certain demographics, such as young males from prestigious universities.
• The industry has experienced shifts in what is considered the ideal founder profile, often influenced by the success of companies like eBay, Google, and Facebook.
• True innovation may come from unexpected places, and investors should focus on the unique potential of each entrepreneur and market opportunity.
• Embracing diversity could lead to the discovery of groundbreaking businesses that redefine industries.

"We hear a lot today about diversity in the industry. And the lack of diversity in the industry is then kind of investing with patent recognition at the forefront, not a complete paradox release diversity, because if you are ingrained in patent recognition, you would be much more inclined to young males who graduated from Stanford with CS degrees."

This quote addresses the potential conflict between traditional pattern recognition in venture capital and the goal of increasing diversity within the industry.

• Venture capitalists have a dual responsibility to both entrepreneurs and limited partners (LPs).
• Entrepreneurs are the primary focus of a venture capitalist's time and resources.
• Limited partners provide the capital for investments, expecting outsized returns to fulfill obligations to their beneficiaries, such as pension funds.
• A responsible venture capitalist must balance the inherent risks of the industry with the need to create a diversified portfolio that can yield high returns.
• Successful investments in high-risk companies like Tesla and SpaceX are examples of achieving significant returns for LPs.
• Assessing the potential of a company requires focusing on what could go right and its capacity to transform industries, rather than just mitigating downside risks.

"But all of that, of that knowledge and all that experience is something that I bring to bear to try to help my entrepreneurs."

This quote highlights the importance of using one's knowledge and experience to support entrepreneurs in their ventures, which is a key part of the venture capitalist's role.

• Recognizing a truly driven and ambitious entrepreneur is challenging but crucial for venture capitalists.
• Thousands of entrepreneurs are evaluated, and signs of drive and motivation are sought after.
• The potential for success is often linked to the entrepreneur's passion and commitment to making a substantial impact.
• While the paths to success may vary, a consistent trait among successful entrepreneurs is their determination to achieve something significant.

"And that's the thing that we really spend most of our time trying to analyze is what can go right and is this one that can actually go so right that it really becomes one of those transformative companies in terms."

This quote underscores the venture capitalist's focus on identifying entrepreneurs who have the potential to create transformative companies, which requires an analysis of what could go right in their business ventures.## Entrepreneurial Motivation

• Understanding the motivations behind entrepreneurs is crucial for assessing their potential for success.
• Entrepreneurs face significant risks and challenges that require a strong, personal driving force to overcome.
• Financial returns or fame are often not the sole motivators for entrepreneurs; there's usually a deeper core reason.
• Examples of core motivators include Elon Musk's goal of reaching Mars and Aaron Levy's desire to build a longstanding company with friends.
• Knowing the 'why' behind an entrepreneur's venture is as important as the 'what' they are doing.

"I'm not just interested in the what I'm interested in the why."

This quote emphasizes the importance of understanding an entrepreneur's underlying reasons and motivations beyond the surface-level aspects of their business.

"Building a company, an early stage company, is insanely risky."

The quote highlights the high-risk nature of starting a company, which underscores why understanding an entrepreneur's motivation is essential for predicting their perseverance and success.

"There has to be some core for Elon that's getting to Mars."

Using Elon Musk as an example, the quote illustrates that successful entrepreneurs often have a fundamental, passionate goal driving their efforts.

• The trend of venture capitalists building personal brands and becoming celebrities has been rising.
• Success for VCs is traditionally measured by the performance of their portfolio companies and the respect of entrepreneurs.
• The celebratization of VCs may be driven by impatience and the desire for early recognition in their careers.
• Entrepreneurs now have more options for funding, including angel investors and various stages of venture capital.
• It's important for entrepreneurs to find the right VC partner in terms of individual fit, firm culture, and investment size.

"We've seen over the past few years the kind of celebratization of VCs and the building of these massive personal VC brands."

The quote addresses the current trend of VCs becoming public figures and building personal brands, which is a significant shift from traditional VC roles.

"What really demonstrates if we're good is that our companies do well and that our entrepreneurs think highly of us."

This quote suggests that the true measure of a VC's success is the success of their investments and the satisfaction of the entrepreneurs they support, rather than their personal fame.

• Entrepreneurs should conduct thorough due diligence on potential VCs by speaking with other companies the VC has invested in.
• Relationships in venture capital are long-term, so compatibility and mutual respect are crucial.
• Transparency and openness are key to a successful partnership between VCs and entrepreneurs.
• Entrepreneurs should be forthcoming about challenges and past failures, as these can be indicators of their ability to learn and adapt.

"Everyone's in sell mode."

This quote reflects the reality that both VCs and entrepreneurs are trying to present their best sides during initial meetings, which can obscure the true nature of the potential relationship.

"Talk to any of my CEOs, I'll make introductions, but honestly reach out to any of them."

The speaker encourages entrepreneurs to independently verify a VC's claims by speaking with CEOs of companies the VC has invested in, which can provide insights into the VC's long-term behavior and support.

"Tell me everything right now. Like do the dirty laundry."

By asking entrepreneurs to be open about their challenges, the speaker is advocating for transparency and honesty, which are critical for building a strong, collaborative relationship.

"If they aren't, then it's probably not a good fit."

The quote suggests that a lack of transparency from an entrepreneur is a red flag for the speaker, indicating a potential mismatch in the VC-entrepreneur relationship.

• The speaker mentions two favorite books: "Mindset" and "A Theory of Justice."
• "Mindset" by Carol Dweck is valued for its insights into growth versus fixed mindsets, applicable to both parenting and entrepreneurship.
• "A Theory of Justice" by John Rawls relates to the speaker's personal values and views on the political climate and society.

"Right now, I'm rereading mindset, which I read when I was trying to think about raising my daughters, and I recently heard Bill Gurley refer to this book again in terms of entrepreneurship and being in a growth mindset versus a fixed mindset."

The speaker values "Mindset" for its relevance to both personal development and professional entrepreneurship, highlighting the importance of a growth mindset.

"The other one is a theory of justice by John Rawls."

This quote reveals the speaker's interest in ethical and political philosophy, indicating a deeper level of thought and consideration for societal issues beyond business.## Challenge in Day-to-Day Role

• Saying no to entrepreneurs is the most challenging aspect of the role.
• Entrepreneurs are passionate and excited, making the refusal difficult.
• It is draining to not get excited enough to invest in their ideas.

"Saying no to entrepreneurs, that is one of the most challenging things."

This quote highlights the difficulty of declining investment opportunities with enthusiastic entrepreneurs, which is emotionally taxing.

• There is no one-size-fits-all framework for saying no due to the uniqueness of each company.
• Efforts have been made to personalize rejections, but it remains a complex task.
• The aim is to be helpful even when saying no, by providing constructive feedback and suggesting suitable investors.

"But I really found that every single company is unique."

This quote emphasizes the individuality of each company and entrepreneur, which necessitates a tailored approach to declining investment opportunities.

• Vulnerability is seen as a strength in the venture industry, contrary to common belief.
• Being open about excitement, fears, and weaknesses can build authentic relationships.
• Honesty fosters empathy and is essential for long-term success.

"I view vulnerability as a strength."

The speaker expresses a belief that contrasts with the typical venture industry stance, suggesting that vulnerability can lead to more genuine connections and better outcomes.

• There is a desire to return to long-term thinking in company building.
• The current trend of rapid growth expectations can lead to premature scaling and excessive capital risk.
• Emphasis should be on building sustainable businesses over 10-15 years and thoughtful capital infusion.

"I really want people to start to think about things in terms of we're building out businesses over 10-15 plus years."

This quote reflects the speaker's desire for a shift in the venture ecosystem towards patience and strategic growth, rather than the pressure to scale quickly.

• The most recent investment is in Betterup, a performance coaching platform for emerging leaders.
• The decision was influenced by the team's qualities and the potential for learning about sustainable organization building.
• There is a recognized need for technology that supports HR beyond basic functions, which aligns with the belief in investing in people.

"So my most recent investment is a company called Betterup."

This quote introduces the most recent investment and highlights the reasons behind the decision, including the team's potential and the market need for HR technology solutions.

• The speaker looks forward to progressing in their career, from partner level to owning a firm.
• There is an appreciation for the support and opportunities provided by the venture community.

"I look very forward to seeing your career progress well on through partner level to general partner to your own firm."

This quote expresses encouragement and anticipation for the speaker's future career advancements within the venture capital industry.

• The speaker enjoys Stratery by Ben Thompson for its depth and substance.
• There is a preference for content that goes beyond headlines and provides thorough analysis.

"Right now I'm obsessed with stratery. Ben Thompson."

This quote reveals the speaker's current interest in a particular blog that offers in-depth insights into the venture industry, suggesting a desire for comprehensive understanding over superficial knowledge.

• Thanks are given to Kara Norman at Upfront Ventures for making the podcast episode possible.
• There is an expression of gratitude for the support received from the venture community.

"And I want to say again, a huge thank to Kara Norman at Upfront Ventures in LA for the intro, without which the show would not have been possible today."

This quote acknowledges the contribution of an individual who facilitated the podcast episode, highlighting the importance of connections and support within the industry.