Episode 06 -How To Identify An Entrepreneur Worth Investing In w/ Joe Medved from Lerer Hippeau



Episode 6 - How To Identify An Entrepreneur Worth Investing In w/ Joe Medved from Lerer Hippeau


Joe Medved:      At this point, you can no longer ignore what's happening from an innovation perspective, because it's not just that someone's going to kind of nip at your heals and take away some of your business, but you have the potential to be massively disrupted in a very short period of time if you're ignoring what's happening in the technology landscape.

Dave Knox:         I'm your host Dave Knox and this is Predicting The Turn, a show that helps business leaders meet their industry's inevitable disruption head on. Welcome to another episode of Predicting The Turn. Today, I'm joined by my good friend and long suffering Cleveland sports fan, Joe Medved. Joe joins us as a venture partner from Lerer Hippeau, and today we're going to talk about his career as a BC, how he predicts the turn, and what he sees in the changing landscape of digital media and innovations. Joe, welcome.

Joe Medved:      Thanks for having me, Dave.

Dave Knox:         Well, Joe and I go way back to the world Venture Capital and some deals we've looked at together and as a long time mentor for the Brandery. And looking forward to the conversation today. What I'd love to start with is tell us a little bit about what led you to the world you are today, starting as an investment banker, and ultimately ending up with Lerer Hippeau.

Joe Medved:      Yeah, so I started my career in investment banking with JP Morgan for five very long painful yrs. And I focused mostly on telecom media and tech companies and I just found over time that I really enjoyed working with a lot smaller companies than I did focusing on financial engineering, which is effectively what we did on the banking side. So, I had worked with some companies in the cable network space and I happened to come across a fund that had a partner who had operated a couple of cable networks and was looking for someone to assist with looking at those new investments, it was called Constellation Ventures, it was part of [inaudible] Asset management when that still existed.

                                So I was there for a couple yrs, and that partner ended up leaving and at that point I transitioned over to soft band capital, where I worked for about a decade, and focused on early stage investing in a lot of digital media companies, but ultimately kind of looked at consumer and enterprise broadly. And so I focused on everything from kind of seed to series B investing at Soft Bank for about a decade. And then about three years ago when Soft Bank Corp shifted focus to much later stage investing, which started this $100 billion vision fund project, I transitioned over to Lerer Hippeau, where I now manage the legacy Soft Bank capital assets and assist with new investments at Lerer Hippeau.

Dave Knox:         Awesome. So, let's talk about that last decade of the focus at Soft Bank and now Lerer Hippeau with everything that you're doing. A lot of that has been the world of digital media, and that's a space that's had one or two changes kind of over the last decade, say the least? But you've also been at the front row of changes that have been in automotive with your mechanic, with food and snacking through Nature Box, and many many others. What do you think is unique about this time that we're going through of all of these industries kind of being upended, changing, and what are you looking for in it?

Joe Medved:      I think generally the pace of change has just accelerated so rapidly, right? Like what's happened in the last yr is probably more than happened in the last few. What's happened in the last couple, last five, in the last five versus the last 25. You just think of the advancements of smartphones and how rapidly that's changed the world that we live in. So, I think what we've seen is that no matter what industry you're operating in, it could be archaic industries like automotive, like insurance, even, right? Where you're in a position that you can no longer ignore technology, because it's dramatically changing not only the way you operate but the way your consumers are acquiring everything that they're purchasing, right?

                                Whether it's a car, whether it's some kind of service for their home, or an insurance product, whatever it may be. So as a result, we've just seen that every major industry has sort of been forced to focus on innovation. And I had a somewhat unique lens being at Soft Bank, which at the time was kind of like a quasi-corporate fund, right? We had all our money from Soft Bank corporation out of Japan which is this massive conglomerate of assets in the Japanese market, focused mostly in the telco and broadband landscape, and mobile.

                                So, we were helping them identify emerging trends in the US markets that they should be thinking about for Japan. And ultimately over time, they decided to make investing core to the focus of what the business had done. But you see a variety of corporations taking different approaches, but I just think at this point you can no longer ignore what's happening from an innovation perspective, because it's not just that someone's going to come and nip at your heels and take away some of your business, but you have the potential to be massively disrupted in a very short period of time if you're ignoring what's happening in the technology landscape.

Dave Knox:         So, that's a really key point that you mention of the competition has changed. It's not about market share necessarily, but it's about you might lose an entire market. When you look at an entrepreneur and somebody that's talking about changing, disrupting, pick whichever buzz words you want to use, how do you separate whether or not that's an outsider that doesn't understand the industry or if they have that potential to be a disruptor?

Joe Medved:      Yeah, it's interesting, because I think there are people that have been successful with all types of backgrounds, someone who's been in the industry for decades, someone who's never been there and is na├»ve enough to believe that they can do something wildly disruptive. And sometimes that's required. I think if there's any common thread amongst a lot of the founders we backed, often it is an individual who, maybe they were a digital native or they were just generally had a love for technology, and they operated within a business that was fairly traditional and they just sort of raised their hand early to be the person ... honestly, not unlike you, with PNG, right?

                                You kind of raised your hand to focus on some of this technology and innovation before a lot of probably the high level executives were truly focused on it. And it's people like yourselves who work within these corporations and experience the problems first hand that they're trying to solve for. They have the pains, and like especially you see, even on the enterprise side, you see consumers that are using their phones to acquire everything that they want, and they're like "why can't I use this device to do certain things within the workforce as well?"

                                So, it's sort of a mix of backgrounds but we love to find founders that have experienced that pain directly, but have kind of a technology bent and the ability to look at things through a different lens to try and disrupt traditional industries.

Dave Knox:         So, speaking of some of those traditional industries, Lerer Hippeau's been at the forefront of the change in digitally native [inaudible] brands, consumer brands. Folks like Allbirds and Casper and too many to even count. What do you think about ... what's led to this new opportunity of brand creation? Because it goes more than just the mobile phone or any of that, it's physical products. What's led to that?

Joe Medved:      I think a key thing obviously is the way that consumers are acquiring these goods, right? Still, the vast majority of things are bought in store, right? So even brands you're working with are still, most of them if they're scaling are still going to look in store. But a lot of them are born online, and the ones that we've seen really succeed, they have a founder who knows how to build an incredibly authentic brand narrative around a high quality product.

                                So if you look at Allbirds as an example, one of the co founders had been ... this is a great background story. He had been a soccer player in New Zealand and he discovered this amazing wool that created these incredibly comfortable shoes, and it was a great product that when people wore it, like nine times out of 10 they would all tell their friends "Oh my God this is the most comfortable shoe I've ever worn in my life." And as a result, the company had such a massive advantage from a [inaudible] perspective in terms of acquiring customers at an insanely low cost, because there was just this great product with a background story that was compelling.

                                And the company really shared that in a very authentic way through a variety of means around social media and Facebook and you start seeing people use influencers, there's all kinds of stories like that. Or you have like Dia & Co, which is a company that we invested in, the founder who's a plus size woman herself found that she basically could not find high quality stylish clothes in traditional retail environments, and she really established this incredibly unique brand voice and build a community around a consumer where she was delivering clothes that made women in her community feel beautiful in a way that could never be delivered in traditional stores that were just not really catering to that audience, which is really substantial in the US and was clearly being underserved.

                                That's an interesting one where she actually had a couple of competitors in the market that had preceded her but she, as an individual, was able to build such a strong brand that she's really become the leader within that segment, right? So I think a key to it, for us, is identifying not only the market opportunity, but the individual who can really drive interesting, incredible brand stories. We were having a partner discussion a couple weeks ago and we were looking at a new direct to consumer brand and we were talking about the brand and [inaudible] and our partner Ben, who you know really well, who's really led most of our consumer investments, he said "Wait, stop, we're having the wrong conversation."

                                He said "Every great bet that we've made in the direct to consumer space has been based on the quality of the founder, often times in the first meeting when they gave that pitch. And it's someone that really has this great ability ... it's almost like identifying emerging artists, it's just someone who has the ability to develop that narrative around an incredibly unique product that you know is going to be amplified in today's landscape around things like social media with younger consumers that are looking to purchase these items more online, at least the influencers do and then like I said as you scale you go to traditional retail as well."

Dave Knox:         When you guys look at these consumer brands, a lot of them, they built businesses that are 50 million, hundred million, even 500 million. But most of them are in a single category. Yet you look who they're competing against, the establishment is the proctor and gambles, the unileavers, the general mills. Where do you see these categories going? Is it going to be some of these digitally [inaudible] brands evolve into digitally [inaudible] companies in multiple categories? Or are they just going to get acquired by bigger guys like Bonobos did by Walmart and Dollar Shave by Unilabor? Where do you see the landscape going?

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Joe Medved:      So, I think it'll be a mix, right? If you look at some of the ones that we're in that have really scaled, like Casper as an example, which really started with just mattresses, has broadened their scope to sleep in general, right? So, they are getting to the point where they've reached a significant scale where they can have vertical products sort of along side their core initial product. They're starting to establish their own stores, they partner with retailers like Target. There are companies like those that may grow into massive independent brands within their verticals.

                                And then there are others that will just very rapidly build out high quality product maybe in a specific niche, and you might find founders and investors kind of willing to sell early. For us, we really kind of look to the founder, they will know when they feel like they've maximized value. But I think you will see a mix of them. But the ones that scale, it probably is that like 75 to 100 million dollar mark where you're like "Okay, we now have to go into physical retail," right?

                                And we see this in particular, so our office is in the SoHo neighborhood of New York, and you go up and down a few blocks near us, every other store it feels like it's being ... there's a pop up shop from some new brand that's emerging sort of in a cool neighborhood, they're all sort of testing out retail. Allbird set down initially, and was wildly successful, and has now expanded and they're opening more locations. Warby Parker had done that for glasses. So, I think we're going to see plenty of those companies really becoming the new leaders, because so much of what's built around the brand, the influencers, is driven through online engagement, right, as opposed to offline.

                                So, I think you are going to see these people that build a brand online that then become winners in the traditional world.

Dave Knox:         Yeah, makes sense. Now, sticking with the world of online, though. One of the things you've talked about is that one of the biggest shifts you think we're seeing right now is the shift to voice. And that's going to be both a creative force and a destructive force. So, how does a brand think about an emerging technology like that, and that shift to an operating system, what should they be doing about it?

Joe Medved:      Yeah, voice is a space, I'd say 12 or 18 months ago, so many investors including ourselves were very excited about voice and the transition, I mean obviously you're seeing this massive adaption of Alexa products and Google Home, and I'm as big a geek as they come with that stuff and we have multiple Alexa's in the home, I just ordered some Google Home devices so I can compare the two. So, I think the connection that an Amazon and Google and some other players are likely to have with the consumer in the home with that voice connection is incredible. But I think it's still going to be a few years before there's a lot of transactions driven there.

                                But I think a bridge to getting there, which is embracing conversational commerce is more likely to happen in the messaging world first, right? So, obviously, at some point, when everyone got into Facebook, you had companies like Buddy Media which we were investors in, which were helping bring a bunch of brands into that world. You're seeing more companies now that are trying to help create, and some of it's through bots and some of it's through more interactive conversations, but trying to help drive commerce through transactions that are happening in the messaging world.

                                And particularly for younger consumers, I have an 11 year old son, he's probably more likely to want to text his friends than he is to pick up the phone and call them. Unfortunately that's where the world is headed. So, I think brands have to recognize that, and think about how they can converse with consumers in a very authentic way in that environment. And I think the same conversational constructs that are utilized in messaging are likely to transition well to voice, when discoverability is kind of solved in that environment.

                                Alexa has so many different skills, and I use it every day, but I can't tell you what skills I even have on the platform, right? So I think it will change, and Amazon's obviously going to have a heck of a lot of control over that experience, and I don't know if there's a way that could be avoided. But I would definitely as a brand be thinking about how I can engage in conversational commerce. Thinking about using voice platforms but definitely going there and messaging today, because I think you can clearly drive transactions there, and that will eventually correlate into audio focused voice.

Dave Knox:         So, on that, one of the biggest things going on in this speed of change, it's not just the companies changing, but us as business leaders, executives needing to embrace that change in this continuous beta that's going on. You're on the leading edge of having to do that change, because you're seeing new start ups every single day. How are you thinking about keeping on top of things and being able to really evaluate these entrepreneurs that are pitching you ideas in spaces that you might not have never had experience in or done a deep dive as somebody pitches you blockchain or ecommerce or voice or anything else.

Joe Medved:      For us, we look across nearly every major industry, right. The only thing we're not really doing, we're not really doing biotech or deep in the stack infrastructure. But we'll look at most consumer and enterprise categories. We're one of the most active seed investors in the country, so we have the benefit of seeing a lot of deal flow. So we tend to see waves of innovation around specific segments, like one segment where we've been quite active where a lot of investors aren't playing is actually the cannabis sector, right? And we've now made a handful of investments in that space, and it's not an area where we had great expertise previously.

                                What we tend to try to do is just mine our networks as much as we can to find experts that we can reach out to, you know to provide some guidance to us. But even in some sectors like blockchain as an example, which could impact so many different industries, like the way we've thought about that segment is we want to make a handful of bets, and people who we just think are just great founders. Very smart, maybe they're people we've invested in in other segments in the past, but potentially they're great technologists, they have developed great products, they're just very smart people that are diving into these industries, and people who we think are eventually going to be nodes in these networks.

                                And honestly, from our perspective, their first or second ideas might not really work, but we just want to back the smartest people in those segments, and that will help strengthen our network and our expertise within those businesses. Now, the other thing you can do as well, Twitter is just the greatest tool, I think, for people in our industry today. I use it regularly, just to track emerging ideas across all the leaders in our ecosystem, but if you are specifically interested in a new segment, you can fairly easily go in and figure out who the influencers are in that space, in part based on follower count but just also tracking who is generating the most social media engagement around content that's created in that space.

                                It can be podcasts, it can be medium posts, it's newsletters, it's a variety of those things, but I find Twitter to be a wildly valuable tool. It's even honestly a great networking tool, connecting with people on Twitter, starting a conversation with them there can very easily lead to offline conversations as well.

Dave Knox:         So you hit on a really interesting part there as being an early stage investor, you have to pay attention to waves of innovation that are coming, but you also have to separate that from a fad. But you're making bets pretty early, before necessarily you know if that is becoming a wave or if it's just going to peter out and die. So, how do you assess that, and how do you make almost a willingness to take those early bets and see some of them die out before the wave starts?

Joe Medved:      Yeah, you just have to be willing to take risk, right? I mean I think generally with early stage investing, generally the thesis always is like you can make 10 investments, three or four are going to fail, you're going to get nothing back. Three or four will get you your money back, and one or two will drive the vast majority of the returns, right? And I think whether you're an investor, or you're someone working within a corporation and trying to drive change, you have to have that same mentality and be willing to fail. For us, it's really just ... we look at thousands of companies, we make two to three investments a month, which is still a very active pace.

                                But even, we may have a fund, our latest funds are around $120 million, we'll make 40 to 50 investments, only a couple of the companies within that portfolio will drive the vast majority of the value. But we just want to continue to back a lot of smart people who have a variety of interesting ideas. It's more challenging, I know, within a corporation often to have that mentality, but you have to give people the autonomy and the ability to fail, otherwise they're just less likely to really create something fresh and new that can disrupt the industry.

Dave Knox:         It makes total sense. So, you've been kind of uniquely positioned in your engagement within corporations because of Constellation and then Soft Bank, but you were coming in since [inaudible] meet with P&G back in 2008, 2009, well before most VCs were thinking about engaging with corporations. What kind of led you to that view of corporations being a good thing for an early stage company versus maybe a harmful thing, like some of your peers?

Joe Medved:      Yeah, it's funny. There's historically been a lot of arrogance on all sides, right? From the founders, from the investors, and from the corporations themselves, right. I think what I saw early on is that ... look, to disrupt a lot of these massive industries, one you want to be close to a lot of the people that are within those large corporations that are thinking about innovation. In part because those are the people that are likely to leave and start the new companies like I mentioned. And they really are going to have expertise and networks within those segments.

                                But part of it is I do think corporations can be very helpful. And look, we played that card at Soft Bank, I think in a good way. And we were uniquely structured, at least for the time in that we were really structured like a traditional fund. So, the partners involved were all putting their personal capital into these businesses. And effectively when we made money ... sorry, when the founders made money, we made money. So, if we were going to drive a partnership with someone like Soft Bank, we were going to make sure that it was a fair deal, because it would economically impact us.

                                Now, we also had to balance our money that was coming from Soft Bank, right? So, we have to do things that are favorable to them as well. But, I think it's set up a good relationship where as quasi corporate investors, we could really operate like a traditional supportive institutional VC. And I think you've just seen corporations shift more and more to that type of format, because if you don't ...

                                And look, there's this massive wave of new corporate dollars in the venture world today, and sometimes, the out of the gates, the thinking is "I'm the 800 pound gorilla in the room, I'm going to set up like I want to write a first refusal to purchase your company, or I want a percentage of your revenue." When you take that strategy, which I think had been done a lot historically, you're going to fail. It's adverse selection.

                                Because even where we said we're one of the most active investors in the country and I can't take credit for this, but I think the Lerer Hippeau team has just built an incredible brand, even so, for a lot of the best deals, we are fighting to get into those deals, right? We work very hard to develop a platform with great resources so that entrepreneurs speak well of us as very supportive investors. So, we need to bring that with us to get into a lot of the best deals.

                                So, if you're known in the start up world as being some kind of corporate investor or partner that's going to take advantage of founders, that news is going to travel so rapidly within and you will fail. But I think we've seen a lot of that activity kind of flush out of the market, because people have realized it doesn't work. So, there's still people that operate in the wrong way in that regard, but I think generally we're seeing more great corporate investors coming in and acting more like traditional VCs.

Dave Knox:         So, as you see this rise of corporate investors, you historically have the corporate VCs involved, but then you have the marketers and the business leaders that are also involved. What are you seeing work and not work in terms of those two groups not often reporting up to the same person, representing the company the same way, not tripping over each other. Any lessons that you've seen from being on both the Soft Bank side and now Lerer Hippeau?

Joe Medved:      I think the best strategies are when the unit that's focused on innovation has a relative degree of autonomy from the mothership, right? Because if it's the job of that team or those individuals to help drive innovation and disruption of the industry, if they need to get approval from the business unit head, you're dead on arrival. That strategy does not work because that person is not going to want to risk their P&L, or they're just going to look at the world very differently than a new founder may. So, I think you need to be willing to have somewhat of an arms length relationship there, where you can allow people to have some autonomy.

                                Because if it's their job to get ahead of the market, you have to let them invest ahead of where you're willing to go. So, I think when you have teams that are very independent, particularly if you want them to lead investments, you almost need to have that structure. If you're part of an organization that's not quite willing to get there yet, I think another good strategy is to have a team that might focus more on following on with other traditional VCs, where you're not necessarily going to come in and lead the rounds, you're not going to come in and ask for any owner's terms, but you're going to be a great partner to someone that wants to come in and lead the round, and you can establish relationships with really high quality firms that want to find strategic partners who can help with ...

                                Maybe it's distribution of product, or helping raise brand awareness or some kind of other partnership piece. Or maybe they want to use you for diligence. As we look into new sectors, we like to find strategic investors that can help us assess the value of a potential business. So, I think if you can be the best friend of the traditional VCs, I think that's another good strategy.

Dave Knox:         Love it. Yeah, that's great advice. So, final question, I mentioned in the beginning. You're a Cleveland fan through and through. Now, I want to make the parallel that you've had to have patience as a Cleveland fan. So, what has that taught you about the patience of venture capital?

Joe Medved:      Well, patience is key. I've been a Cleveland sports fan since I was born, and I've seen one championship in my lifetime, which is wildly painful. I do think, to be a start up investor, or to be a founder, you have to be wildly patient and kind of like being a Cleveland sports fan, you have to be a little crazy, too. Because you have to believe that the unbelievable can happen. Ultimately, if you're founding a company, you're nuts to do it, because the odds that you're going to succeed are so low, right? But that's why when they do succeed you have an incredible outcome and it's so well deserved.

                                And investors obviously we're spreading our risk across a number of baskets, so we're not going to make the same return and we certainly don't deserve the same return as the founder. But we're also a little nuts to invest in this space, because most investments fail. So, I think like being a Cleveland sports fan, you just have to be willing to gut it out for many years. And the other key thing is you just have to try to find a great leader. You've got to find a LeBron James or god-willing a Baker Mayfield as the next great leader in Cleveland. You need to find someone to lead people up a mountain when death is nearly certain.

                                Someone who can really convince people to work hard and take massive risks, to actually drive home a win.

Dave Knox:         I love it. And then you unlock the beer fridge when you get the win finally.

Joe Medved:      Yes, there you go.

Dave Knox:         Awesome. Well, Joe, it's always a pleasure. We're here for the centro fuse annual meeting, so we're going to head off, and I appreciate you taking time to sit down.

Joe Medved:      Thanks for having me. Always a pleasure.

Dave Knox:         Thanks so much for listening. If you like the show, hit that rating, and make sure to subscribe so you don't miss a single episode. And for more resources, head over to predictingtheturn.com.