TCT EXCLUSIVE interview: Arjun Sethi, Tribe Capital
|May 22, 2020||4|
Arjun is a two-time founder (2 exits) turned Angel and Venture Capital investor. He has invested in some of the most successful Silicon Valley companies like Slack, Carta, Gusto, Front, Lyft, Snapchat and Opendoor.
'N of 1' Investing with Arjun Sethi, an interview
Arjun Sethi, Co-Founder at Tribe Capital
TCT: Thanks, Arjun, for sitting down with us - let’s dive right in. Your first two companies were both acquired; what inspired you to found them and did you always know you were going to be a founder/CEO?
I didn’t intend on starting any companies. I actually started a dozen different projects and only two went on to be meaningful. I was driven by teaming up with intelligent and ambitious people so that we could learn together as we solved problems in the early consumer social web. For me, everything started with the product and team. At its best, this manifested itself as an environment where we could ideate, test, build, deploy, and then scale a wide array of ideas. Building and scaling a company came second to working with people to solve a problem that we were irrationally drawn towards. This is how I think about being product-led and team-led as opposed to being business or sales-led.
How did you first get into Angel investing? Did you know that you wanted to do this before you had an exit?
During my time as CEO of Lolapps in the early-2010s, I dabbled in angel investing primarily because I had a large network that saw a lot of deals. I invested almost entirely on my gut and on peer-driven fear of missing out, commonly referred to as FOMO.
In 2014 Yahoo acquired my second venture-funded company MessageMe as part of a broader M&A driven strategy to compete with Facebook and Google. At Yahoo, I oversaw dozens of acquisitions while angel investing in parallel. Naturally, these two activities had a lot of synergies. Over the course of 10+ years, I angel invested in almost 100 companies which included hypergrowth and unicorn companies such as Gusto, Front, Lyft, Snapchat, and Opendoor.
As time went on and I began investing larger amounts of capital, I started losing money and it led me to recognize the stark contrast between the general approach of gut-driven investing to our well-oiled approach of data-informed product development. At an intellectual level, this inherent contradiction between the evidence-driven world of building products and the gut-driven world of early-stage investing is, in some sense, the most interesting part of venture capital. When you mix this with the inherent thrill of working with great founders who have found a secret and are building the future, venture capital was simply the most exciting way I could imagine spending my time.
Who were your first mentors in VC?
I’ve had many mentors along the way that have taught me about company building, investing in startups, and capital allocation. I separate capital allocation from investing in startups because it takes a different mindset to understand and underwrite risk than it takes to be a good partner for founders.
In my initial foray into investing, I was surrounded by folks like Ariel Poler, Brian Pokorny, Ron Conway, and Hiten Shah. Along the way, I met Mike Hirshland who was one of the very first investors in my own companies and continued to back us when things were both high and low. I spent a lot of time learning from Marc Andreesen and Om Malik during my time at MessageMe.
When I joined Social Capital to be a full-time investor, I spent a lot of time learning from Chamath Palihapitiya and Ted Maidenberg and am still learning actively from Ted as we’ve co-founded Tribe together with Jonathan Hsu. On the one hand, Chamath is a big brash personality who wanted to try crazy things which helped create some big waves. On the other hand, Ted mentored me on the actual nuts and bolts of being a good steward of capital and the craft of being a venture capitalist. There are a myriad number of complexities to navigating the line between your LPs and entrepreneurs, and Ted is a master of understanding and articulating all sides while keeping the highest possible integrity.
What compelled you to leave Yahoo to join Social Capital?
During the social web and social gaming days, I had known of Jonathan because we both ran in similar circles that were innovating on a bunch of data-driven tactics to drive growth. I was aware of his work in social gaming and subsequently at Facebook where he helped to build out and lead the data science and analytics organization. While I was at Yahoo, one of the founders in my angel portfolio spent time with Jonathan and actually recorded the meeting. It was clear from listening to that recording that Social Capital at large and Jonathan, in particular, were thinking about venture investing in a different way than other folks. They were genuinely trying to find the middle ground between the data-informed approach to product development that had emerged in the social web era and the traditional qualitative approach to venture capital that was then prevalent. Given that this was exactly the higher-level thinking that both drove my own company building experience as well as my interest in investing, I knew that I had to learn more about Social Capital.
Can you talk more about the departure from SC? How is your relationship with Chamath Palihapitiya now?
Chamath’s early reputation was built on his work leading to growth at Facebook. He had the vision and foresight to bring the best and brightest folks together to create a unique way of approaching venture capital by underwriting companies leveraging data. We at Tribe represent a large fraction of the team that was formed to explore that idea. Chamath helped show us how to bring an entrepreneurial spirit to venture capital by encouraging experimentation with all sorts of things across every stage of capital allocation. These experiments included the core attempt of bringing data science into venture capital and went on to big experiments such as capital-as-a-service for lightweight programmatic investing and SPACs as an alternative to IPOs.
The Tribe website declares, “We invest in N of 1 companies. We find them. We evaluate them. We make them.“ Can you explain N of 1 companies and markets in layman’s terms?
N-of-1 companies are unique companies that stand alone and are meant to contrast with “1-of-N” companies that populate most competitive markets. They are companies that, through the dynamics of their product-market fit, are able to gain a disproportionate amount of market share in their particular niche and are then able to parlay that dominance to other adjacent markets. We think that they are particularly prone to emerging when technology enables a new raw resource — an atomic unit of value — and some product is able to find a way to grow quickly and cheaply to accumulate that unit of value. This is fully articulated in our Carta essay.
At Tribe, you obviously rely heavily on data to make investment decisions, are there any "intangibles” you look for when evaluating early-stage companies?
Absolutely. We rely heavily on data but we don’t do it at the expense of the intangibles. Unlike other folks, we do not view the two approaches to be fundamentally in conflict. As investors, we are trying to make the best decision possible given all the evidence and that evidence sometimes appears as data and at other times as qualitative information. We spend an inordinate amount of time thinking hard about how we mix together art and science. We don’t believe that it is a fundamentally solvable problem — early stage venture capital itself is fundamentally unsolvable — but we are constantly striving to improve at it and intelligently leverage data as an important contributor towards that pursuit.
What non-data filters do you use when vetting an investment into an early-stage company?
At a high level, we are always thinking about the product, market and team and how they distribute, the edge. Data provides a particularly objective lens on products as they interact with the market, but we’re constantly assessing every opportunity based on those three lenses whether through data or otherwise.
What’s the worst investment you’ve ever made?
In my mind, there is no such thing as a bad investment. While we look for returns in any investment, we also actively look for opportunities to learn and compound knowledge. Even in cases where outcomes may not be great, investors and the founders typically learn together regardless and that in and of itself is valuable.
That’s a great outlook. How about the best?
To exercise the framework above:
Compounding capital: Personally, Snapchat, Orbitera, and MessageMe but at Social Capital and Tribe, the best known companies that we invested in were Slack, Carta, and Cloud Kitchens. We invested in these companies at their earliest stages and continued to re-invest across multiple rounds. Slack went public in 2019 and Carta continues on a great path. However, from an IRR POV, there are definitely a couple of seed investments that have managed to exit with M&A within a few months generating incredible IRR on small dollars.
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Many of Tribe’s investments seem have been follow-on’s into former Social Capital investments, do you see this trend continuing?
Actually, only about 20% of Tribe’s investments to date have any connection to Social Capital - most of our investments are companies that we have met since forming Tribe. We had developed many relationships as individuals with founders in the Social Capital portfolio so it was only natural that we continued to both shepherd and re-invest in the best of that portfolio while also building new relationships with our new platform.
What does the world look like in 2021?
Some context on the current state of affairs:
We’ve been in a shelter in place across the United States for 10 weeks. The federal and state governments have closed down traditional brick and mortar / retail business and commerce.
Small business is 50-55% of GDP and 95% of employers in the United States. There are projections that 25% of these businesses won’t come back in a recovery over the next 2-3 years. That means $350 billion of $1 trillion will be wiped out.
Since 2008, The US Federal Reserve has been more expansive of the securities and debt that it continues to backstop here within the United States and abroad, mainly European assets through swap lines to preserve credit markets and their liquidity.
The recovery in China has been slow and modest, which is indicative of the baseline of what the US and European recovery might look like. https://www.caixinglobal.com/2020-05-16/reopening-chinas-economy-tracking-the-heartbeat-of-a-recovering-nation-101554931.html
The projected real estate market default rates of renters, landlords that effectively reduce the serviceability of loans and paybacks. What type of effect does that have and can the government continue to stimulate, and for how long?
There are many other variables around consumer demand, health, and opening up the economy to consider.
Some of our thoughts given the context:
Everybody is thinking about COVID-19 right now and I think it’s safe to say that it will still be significantly impacting both businesses as well as day-to-day life. It’s important to remember that financial markets and the actual economy are oftentimes very far apart. In the Great Depression, there were many spells between 1929 and 1934 where the market rallied by large double-digit gains for several months but economic fundamentals in terms of employment and business earnings were steadily contracting. The market at that time was mostly reacting to policy announcements that revolved around providing large amounts of coordinated federal fiscal policy the largest of which came via the New Deal in 1933. So given that context, perhaps we shouldn’t be so surprised by the disconnect between the market and the real economy.
At Tribe, we think that the real economy at large will still be suffering in 2021 with significant unemployment and aggregate demand at levels still below the pre-COVID era. While we believe that the high-level picture will be bleak we also believe that there will be several pockets of thriving economic activity. A lot of the accelerating trends that we’re observing now will still be in full force. For instance, b2b saas that enables remote work, clear trends in e-commerce, gaming etc. At some level, this will all be part of a larger refactoring towards software and services that has been happening for a couple of decades at this point and that trend will continue despite the macro conditions. The broad macroeconomy (and media’s interpretation of that macro-environment) will continue to be somewhat at the mercy of federal fiscal policy but the economy is really unimaginably large and we expect there to be several segments that will continue to be attractive where great companies will be built.
That’s incredible analysis, thank you. How would you describe your approach as a board member these days? Are you hands-on or hands-off?
Being a good board member means knowing when to be hands-on and when to be hands-off. I’d say that my main approach is to have an even keel and to be that sounding board when the CEO and management team needs but specifically not being overbearing or overly prescriptive.
Last question, should PE/VC investing be more broadly available to non-accredited investors? What trends do you foresee in this space?
Officially our take is very aligned with our company, Carta, and the letter they sent to the SEC.
The “accredited investor” definition is incredibly narrow and acts effectively as an enforcement mechanism to exclude large swathes of very intelligent investors from participating in one of the main engines of economic progress (i.e. entrepreneurial finance). The point of capital markets is to allocate capital from those who have it to those who have a productive use for it. However, when someone buys shares on a public market they are explicitly not participating in this motion. They are merely buying shares from some other owner and the underlying company gets no benefit. In contrast, when a VC invests $10M into a company, the vast majority of that capital turns directly into wages for employees. Loosely speaking, every time you see $1M invested into a company that’s roughly eight person-years of employment that are being financed. The fact that we have basically walled off this later activity to the privileged elite is a bit of a shame and I believe that we should find ways to more effectively use the large pools of capital to finance productive projects which inherently means more capital to early-stage companies.
Given that the burdens of being a public company are only increasing - never decreasing - I expect that the trend of staying private will continue. The primary reason for going public is to achieve liquidity for founders, early employees, and investors. While it used to be the case that this was coupled with equity ownership transferring to individuals in the broad middle class in America, today most public equity is owned by big giant index funds that are already partially in the business of protecting their client’s capital. The public markets are a bit of an anachronism and we foresee the future to have companies staying private longer as the market figures workarounds to get exposure to private companies. This already happens in the form of REITs, Vision Fund, SPACs, etc and will continue. Instead of barring people from investing based on their net worth, it would be better to have them pass a test before being able to invest in risky ventures. You might think that this would be somehow discriminatory, but we already do something similar for driver’s licenses and I think the argument for it in the case of private investing is not that dissimilar.
Thank you for your time and thoughts, we look forward to the continued success of Tribe and your portfolio companies!
Doing More with Less: A Model for Growth in Economic Recession -Via ProdPerfect
Notable Deals 5/16-5/22
Deal of the week: Samsara nets $400mm
Samsara Networks Inc., a startup focused on internet-of-things technology, has raised $400 million, cutting its valuation to $5.4 billion, according to a memo from Chief Executive Officer Sanjit Biswas to employees Wednesday.
Fly Now Pay Later raises $42,410,722 led by Revenio Capital | Fly Now Pay Later is a fintech company that helps consumers spread the cost of their travel over a flexible duration.
Octant Bio raises $30,000,000 led by Andreessen Horowitz | Applying next-generation DNA sequencing, gene synthesis, and gene editing to discover safer, more effective, cheaper drugs.
Deel raises $14,000,000 led by Andreessen Horowitz | Payroll for remote teams
Navenio raises $11,037,649 led by QBN Capital | Navenio is provides location based services for indoor environments via mobile applications.
Run The World raises $11,000,000 led by Andreessen Horowitz, Founders Fund | Run The World is a digital platform that enable people to collaborate with and learn from others through online events
Tapcart raises $10,000,000 led by SignalFire | Tapcart is a SaaS platform that enables ecommerce merchants to launch and manage mobile apps for their brand.
XWING raises $10,000,000 led by R7 Partners | XWING develops the suite of technologies for pilotless commercial flight of vertical takeoff and landing (VTOL) and fixed-wing aircraft.
Big Sky Health raises $8,000,000 led by Greycroft | Mobile App
Brainbase raises $8,000,000 led by Bessemer Venture Partners, Nosara Capital | Brainbase helps companies manage and monetize their intellectual property.
PathSpot raises $6,500,000 led by Valor Equity Partners | PathSpot is a system that protects food service companies and their customers from the threat of food-borne illness.
Nautilus Biotechnology raises $76,000,000 led by Vulcan Capital | Nautilus Biotechnology offers a high-throughput, low-cost platform for analyzing and quantifying the human proteome.
HotSpot Therapeutics raises $65,000,000 led by SR One | HotSpot Therapeutics is a developer of a therapy platform designed to discover medicines and provide proper treatment.
Truework raises $30,000,000 led by Activant Capital | Truework is a verified identity platform which aims to protect sensitive personal data behind consumer consent.
CLARA analytics raises $25,000,000 led by Aspen Capital Group | A leading predictive analytics company for workers compensation
RapidAPI raises $25,000,000 | RapidAPI is the world’s largest API Marketplace where over a million developers find and connect to thousands of public APIs.
Confluera raises $20,000,000 led by Icon Ventures | Confluera provides security platform featuring a broad range of autonomous capabilities that deterministically track ongoing cyber threats.
Bevy raises $15,000,000 led by Accel | Bevy is an enterprise-grade virtual and in-person community events platform designed to help brands build, grow and scale a global community
Directly raises $11,000,000 led by | Directly offers AI-powered solutions to resolve customer issues with the right mix of automation and human support.
United Dwelling raises $10,000,000 led by Alpha Edison | United Dwelling aims to tackle the affordable housing problem using data, creativity, and underutilized garages and backyards.
Enuma raises $9,000,000 led by Hyunjoo Je | Enuma creates engaging learning solutions that empower all the world’s children.
Amwell raises $194,000,000| Amwell is a telehealth platform that provide its patients more affordable, higher quality health care.
Brex raises $150,000,000 led by DST Global | Brex provides a corporate credit card called the Brex Card for technology, e-commerce, and life sciences companies.
Aspiration raises $135,000,000 led by Alpha Edison | Aspiration is a financial firm with a conscience that is built for everyone, committed to giving and founded on trust.
States Title raises $123,000,000 led by Greenspring Associates | States Title is an insurtech platform that uses machine intelligence to remove friction from residential real estate transactions.
Mindstrong raises $100,000,000 led by | Mindstrong is dedicated to transforming mental health through innovations in digital measurement, data science, and virtual care models.
Coalition raises $90,000,000 led by Valor Equity Partners | Coalition operates as a cyber insurance and security company that helps businesses manage and mitigate cyber risk.
Imperfect Foods raises $72,000,000 led by Insight Partners | Imperfect Foods mission is to reduce food waste and build a better food system for everyone.
Amplyx Pharmaceuticals raises $53,000,000 led by Sofinnova Investments | Amplyx focuses on developing innovative therapies for debilitating and life-threatening diseases in patients with compromised immune systems
Sound Agriculture raises $22,000,000 led by S2G Ventures | Sound Agriculture uses molecular discovery to create climate resilient crops, enhancing harvest yields for growers.
ChromaCode raises $10,000,000 led by Adjuvant Capital | ChromaCode is a molecular diagnostics company focusing on bioinformatics.
Human Interest raises $10,000,000 led by Glynn Capital Management | Human Interest provides 401(k) benefits, retirement savings plan and the investment know-how, accessible to small to midsize businesses.
Atea Pharmaceuticals raises $215,000,000 led by Bain Capital Life Sciences | A pharmaceutical company based in boston.
SQZ Biotech raises $65,000,000 led by Temasek Holdings | SQZ Biotech is a developer of a cell engineering technology designed to deliver a diverse set of materials into patient cells.
PresenceLearning raises $27,000,000 led by Bain Capital Double Impact Fund | PresenceLearning is a provider of live online speech and occupational therapy sessions for k-12 students and school districts.
Amplitude raises $50,000,000 led by GIC | Amplitude is a product intelligence company that provides product intelligence tools that help teams run and grow digital businesses.
MakeSpace raises $45,000,000 led by Iron Mountain | MakeSpace is a storage company that makes it easy to order, store, and retrieve physical belongings.
BetterCloud raises $75,000,000 led by Warburg Pincus | BetterCloud is the first SaaS Operations Management platform, empowering IT to define, remediate, and enforce policies for SaaS applications
Samsara raises $400,000,000 led by | Samsara is an IoT platform combining hardware, software, and cloud to bring real-time visibility, analytics, and AI to operations.
Couchbase raises $105,000,000 led by GPI Capital | Couchbase is the NoSQL database for business-critical applications.
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