Episode 08 - Ignoring Hype, Trusting Data, and Disrupting the Venture Industry w/ Paul Martino of Bullpen Capital



Episode 8 - Ignoring Hype, Trusting Data, and Disrupting the Venture Industry w/ Paul Martino


Paul Martino:                Venture is a very funny business. Even though we're funding disruption, the vast majority of people in venture do it all the same way.

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 here with Paul Martino the founding partner at Bullpen Capital. Paul start off, love if you could tell us a little bit more about your background and what led you start Bullpen.

Paul Martino:                So I'm a now, I guess, six time founder. I was a four time founder at the time at which I started Bullpen. Then I started Bullpen which was number five and then we actually incubated a company in our office, that's number six. I did my Ph.D work in the mid-90's and everything that people would call big data, I did at Princeton University in '95, '96. I grew up in the Philly suburbs and I started my first company when I was still in high school, which was a game company in the old bulletin board days. So that gives you an idea kind of what the background looks like.

                                    Always wanted to be an entrepreneur. Never ever wanted to be involved in a career path that was assigned. Like my brother's a doctor and it was like well, when I'm this old, I'll do this and when I'm this old I'll do this and when I'm this old, I'll do this. Don't get me wrong, God bless him. That's exactly ... We need a lot of doctors. I just knew anything that was that prescribed was never gonna work for me. So I had to be on that, let's go make it up as we go along path and sure enough, entrepreneurship was the right way to do that.

Dave Knox:                   I love it. So one of the things you've talked about is that venture capital is all about disruption. But, it's an industry that for 50 years, never disrupted itself. How are you doing that disruption with Bullpen and then mention of this post seed round as you call it?

Paul Martino:                We're just one of a very small number of funds that actually in my opinion do anything different. Venture is a very funny business. Even though we're funding disruption, the vast majority of people in venture do it all the same way. They have a better knowledge of a business or as I kind of jokingly say, they look better than the person next to them, therefore; you'll take my money. And it becomes a branding exercise.

                                    And my ratio is about the following. I can give you 10 venture people in a room, nine of them are trying to look better, sound better and know more about a category than everybody else and you're gonna get that one out of 10 people who's actually trying to do something different. So Bullpen is certainly doing something different. Josh Kopelman was doing something different. Andy Rachleff when he started Benchmark was doing something different.

                                    But the list is short and of this last decade, of the now 4 or 500 micro funds, no way there's more than 20, 25 of us who I would sit down and say, "Let's start from a blank sheet of paper. Let's go figure out what's broken in the business and try and fix it." I find that to be unacceptable in the business. I find it just ridiculous that there isn't more self introspection in our business. Especially since our businesses are out funding disruption. There's a certain deep irony to this.

Dave Knox:                   Yep, without a doubt. So one of the ways we've gotten to know each other is through Fullpen, which is one of your ways of doing something different. Outside advisors you bring in. So what is Fullpen and how is that part of the fund of what you do?

Paul Martino:                You know what? That's the first time I've gotten that question. Obviously you're perfectly qualified to ask it, but it is actually quite on the mark. So, when we were thinking about what we would do about venture partners at Bullpen, we're like, well, I was in EIR once. I was a venture partner once. Actually most of us in the fund, we had either done an EIR gig or had done ... With an EIR gig, it doesn't make any sense. You quit your day job to go and sit in somebody else's office for six months. Wait a minute dude, isn't the value you have where you work? So quit where you work and access you have to come sit in my office, oh by the way, none of the partners would show up to?

                                    So Duncan and I and Rich in the early days were sitting around going, well, what would our riff be on a venture partner program? We said what if we had 6 or 10 domain experts who were a virtual management team. Someone who was really good at branding. Someone who was really good at marketing. Somebody who's really good at sales. Basically a virtual management team and they had carry in every deal. That's another thing I think a lot of firms get wrong. The venture partner riff is you get carry in the deal you help. No dude, I want Dave Knox bought into my whole portfolio.

                                    And so we said, let's do an informal program where all the participants are actually carry members in the entire fund. Let's meet once a month and let's have them keep their day jobs. You weren't allowed to quit your day job. If you quit your day job, I don't want you anymore because the main value you had was that you were the Chief Executive at such and such. You were the Chief Executive at Topix. You were the Head of Customer Acquisition at Zinga. You're the Head of Digital Advertising at Rockfish. Whatever it was. That was the value proposition.

                                    And then by the way, we inadvertently solved another problem. Another problem you have a lot when you run a venture fund, is you run into an old friend or someone who's looking for a job or their next gig and they go, "Wow, I'd love to kind of network with you and meet you and talk everybody." So what do you do? You have them come to the office and maybe one or two of your partners is around. Well guess what? Once a month, everybody including Fullpen is in the office. 20 of us. Fullpen, 10 to 12 people, all the partners, all the employees. There's 20 of us. So guess what, I can invite one or two friends every month to a Fullpen session, they can meet everybody in one fell swoop, raise their hand and go, "I'm looking for a job." And if we can introduce you to 10 opportunities by the end of the day, shame on us.

                                    So in a weird way ... This is what's funny about being an entrepreneur. We were out to solve one problem, which is having more value and impact for our portfolio and we solved another problem, which is networking outsiders into our pool better and that's why more people in venture should actually be entrepreneurs again, because maybe you'll go solve a new problem.

Dave Knox:                   Yep. Love that. One of my favorite things of the Fullpen is that it's probably every single month, one of the companies get done with their meeting and they go, "That sure as hell wasn't what I was expecting." So how do the companies ... What do they even get told when they're about to walk into this room

Paul Martino:                Yes. So the meeting is so different and unusual that we've gotten ... I read the riot act to whoever the inviter is. Frequently the partner and then general head of operations will follow up. Because I don't want anyone sitting there going, "I don't understand this. Why are there 20 people in this room?" I'm like look, the pitch is simple. You've got the partners, you've got the advisors. Everybody in this room is someone who potentially could either invest in you or help your company. And you know as well as I do, how many times did you become and advisor to a company that the Bullpen did or did not invest in?

Dave Knox:                   Exactly.

Paul Martino:                And so once we explain to the people who come in, the two to three companies every month, that you're in a unique spot to be showcased to a much broader part of the ecosystem. But they're confused. Christine Herron who's a venture person from Intel is sitting there like, "I don't understand." Intel's with another fund, why does she sit here?

Dave Knox:                   Am I pitching Intel?

Paul Martino:                Yeah, am I pitching Intel? And so we have to do a good job explaining why this is such a valuable hour of your day to our entrepreneurs. And yes, every once in a while we do a poor job of that. And the poor entrepreneur is like, "What the frick is this?"

Dave Knox:                   I love it. So one of the things you talk about is Bullpen is about ignoring hype and trust new data.

Paul Martino:                Yes.

Dave Knox:                   So that's a lesson any company can learn. Big, small, investor, marketer, etc. How do you really use data to ignore hype? How do you put action behind those words?

Paul Martino:                So what we figured out was remarkably simple. And this is only because so few other funds do it. I am imagine if we were in a more data driven business, this wouldn't have worked because the low hanging fruit would have been picked already. Let me tell you the secret of what we do. It's actually remarkably easy.

                                    So, we're looking for companies that no one else is paying attention to, but there's a reason you should be paying attention to. We're looking for the false negatives of the ecosystem. Those false negatives fall into a couple categories. The founder is from an unsexy school. The company's in a weird geography or the category is out of favor. You know the venture [inaudible] guys deemed that to be a bad category this particular year. That's like pink being in and purple being out, or whatever it is. There's a little bit of fashion associated with it.

                                    So if you want to find companies that are doing a good job in spite of being off by one of those three characteristics, why don't you start with actual metrics of the business. So what we do is we invert the screening funnel of the way most venture funds do it. Most venture funds say, who are you, where'd you come from, how did you meet me? How warm was the lead? Is this a founder who can move mountains? By the way, we ask all those questions, but we ask them at the end, not at the beginning.

                                    So a normal venture fund, who are you, where'd you come from, how do I know you? How warm is the lead? Oh, do I like the business? Down the funnel, down the funnel. Oh, analysts, go look at the financial model. We do the opposite. Oh analyst, look at the financial model before we even take the meeting. And so now, by starting with the financial model which is usually the bottom part of due diligence, we're able to screen a completely different subset of the companies. And oh by the way, this is not automated. Some people every once in a while come to our office, they're like, "Let me see your super computer." I'm like, No, dude. No."

                                    It's remarkably simple. Any analyst can be trained in a week on the key metrics that we're looking for to say this is a company even though the founder used to be cocktail waitress in Florida doing cosmetics, this is one you need to look at. That's Ipsy, right? We have companies that look like that, but if you start it with the background of the founders, you wouldn't have ever looked at that company. But like the true money ball ... Money ball's approach wasn't find guys who can hit home runs, it was find guys who get on base. But guess what Billy Beane, had to go do? He still had to go watch the guy bat.

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Paul Martino:                So this is where the art meets the science. The science says which company should I look at that no one's paying attention to, but the art of it is, I gotta still go watch that company swing the bat. And so if I look at a different subset but then make venture decisions at the bottom of the funnel because they get on base, we're gonna find a completely uncorrelated set of companies that actually match the venture screen, but I'm gonna go look at a set that no one else looked at, and that's the magic of Bullpen. Isn't that there's a super computer, it's that's if I start with the numbers and go with the gut last, I'm gonna play the game the opposite order almost everybody else in the field does it.

Dave Knox:                   I love that. So talk about place where you played different. So one of my favorite posts you ever wrote was, "Vice, Virtue and Vision." And you talk about that at Bullpen, on a rare occasion, we attempt to predict the future. While our bread and butter is stage and milestone based investing, i.e, post seed, everything you just talked about, we do occasionally play in the traditional venture sandbox of the manic investing. What did you mean when you said, that "The history of venture capital is filled with bold predictions of a future world?" So start there.

Paul Martino:                So first off, it is, and almost all of them are wrong. Right? That to me is irony. This is why it's almost verboten. It's not completely verboten, it's almost verboten to predict the future in the office. Because we find that it's pretty dang difficult to predict the future. And oh by the way, there's a certain of ego and uberis that you fill yourself with if all day you're attempting to predict the future.

                                    Now if every once in a while, you literally are sitting in the cat bird seat and you're the only person who can see it, well damn it, go with it. You know this happens a lot in enterprise software or in deep tech. Literally, there's only three people in the world who could build the thing. I know one of the three people that can build the thing, guess what? I have unfair knowledge.

                                    So in the case of vice in general, in particular around gaming and gambling, we were inbettible, we were [inaudible] we were in jack pocket, we were in derby jackpot. So we had horse racing, we had lottery, we had fantasy sports and you know what? A case comes in front of the Supreme Court that's likely to legalize sports betting, you know, maybe this will happen once in my career, maybe twice in my career, where I really wasn't predicting the future. I actually knew something nobody else knew.

                                    To me that's the big difference. Predicting the future is I have a thesis about how the world should be. I don't have any thesis about how the world should be. I just knew that there were a couple things that were likely to happen because I had unfair knowledge over everybody else. And to me, that's the difference in if you show up Dave to my office with unfair knowledge about something, God bless you. If you show up saying, "Well, you know, self driving cars are gonna change the universe in this way 20 years from now." I'm gonna kind of laugh a little bit. I mean we're in SpotHero which is one of my favorite examples of this.

                                    So everyone has these thesis's around self driving cars. They're gonna do this and do that and CEO of SpotHero comes into my office one day, and this is before SpotHero had become the big time winner, which it looks like they're the winner in on demand parking. He said to me, "Yeah, that's awesome, but you know eventually all those self driving cars have to go park somewhere right?" It takes a Midwest guy from Chicago with simple sensibilities to cut to the chase. Eventually the car's gotta go park somewhere. So I don't care what the future of self driving cars is, I have a good business. And so that kind of much more practical application of the future is interesting to us than what the actual geography of cities will look like 20 years from now because self driving cars will be blah, blah, blah. That seems really hard to do.

Dave Knox:                   Yep. I love that. So, playing up on that one more. So you talked about sports gambling, but what you talk about really in that post is that what happened is yes, this piece of legislature, but the place before that was the recession. 2008 happened, that meant the government needed to look at new revenue streams. New everything. I talk about that's second order of consequences. As human beings, we're really good at cause and effect. We're really shitty at thinking about this happened, so here's the potential things that might play out for it. What led you from great recession to renewed revenue streams to these vices that might be out there?

Paul Martino:                So again, I don't want to get too much credit and I mean that not in a humble, brag way at all. I want to make sure you understand what direction the arrow goes at Bullpen. Because the arrow really does go the opposite way at Bullpen. So we're sitting there waiting at 4:00 in the morning for the State of New York's legislator to decide to legalize or not, FanDuel. We got people in the State House at 4 in the morning. So it wasn't so much that we needed to predict the future. We saw what was getting horse traded at 4 in the morning between the groups and understood the way that legalization would go to both oversight as well as taxation, which would be a cash cow for the states that were strapped.

                                    So the arrow again, kind of goes in an opposite order. Not that, "Oh my God, there's a great recession. What will be the businesses that we need to go in?" Which I think is the unknowable, impossible thing. On the other hand, while I'm sitting in the State House, I have unfair knowledge about what these legislators are doing. Oh by the way, this is gonna happen in California next, it's gonna happen in Pennsylvania next. Oh by the way, they asked us to help draft the legislation.

                                    Oh, I see why all this is happening. It's because they're so upside down in their pensions and they need the money. So it's much more pedestrian. Where as other people in the business give us some great application for how forward thinking we were. No dude, we were just in the trenches and got the data. Guess what? If you had the data Knox, it's not that hard.

Dave Knox:                   I love that. So let's talk about that ... You know, because predictions can't [inaudible]. You're a card player though. You love playing poker, go to the casino. So how do you get those advantages when you look at playing cards? It's not the hands in your ... The cards in your hand, it's knowing the table, knowing the players. Knowing where the turns gonna be about not knowing what card it's gonna be, but knowing how other people might react. How do you play that? How do you read people, industries and that's a science and an art that you're doing at the card table.

Paul Martino:                Yes. And I think the best analogy is the following and I've heard this said many times. I don't know who properly to attribute it to. In a start up, there is always at least one lucky break that happens. And the difference between that startup being the winner or not is how well they capitalized on the lucky break. This is where poker and startups are absolutely the same. If the turn card is the ace of spades, which I need. Am I gonna be able to pounce? And if it is, did I have enough money on the table to lay, the right read, did I set the game up right so if my card comes, I'm gonna make a lot of money. Or I'm gonna have a great company or I'm gonna build an awesome product.

                                    That's where poker and startups are just the same. Because people I think, again, start having this I can will the future, I can make my lucky break happen. You know what? Every once in a while, you can. I'm not gonna discount that. And there are a few entrepreneurs I've met in my life who really can almost break space and time. But you know what? For us mere mortals, I'll play enough games so that when my card hits, I can pounce. That seems like a better way to make money in the long run.

Dave Knox:                   Yep. I love that. End of the day, that's what predicting the turn is about. It's not about predictions. It's not about being a futurist and hoping. It's you put yourself as a company in position. Whether you're an emerging company, a big company or anything in between. So related to that, you've had a lot of portfolio companies, amazing successes that have gotten to that point of time to start partnering with a big company. You talked about SpotHero, they announced one with Hertz. FanDuel, which you sat on the board with, did a lot. From the NBA to Comcast, to etc. What do you tell all those companies when they start going down these partnership paths of working with legacy companies that might not understand innovation? What are the coaching you give them? The watch outs?

Paul Martino:                So here's the first stat that you might be surprised by even though you've been involved with our fund for so may years. 30% of the rounds we lead, we have a strategic investor as a co-investor. So one in three that we've done 90 companies, 30 times the strategic was actually in the round when we first met the company. So this is critical to our DNA. So we've invested with Microsoft and Salesforce and Intel. God knows how many times because a lot of times the company comes to us and says, "Intel will give me $2,000,000, but they want a third party lead, will you help me?"

                                    So this has been bread and butter for us. So if a third of them have it at the time of our investment, another third of them have a strategic show up in the first year. And then guess what? By the second year, 90% of them have added strategic to the table. And we have by and large embraced this. Again, breaking the mold of venture. A lot of times, don't have the strategic come into the round too early, etc., etc., etc. But since we invest after product markets that a strategics's almost never too early for us to come in.

                                    Now if you have an oligopolistic business and you want to pick one and alienate the other three, that's potentially a problem. You gotta be smart. If you're doing business with an ad tech company and you partner with Omnicom, well guess what? You might not be able to have WPP at the table, because they don't like each other. So there are issues with partnering with strategics. But 9 times out of 10, most of the issues that you come into are in your own head as opposed to in the actual business practice of what you want to go get done. So we enjoy partnering with strategics and we have found that [inaudible] strategics is actually a core value proposition what Bullpen does.

Dave Knox:                   It's so true that the whole thing of Sand Hill and traditional VC when we're starting to brand [inaudible], I can't even begin to count the number of times people said, well why would you want a P&G or a Nestle or somebody else involved too early? Aren't they just gonna influence badly, do bad behavior. It's kind of one of those analogies that a lot of big ... Or a lot of VC's say isn't good.

Paul Martino:                So I'll give you another one I like. This one I'll attribute properly. Mike Maples of Floodgate, good friend of mine. We're actually hosting fun event in December called "No Fleece." Mike is how I got in the business. He actually offered me a job to join him at Floodgate, which led to the brainstorming that eventually became Bullpen. So I turned down the job and joined the business anyway.

                                    He once said the following thing to me. "Whenever I meet someone who's card says Director of Innovation, I run." And so I kind of at first thought that was funny, but then more and more, I meet the person whose card said Director of Innovation and I find out that they literally were on some island so that somebody felt good about themselves in the big company. Whereas the business unit owner who had a problem to solve, was always the person you wanted to deal with.

                                    Sure, maybe the Director of Innovation can play tour guide for the company. But that's it. They don't have the budget, the importance and the wherewithal. I'm sure there's some examples and so someone out there is listening whose title is Director of Innovation. I'm sure a couple of you ar super awesome at that and make things happen and make green for your company. But most of the time, you're the tour guide until the business owner really gets engaged. And I see too many of the startups get engaged with the innovation lab of the company as opposed to the B.U., who really needs your thing. So make sure you understand you've got strategic alignment with the person whose business and life and bonus you're gonna affect.

Dave Knox:                   So true. So we've talked about innovation, we've talked about Bullpen. So you've talked ... You've got Bullpen, you've got the playoff fund which you just announced. You've talked about Money Ball. What led to all the sports analogies? And why has that been at the core of what you've done, besides just being a Philly guy?

Paul Martino:                It's actually really funny. It wasn't by design. It wasn't wow, I'm such a sports fan that I need that to be part of my life. It wasn't like that really at all. It just seemed like every time we were doing something, it showed up again. So the story of Bullpen, how we even got our name is attributed to Chad Durbin who was a pitcher for the '08 Phillies, who's an LP in the fund. Before Bullpen had a name, he was in our office pitching us, in between seasons, it was between 10 and 11 seasons, he won the World Series with the Phillies in '08. He was doing a sports recruiting website to match scholarships with high school athletes, called Showcase Youth Sports.

                                    We were as experimental as he was. We didn't even have a name yet. It was me, Duncan and Rich kind of screwing around in Rich's office acting like we had a fund. And Chad said something to us that went something like, all these things become myth at some point. But Chad said something like, well, you know you guys kinda do for the seed funds what I do for the starting pitchers. We're like actually, you're a bullpen pitcher and the starting pitcher runs out of gas, you go in to get him to the closer and we're like, yeah, we're the middle reliever between the starting pitcher who's a first round or a floodgate and the closer who's the [inaudible] or the sequoia.

                                    And so we went with it. And then it turned out we were doing Money Ball style analytics and then we invested in FanDuel and then next thing you know, we're in a whole bunch of sports stuff, but it wasn't like we stood up and said, "Wow, we're sports enthusiasts, let's find a way to do sports that are fund." Kind of happened the other way around.

Dave Knox:                   Like you said, every once in a while you have to be at the table and know when to pounce. And you guys pounce in the right way. So, awesome. It's been a pleasure. I feel fortunate that I've been involved with Bullpen as long as I have. I tell everybody, I think I learn more out of the meetings than I ever give in to them, so I appreciate the time.

Paul Martino:                Knox, glad I could come. Thank you.

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 Predicitingtheturn.com.