Selling Group Nine Media, The Evolution of New York's Startup Scene and The Future of Digital Media with Ben Lerer, Managing Partner at Lerer Hippeau

0:00If you don't actually do it, then that is like a pretty negative signal. I think that we, in 2021, forgot that building a business was really tough. What I ended up doing was taking all of my psychosis and all of my anxiety and all of my concerns and bringing them over to... What that was like during that transition in 2022. But that's slow. We have$1.2 billion under management. Hello, I'm your host, Mike Gelb, and this is the Consumer VC Podcast brought to you by Propeller Industries. Propeller Industries is a leading strategic finance and accounting partner for venture stage companies. On this show, we discuss the intersection of venture capital and consumer innovation.

0:40And if you're enjoying the show, please like and subscribe on YouTube if you're listening on YouTube or whichever platform you're viewing this content on. If you're listening on Apple or Spotify, please leave a review as well. If you want to make sure you're in the loop and you want the full experience, you can subscribe to the newsletter at theconsumervc.com where you'll receive new episodes and weekly updates of all the consumer deals that are happening. All content episodes are for informational and entertainment purposes only and is not investment advice. Our guest today is Ben Lair, who is a managing partner at Lair Hippo.

1:13Lair Hippo is a venture capital firm based in New York City who were early investors in Warby Parker, Glossier, and Topicals, for example. He also founded Thrillist. Thrillist is an online media website Ben founded in 2004 and was also the former CEO of Group 9 Media until it was acquired by Vox Media. Yeah. We discussed that acquisition, actually. That's what we started off with. Why he sold Group9 Media to Vox, why he transitioned to VC full-time, and the evolution of New York's startup ecosystem, what New York was known for, what it's known for now, and also the goal of when he actually backs a company.

1:54Without further ado, here's Ben.

2:01Ben, thank you so much for coming on the show. How are you? I'm well. Thanks for having me. Really appreciate you taking the time. So last year, you transitioned full-time as a VC. I know obviously you were investing as well, obviously part of Layer Hippo and everything like that. But I believe you transitioned to investing full-time in 2022 after Group9 Media, which you were obviously the CEO of, sold to Vox. It's a really interesting time to be in BC. What have you, and kind of like the first year or two investing full-time, what was it? Can you talk to me a little bit about what that was like during that transition in 2022 and how are you seeing the market today?

2:49Yeah, absolutely. Well, it's been sort of a funny ride. So we started Lira Hippo in 2009, 2010, and I was building Group 9 and sort of doing two jobs at once for what turned out to be much longer than I expected to do two jobs at once. And I think, you know, interestingly, you know, A, you had just very consistent growth in sort of like the venture market in the, you know, early stage tech sector for a decade, like an extremely long bull run. And I started my investing at first, you know, hobby and eventually career, I guess, at a time when we were coming out of, you know, sort of like the 2008, 2009 tech blow up.

3:44And venture investing was this wonderful distraction from the realities of grinding through being a CEO and an entrepreneur and an operator. and I don't think I fully appreciated how, what a fun time it was. And it was sort of just this like this other thing that I did, I spent a ton of time on it, but it was in a very favorable market. And when I, I was eager to sort of get over to investing full-time when I finally sold Group 9 and made the change, it was at essentially the moment that the sort of, you know, correction was happening or beginning to happen in venture. And so it's been a really, I would say a few things have happened.

4:36One is, you know, I had, I sort of had emotionally put my stress in my operating job and let, and VC was this departure and this sort of like creative expression thing for me. What ends up happening, and this is partially how I'm wired, is I make the switch over from being an operator as my sort of like primary day-to-day job, albeit I was super active writing a ton of checks here and co-leading the firm, but it was the other thing. And so what I ended up doing was taking all of my psychosis and all of my anxiety and all of my concerns and bringing them over to the fund and doing that at a time when the market is more challenging.

5:25I think that this is a really healthy and sort of good, I don't know, like when things are too hot, things need to cool down. It's inevitable and sort of the pendulum swings. I think we're in a really unpleasant and uncomfortable part of the pendulum. And so admittedly, I'm of two minds. On the one hand, I'm doing the job I want to do for the rest of my life. I'm so proud of what we've built here. I love our team. I love our portfolio. I think that we've done a really good job and I'm so excited for the future. On the other hand, anyone who does not acknowledge that this is a really hard time and a really stressful time to be a venture investor is either very naive or being disingenuous.

6:08And so it's been a real transition and I'm working really hard and And we're really working hard and grinding through this market. Yeah. I mean, certainly these last couple of years have been very challenging, especially when you compare it to a low interest rate or zero interest rate environment that we had over the last 10-year period from the time before. Why in 2022? I'm just curious. Why in 2022 do you feel like it was the right moment to kind of sell Group9? I don't know. I'm a believer that companies generally get bought, not sold. And so I wasn't running a sale process with Group 9. I had, you know, I think built good relationships with the folks who I thought might be natural acquirers.

6:58And, you know, a bunch of things were happening in sort of the macro market and things were happening in our business and in some of our peers' business where it was a moment where I think consolidation in digital media was inevitable. And there was, you know, there were buyers and there were sellers. And I actually thought that I was buyer. So the conversations that I was in market, I was in market positioned as a buyer. And in one of and through some of those conversations, it turned out that other people thought they were buyers, too. And one of those was Vox. And so I ended up being the seller.

7:33But, you know, I didn't come into 22 saying I'm going to go sell the company. I came into 22 saying, I want to try to create enterprise value. I want to try to build this. And it turned out that, you know, the decision forward was the best path was to build it with Vox versus independently. Got it. Got it. That makes, that makes a lot of sense. And interesting kind of turn of events there with, um, with thinking you were actually a, uh, a, um, a buyer, but then you actually turn out to be a seller. So that's great. And, um, that's, that's awesome. Um, and you know, I mean, what I think of obviously like layer hippo and I've had a couple of your um your colleagues on um which has been a lot of fun to host them and I and you know I think layer hippo obviously I had to think about New York and and the New York startup ecosystem and and and you all were were there from there from like the beat from from kind of the beginning um um from the startup investing period in New York and um New York was known for back then just because they had you know many more companies and what have you in consumer.

8:34So, and obviously you all were kind of the leaders of that kind of moment with obviously Warby Parker, Casper, Everlane, BarkBox. But, and obviously I know Larry Hippo is also a generalist firm. You don't just invest in consumer. You do invest in across different categories, but how are you thinking about, and I guess when I say consumer and think about consumer, I'm thinking about inventory-based businesses. How are you thinking about investing in inventory-based businesses today? So let me add something right before that, which is our strategy here has always been, and this may sound cliche and lots of early stage venture investors say the same thing about talent, but our strategy has been about talent.

9:23It's always been about finding people that we think are excellent and are going to build great stuff. And New York, when we got started 12 years ago, in New York, for the first five, six, seven years of the existence of Lira Hippo was a market where I think a lot of the best talent wanted to go and build consumer companies. And in particular, a lot of the best talent wanted to go build inventory holding consumer companies. Folks looked at gigantic industries that had been around for a long time that had large traditional players that had not been disrupted. And there were new advancements in marketing and in supply chain and in a bunch of spaces that made opportunities to build new direct-to-consumer product companies very quickly.

10:08And so we followed that talent into that category and I think did a good job doing that. In the last five or six or seven years, a lot has changed in terms of the size of the opportunity to go and launch inventory holding consumer businesses. The traditional companies that were ripe for disruption, in some cases already got disrupted, in other cases got smarter and became and modernized. Some of the sort of unfair advantage arbitrage-y moments that existed with various acquisition strategies, like when, you know, Instagram first turned on advertising, for instance, those channels got flooded and stopped working as well.

10:55Obviously, iOS, you know, 14.5, like, broke a lot of the, you know, the sort of like back end data infrastructure that created some of the really efficient acquisition spending, you know, etc, etc, etc. And so what we've seen over the last few years is a lot of the best talent that five, six, seven, eight, nine, ten years ago maybe wanted to go and build these sorts of Warby Parker of businesses are now saying this may not be as ripe an opportunity or as great a space. And I think that that then gets compounded by the fact that you had a lot of not just early stage investors, but late stage investors pour a ton of money into these businesses that grew really well from zero to one or one to two or whatever, you know, that got to$20 million or$50 million or$100 million.

11:46And then as they got larger, where I think the original thought had been these businesses are going to become better businesses, acquisition got more expensive. They, you know, going and being omni-channel led to margin issues. Companies overextended their SKUs and got into inventory problems, blah, blah, blah. And so now where you've netted out is later stage investors, particularly later stage tech investors, are much more risk off in terms of backing these kinds of inventory heavy businesses. And so as an early stage investor, I have to A, go and say, do I think that this is where the best talent is going?

12:29And B, who is going to continue to finance these businesses in the future after they get to series A, B, C, when I know a lot of the folks who had funded the last generation are not going to show up for the next generation. And it's led to a massive slowdown in the number of these companies that are getting started and funded and also a slowdown in the number of deals that we've done in that space. Do inventory-based businesses, do you find, have the same return profile, for example, from software tech companies or the traditional venture model? There are clearly examples of companies where that has been the case.

13:07There have been real venture returns created by product companies from the last generation and from this generation. I think that they are – by the way, and this is the same for software. I think we were in a world that these businesses were easy to build and then everyone thought that you could go build any SaaS business. And then that's like the holy grail and easy. Like everything's hard. Everything is hard. But the reality is that history has shown that a low percentage of these inventory holding consumer businesses have driven really significant venture returns. Some of them have. We have been one of the funds who has been fortunate to be in a number of those companies.

13:49But generally speaking, it's been a hard category and there's been probably as much death and destruction as there has been real solid returns driven. And so it's just a space to approach cautiously. It is a space that I think we continue to have an unfair advantage in. We know what the profile of these founders looks like. We've been around these businesses and seen, you know, great stories and seen mistakes made that I think we can help people avoid in the future. But broadly speaking, these aren't software margin tech leverage businesses. They have different dynamics, and so it's harder to drive extreme venture returns.

14:35yeah i mean what what i've kind of found with just talking with um a number a number of investors and um is even at the early stage thinking about like portfolio construction might look a little bit different if you're investing in consumer brands versus like technology companies because with consumer brands like maybe like the ideal return expectation is maybe like a let's say let's call like a four to six x return or you know on investment which is still really strong or or an 8X return. And maybe the outcome is in the hundreds of millions as opposed to the billions, which that's kind of the ideal outcomes on the tech side.

15:15But that's a great point. I would say that this applies to the market broadly. I think we got into a world where the cliche, I don't invest in million-dollar companies, I invest in billion-dollar companies. Like the idea was early stage VCs coming and going, if it's not a billion dollar idea, I don't want to do it. And if you actually look at the history of venture outcomes, the average venture exit for a successful exit is in the$100 million range. Very few companies become billion dollar outcomes, software, or, you know, physical product commerce. I do think that rewiring around how do we invest into a business, both at entry price and at the amount of total dilution and capital that's going to be brought into this business over time so that we can drive alpha as a venture fund with two and$300 million exits.

16:14Like every company is not supposed to be a billion dollar company. Where you get into trouble is when you raise hundreds of millions of dollars for a business to drive a venture outcome, you need to be worth billions of dollars. But what if you can have a model where you can be self-sufficient and still growing nicely, raising, you know, sub$20 million over the lifetime of your business? Well, if you can go sell that business for two or$300 million, you can drive great returns. I know this is like, obviously a tough market to, to talk about this in, but like, how do you, what do you make an investment, you know, at the C stage?

16:47Since I know that, you know, that was kind of like the founding of Lair at that stage. But how do you also like make sure that you're partnering with like the right company and that kind of like maybe like understands that, hey, like we need to go out. And again, this is probably not like the best market to actually say this in, but hey, like if the opportunity sees itself, like maybe it actually might not be the best thing for you to raise like hundreds of millions of dollars. Maybe we go seed series A, series B, and maybe like that's it or along your like trajectory. We have very explicit conversations with folks before, during and after our sort of courtship and, you know, beginning a relationship about this stuff.

17:27I mean, one of the first things that we do after we invest in a company during our onboarding, one of the messages that we try to land very clearly is that late stage capital is not your friend. This is not like the lack of alignment of incentives of a Series C or D investor relative to a founder is significant. And if we look at the best returns in our portfolio over time, there are outliers. But broadly, it's companies that raised less money and built businesses where they had more control of their own destiny. They got to profitability earlier. Or they, if not profitable, were not companies hemorrhaging cash on their way to try to sort of have someone pick them off before they ran out of money.

18:21The best way to get a good outcome is to have control of your own destiny, right? If you have to sell, you're probably not going to get the good deal. And so how do we encourage founders to be, to sort of subscribe to that belief that they're going to need to be capital efficient in their growth? Part of that comes all the way back to the kinds of founders that we pick to work with and that we try to work with. And I would say that we are biasing more towards folks who have been through the rigmarole before, people who are either former founders doing it again, people who have been on the executive team of venture-backed stuff that has been high-flying, in some cases, high-flying and overcapitalized and screwed up.

19:11Like, there's incredible lessons to be learned from being a part of a thing that made mistakes by overcapitalizing themselves. And so we think that some of those hardships are character building, and we're looking for people who have scars from learning lessons the hard way. Can you talk a little bit about how the incentives from Series C and Series D investors, for example, are different to the incentives of seed investors? I mean, yeah, I say generally, you know, last money in, first money out, much more risk averse, planning for, you know, they want to, they're planning for their, you know, two or three X.

20:02and they are, you know, we've seen this an infinite number of times. They invest in a thing. They want to see it working and be sort of like an outlier in terms of growth for them. If it's not, they lose interest, their last money out, and they just are trying to play defense and make sure they get their money back and can move on to the next one. That's the late-stage investing model. Uh, and, um, you know, I think one of the, one of the scary things that, that you sometimes have to just be honest about is, you know, how, how much do I want a check, a company to work that I put a million dollars into?

20:44I think for a while, someone who wrote a$50 million check or$100 million check, I naively early in my career was like, oh, my God, they want this to work. They need this to work 50 times more than I do. And the reality is their fund is 50 times the size of mine. And, you know, not to say that I don't really want my million dollar check to work, but like part of the business model is that sometimes it works and sometimes it doesn't. And that's part of and you accept that. And I've found that that is the reality for these later stage funds. Not everybody, but for many of them, which is, hey, I put$50 million in.

21:21It turned out I was wrong. Hopefully I go get my$50 million back as I'm, you know, top of the cap stack. And then I can move on to the next one. Meanwhile, that's a terrible outcome for founders. Defensively going to try to repay the cap stack and last money in. Are you kidding? Like, you know, you just put seven years into building this thing. You're the last money out. You need to create real enterprise value. And so huge, huge misalignment there.

21:53And, you know, I would also say for the most part, you know, when we're your early stage investors are investing in you, your late stage investors are investing in your company. And those are two different things. This episode is brought to you by Propeller Industries. If you run a high growth business and you're focused on profitability, extending your runway and improving your operational efficiency, you probably need a finance and accounting whiz that will grow with you. Well, instead of hiring someone full time, what would be cost effective is working with Propeller Industries. Propeller Industries is a leading strategic finance and accounting partner for venture stage companies and has partnered with over a thousand startups and high growth businesses across consumer products, consumer tech, and enterprise.

22:34Some of the brands that they've worked with are Liquid Death, Olipop, Hims, Farmer's Dog, Away, MoviePass, and Giphy. Propeller also provides specialized support for fundraising and M &A with transaction advisory services. Propeller's TA team of former investment bankers and investors can step in on more of a project basis when pursuing full-scale financing and M &A. There's a link to Propeller Industries in the show notes if you want to learn more information. so obviously you've had i think um if if if if i'm correct eight seed funds like you're on i think you're on fund um fund number eight on on on the seed front size on the select side i believe you're on fund number four um that's right um so how how large is it is like the fund eight seed size and how do you even think about how big of a of a um of as a dollar amount like when it comes to your strategy, we can dive in a little bit of your strategy.

23:31What the ideal fund size is for seed? Yeah, it's a great question. I think what you've seen over time as the sort of more and more interest has come into venture broadly is you've seen fund size get bigger and bigger and bigger. I mean, there's now people who have$500 million,$600 million seed funds. That feels really big and hard to sort of rationalize as a business model, but AUM is attractive to a manager, right? Assets under management means fees means, yep. And for some of these funds, it's a lot more than 2 % or a little bit more than 2%. So, yeah, I think what you see is there's been a drive towards larger funds.

24:18That is a shared fault. LPs have been there to provide those dollars and GPs have taken the money. And it's not like GPs did something wrong or LPs did something wrong. The whole space got overheated and funds got too big. Our funds have gotten bigger, sort of like incrementally fund over fund. and there's a few reasons for that. One of them is going from our first funds to where we are now, our ownership has grown. And so in the early days, we might have owned one or 2 % of companies. Now we're owning 10 % plus of companies. And so there is natural growth that comes with that. I think if you are a seed fund and you're trying to move up to own much more than 10%, you have to make some changes in your model because you can't be collaborative.

25:08Every deal that we do, we're collaborative. We're working with other groups. We're taking 10 % of usually a 20 or 25 % dilutive round. And so we're able to work, you know, generally I'd say really nicely with other funds who we think add value, who we like to work with, who founders have preexisting relationships with, or who founders think are going to be great partners, et cetera, et cetera. And so it's important for us in terms of how we source deals and how we sort of participate in the ecosystem that we are not going and trying to gobble up 15 or 20%. I think the funds that move into 15 or 20%, it feels really good because they're able to say, well, I have lots of ownership.

25:46I think that you limit the pool of companies that are ultimately going to want to work with you and the deals that you're going to see because you shut off some opportunities that are not looking for one singular partner from a founder perspective or some deal from other venture funds and angel investors who don't want to share a deal with someone who's going to try to gobble the whole round. And so our check sizes have gone up. We now make between 40 and 50 core investments in each fund. That's a strategy that we've executed now for several funds. And we think it's a a strong position where we have both enough variety that any, it's sort of the right size where any single company can be a fund returner.

26:33So we have enough shots on goal, but we don't have so many shots on goal that we end up being an index fund of sort of like, you know, broad, like what does seed in New York look like? Yeah. And so we're, you know, we think we have the right mix of concentration. And it's something that we revisit every fund. We've also, you know, over time made slight tweaks or maybe in some situations more significant tweaks to how we think about reserves and, you know, money for original checks versus following on. I think, you know, we've learned over time that we think follow on capital is important for a bunch of reasons.

27:11One, we think it's important to the best founders to know that they're going to have supportive capital down the line if they do their job from insiders. I think it's an important signal in the market. And so it's something that we want to do in terms of being able to get into the best early stage deals. We also think that when we have sort of an unfair information advantage or any insider has an unfair information advantage of understanding how a company is behaving. And so knowing if there are places that we want to, you know, put more money in and buy up is a tool that we can use. And then I do think that over time we've seen that, and we're seeing it in this cycle, you know, five, six, seven, eight, nine, ten years later, you can have really great companies take a stumble.

27:57Not a huge stumble in some situations, but a stumble, need capital. And if you're one of those companies, then you take a stumble and you need capital in a market like this, the folks that are coming in to save the day are predators and are doing, I think, are just really, really, really trying to take a pound of flesh. And that can be really problematic for the early stage investors who don't have late sort of reserves years down the line. And so thinking about how we are able to be defensively minded because you never know when you write a seed check what the series B or C or D market is going to look like years down the road when those companies are raising money.

28:41And if it's a market like this one, you may find some pretty unpleasant outcomes if you're not set up with a little bit of cash. So is follow-up pro-rata capital actually a good thing, especially in today's market? Because on one hand, yes, it is like a positive signal, right? It is a positive signal that you're following on. And of course, as a seed investor, for example, looking at having future investors to be part of the company's journey, you obviously know probably the most about the company since you've been working with the company since you've invested in the past. But if you don't follow on, if you don't actually do it, then that is, I would think, a pretty negative signal for the company.