When to Invest in Consumer Technology with Vanessa Larco at NEA

0:00three metrics and it's still true for all companies three metrics but we were like hyperoptimizing for the three virality slash distribution, monetization, and then we needed retention, right? Like we needed people to retain because that was their CAC to LTV equation. So we put in all these viral gates, like we needed to get viral because that would bring out our CAC down. And then we needed to monetize because that would bring our, monetize and retain that would bring our LTV up. And we were just constantly balancing LTV to CAC, LTV to CAC, because that's how you kept going. And I used to have this curve that I would draw and maybe I can do it in my hands, but basically CAC rises, right?

0:37Over time because you acquire most enthusiastic customers at the beginning really cheaply. And then over time you have to spend and spend and spend to acquire like the people that are more skeptical, right? So that CAC goes up. And then you're, um, in gaming, the truth is that like your ARP or like your average revenue per user actually goes down. At the beginning, it's really high. Cause again, these are people that love social games and want to spend on social games and will spend a lot of money on social games as you get the more skeptical users that are more expensive to acquire they also uh spend less in your games because they're less into the gaming thing so that their LTV is lower at the point where these two curves intersect that's like the death point for your game that's when like the game stops like you can't acquire anymore because your CAC and your LTV are break even and then that's it's over so the whole time Every day we went into the office, the whole point was like, how do we change the slopes of these curves so that our game lives on another day?

1:35How do we keep CAC down? How do we squeeze it down? How do we keep LTV up so that they never intersect? Hello, I'm your host, Mike Gelb, and welcome to the Consumer VC. If you like conversations with VCs about the latest in consumer innovation, you're in the right place. This show is brought to you by Propeller Industries, the leading strategic finance and accounting partner for venture stage companies. Now, I know this is free content, but that doesn't mean that I don't have a favor to ask. If you're enjoying the show, please subscribe on YouTube or whichever platform that you're listening on.

2:10And if you want the full experience, subscribe to our newsletter at theconsumervc.com. You'll receive a weekly update of all the news surrounding the emerging consumer ecosystem. and you'll be the first to know when a new podcast episode drops. Now, our guest today is Vanessa Larco, who is a partner at NEA. NEA is one of the largest VC firms. They have 25 billion under management and one of the most iconic VC firms ever. Previously, I've actually had one of the firm's founder, Chuck Newell. So definitely check out that episode if you want to learn more about NEA. Vanessa started her career in the gaming industry, but doesn't invest in gaming, which is quite interesting.

2:53Some of her consumer investments include Mejuri, Kindred, and Greenlight. We discuss what is tricky about investing in gaming companies, metrics that matter in consumer, and can you still have a billion-dollar outcome in consumer inventory businesses, and much, much, much more. Without further ado, here's Vanessa.

3:16Vanessa, thank you so much for joining me here today. How are you doing? Hey, Mike. Good. Thanks for having me. Oh, it's an absolute pleasure. I want to start very early on in your career. I mean, you were making the first Microsoft Surface that, of course, had touch. Can you walk us through why Microsoft, first of all, decided to create? I know it's obvious now, right? But why Microsoft wanted to create a touchscreen computer, a computer where you can actually navigate through touch, and also some of the complexities that you had to deal with in creating the actual touch control? Yeah. So Microsoft for a very long time believed in touch technology.

3:58I mean, they had, I remember Bill Gates like in the, I don't know, maybe early 2000s, maybe had a tablet with like a stylus. And it was big and clunky, but like it was, they didn't call it a tablet at the time. It was called something else, but they tried, right? And we had Palm Pilot. Palm Pilot was kind of like a mini tablet with its mini stylus and so i think people have been wanting to do touch handhelds interact more interactive devices that weren't keyboard mouse for a really long time before surface emerged and the story was that like the founders of surface kind of sketched out how this like table would be this multi-touch super collaborative thing uh on like a napkin and And it got greenlit and they like spun out a mini team to build and prototype it.

4:47It ended up being really a magical experience. It was like Mission Impossible style mind-blowing when you first interacted with it. Because there weren't very many colorful, animated, like you put your finger down and bubbles would explode from your finger touch. There was just so much delight baked into that experience that we were like, you know, I'm sure someone's going to want to buy this table that's really cool. And so we built really cool technology that was fun and delightful without a ton of thinking around who would be the buyer for a$14 ,000 table. But we sold a bunch. We sold to like casinos.

5:27We sold to some restaurants and bars in Vegas. Like we sold, I think, to like a cruise line. Like it was very novel. It had this novelty factor. But my job was to develop the controls, like the right-click menus and the pinch to zoom and the swipe to turn. These are controls, right, for developers to use when they build applications for the Surface device. And that was a really hard task because developers were like, well, how many of these devices are there? And how am I going to make money if I put my app? There was no App Store. There was no concept of App Store at the time. So they were like, how am I going to make money building an app for the Surface?

6:05and we'll pay you. And they're like, yeah, I'll just port over my Windows application to Surface. And yeah, it'll have a little triangle mouse, but just have people drag it around the screen. And we're like, no, no, no, no. We want to design something totally different. Like no mouse, because you have 10 fingers. So your app needs to support 10 touch points at any given. And their heads just, they were just like, what are you talking about? How do we design an app without out a mouse. Like, I don't understand what that even looks like. So we had to develop our own internal apps that were like, had really interesting design paradigms to then show developers like what it could look like if there was no such thing as a right click menu.

6:48And yeah, it was, it was really interesting. It was really interesting to like, try to talk to people about where design is going who ultimately had no financial incentive to jump on board. So there was a really good lesson there, by the way. The table went away and it turned into a tablet, which makes a lot more sense. Yeah. I mean, and also this was something that was, you know, new and also like, you know, hard to imagine as well of that, that, you know, this was actually becoming the future because it wasn't, it wasn't quite there yet. What did you kind of learn about that experience when it comes to, you know, just, just UI when it comes in, in hardware hardware super hard i remember like we designed something cool and the hardware team's like it not gonna work we're like no man so we'd go back and like design something like what are this like it not gonna work we're like dang it hardware make things work for us um it's really hard to design software and hardware at the exact same time um so i learned that lesson the hard way and then i think the interaction design is just tricky there's like but one of our designers I mean this might be not politically correct anymore but he's like they'll be like okay well we'll hire more designers to figure this thing out and he's like look nine women can't make a baby in a month like some things are just gonna take time and I think when you're designing a new paradigm design just takes iteration and it takes time and it takes like you start here and we're like well that's not quite right so then we iterate and iterate and we're like you know what let's throw the whole thing away that was a bad idea to start with let's start with a new idea and these things just take time is yeah no that that makes that makes um totally totally and i mean kind of grouping that you know hardware software that's i mean i i cannot only imagine how how challenging that is um uh from uh from that perspective and i know that you you then i know that you then you know worked at worked at xbox and as and as well as um on there um and also on you know the new kind of way to communicate, which was, you know, through, through speech to actually tell, you know, through speech to actually communicate with a device to talk to me a little bit about some of the challenges when it came to, um, when actually, when you were actually creating, you know, speech, speech technology.

8:58Yeah. Okay. So first of all, V ones, the first version of anything is super fun because typically there's no precedent and that's really exciting. Um, it's also really hard because again, there's no precedent. And so for speech recognition for Kinect, for Xbox Kinect V1, it was one of the first Fartalk devices. We called it Fartalk because there's close talk speech recognition. And then the only Fartalk speech recognition technology we had was CAR. It was like the car audio where you talk to your car. And that's like a very, like there's very few commands. It's pretty set forward. And you also have a, sometimes had a screen on your car that would tell you like what things you could say to it.

9:41So we're like, okay, this is different because this is not like transactional. You're going to play video games and we need voice recognition for media and entertainment. And it's in your living room in a highly social place. And so we're like, well, how do you make this fun and whimsical? And how do you make it not weird for you to be sitting on your couch talking to your Xbox? And through all of our user interviews, people were like, yeah, no, that's weird. Like I just, I look like a weirdo. I'm talking to my Xbox. And you would wake it up by saying, Xbox, play movie. And they're like, yeah, that's weird.

10:12I'm like, no, it's fun. So we played around with like different sounds to like make it sound like, like it woke up. And this is like fun. And then we'd give you like this feedback to encourage you to keep going and keep talking. And we'd have these little animations on your screen. And we tried all kinds of things to make it seem less weird. But again, it was a design challenge. How do we teach people what you can say to the device? at the time it couldn't do like natural language processing we were very limited we didn't most of our users on xbox weren't on xbox live like they were not connected to the internet so we couldn't do speech recognition in the cloud we had to do it on device and the device was almost 10 years old so we had very old hardware and very limited memory so there's only so many commands we could load on the device and so we were had like technology constrained we had cost constraints and we had like design constraints.

11:04And so it was, it was gnarly, but it was really fun to think through what it would look like. And then when Alexa came out, like my head exploded, like, whoa, a Fartalk device with no screen that can do natural language processing. This is bonkers. Um, so yeah, it's been fun to see how fast technology has evolved, especially in the home for consumers. Did you, did you think that when it came to, because totally understand from the use case of, or, or, you know, customers or fans of, of Xbox saying that, no, that's just really weird to actually talk to Xbox and say, Hey, wake up Xbox. I want to play you now.

11:41But did you, did you always have an inkling that, you know, even though the feedback was weird, that this was maybe where we were going, or this was one type of way to actually communicate with technology? Yeah. I, I thought that like we would interact with technology, with gestures, with speech, with touch, with keyboard, with mouse. And I still believe that that to be true. And I think, um, it's more like immersive tech and you start blurring the lines. I think the trick is finding the right controls for the right tasks. And so like, yeah, maybe controlling your TV with voice is not great, right?

12:22Like if you're like next channel, next channel, like that's way more obnoxious than just hitting like the button on your remote. So you do have to really evaluate like what's the task at hand and what's the best medium to achieve that task. But the technology is pretty limited right now. Like speech recognition is getting better, a lot better. um gestures has kind of frozen like we haven't made any progress since xbox maybe now with the x with apple vision it'll revive a bit and that takes off maybe we'll like get the next gen of gestures um but i still think gestures is really interesting and i'm still very inspired by like the minority report screen with like the originally one with tom cruise like zooming into things and spinning things and like you know like i i still think that there's some information that's better manipulated with gestures than with mouse um and voice we're just yeah and well it felt like maybe gestures or or uh that they kind of maybe saw like a rise and like a fall quite quickly because people didn't really or more so that um where you actually are kind of fully fully immersive and you actually were able to um you know move around and play a game moving on we kind of saw like a rise of that quite quickly and then maybe then maybe there wasn't as much investor interest a few years ago.

13:43Is there an immersive technology that you don't think is going to take off the way? I know that gestures, we still think that we're pretty early on with, but is there, I guess, an immersive technology that you don't think is actually going to, that you maybe aren't as bullish on? No, I just think that it has to be an intersection of it makes sense for us to use this interaction model or this immersive technology with like this really cool thing that we want to do and like that has to let us up to that cool thing and then it has to be a great end-to-end experience right and if it's not a great end-to-end experience nothing else matters if it's a great end-to-end experience but it's like a million dollars well that doesn't that's not attainable so there's like there's like a whole list of things like it's amazing to have some real like innovative technologies take off.

14:40There's like a litany of things that have to like fall perfectly into place for something to get adopted and take off. But I think for a lot of this stuff, like it's possible. It's just like how many of those things have already lined up and how many are still left to line up is the real question. And that's just timing, I think. That makes sense. And also that, you know, the overall experience has to be amazing or the technology actually has to line up. It can't be, there's certainly a difference when if there's a lag or delay or even if the gestures, it's actually not picking up the gestures or what have you.

15:24What is, I know that you kind of transitioned a little bit from building new technologies in order to maybe focus on gaming, if that's fair to say. Can you talk to me a little bit about how did you think about creating new games for iOS and a little bit about that transition? Okay, so the transition felt a little more natural because I'd been at Xbox, but I worked on the platform team. And again, I worked speech recognition, but my job was not just build speech recognition experience on the platform, but then convinced developers, again, like Surface, to go use speech recognition in their games, right?

16:06So then I went out and met with all these game developers and would try to understand, like, what games are you building for Kinect? And in their case, it was, like, very clear how they're going to make money. They sell the CD-ROMs at the time. So we're like, okay, now they're convinced that they can make money off this, but now how do they bake it into their games? So I spent a lot of time with game developers in game studios trying to get them to build stuff for Kinect. so when I decided to leave Microsoft um I wanted to go I wanted to move to the Bay Area I wanted to go work at startups so like that was like criteria number one criteria number two and at the time there was this like explosion of social gaming companies and everyone at Xbox was like really annoyed by them they were all like oh that's like cancer these are the worst games ever how are they making so much money how are they getting tens of millions of users and my ears worked.

16:56I'm like, Ooh, that sounds like disruption. That sounds like you guys are threatened. I should like, if I want to move to the Bay area and I want to work at a startup, I should go work at a gaming startup, a social gaming startup, because that seems like it's disrupting console gaming. I was wrong, but, uh, I moved to the Bay area. I took a job at Playdom and, and we were building Facebook games and I learned a ton cause I came in with this like Xbox mentality of everything has to be magical and everything has to be perfect. And like, there's no timelines. Like we, we had timelines, But we were all like all about the creative process.

17:28And I get to play them and they're like, we A-B test everything. It's a mathematical equation. There's no, like, we don't value creativity. We just like take a game, reskin it with a new theme, test out the theme. If it's a low cost requisite acquiring a user on Facebook, that's our theme. And then we just like optimize, optimize, optimize, A-B test, A-B test, A-B test. And I was like, what is this world? But I was fascinated by it. and it was so profitable. And I was like, wow, we're making a lot of money here, like a lot of money. And I learned a lot about AV testing and data-driven decisions and moving fast and breaking things and all like the Silicon Valley, the MVPs, the whole thing, the lean startup method, all the things that were like all the rage in 2010.

18:19And then it all came crashing down pretty hard. Facebook killed the ability for us to manipulate the news feed. The Facebook in-app game currency was also killed. Like so many things dried up. We burned out our users because our experiences ended up becoming spammy and not fun. So we ended up having pretty shitty experiences. And it just died. Like the whole industry just kind of like, just like gone. uh and that was hard i was there on the upswing and i was there like for a lot of the way down um and so i learned some valuable lessons of like yeah there's a time and a place for data driven decisions and there's a time and a place to lean hard into experience and brand and design and the question is when do you lean into which and that's the that's the art of the whole thing yeah i mean that it kind of seems like from that experience working working working there and and seeing like the rise and also the fall, it was the kind of valuing virality over creativity or, or, or, you know, and like the actual op is it, is that for the site?

19:23Three metrics. And it's still true for all companies, three metrics, but we were like hyper-optimizing for the three virality slash distribution, monetization. And then we needed retention, right? Like we needed people to retain because that was their CAC to LTV equation. So, um, we put in all these viral gates, like we needed to get viral because that would bring out or CAC down. And then we needed to monetize because that would bring our, monetize and retain that would bring our LTV up. And we were just constantly balancing LTV to CAC, LTV to CAC, because that's how you kept going. And I used to have this curve that I would draw and maybe I can do it with my hands, but basically CAC rises, right?

20:00Over time because you acquire most enthusiastic customers at the beginning really cheaply. And then over time you have to spend and spend and spend to acquire like the people that are more skeptical, right? So that CAC goes up and then your um in gaming the truth is that like your ARP or like your average revenue per user actually goes down at the beginning it's really high because again these are people that love social games and want to spend on social games and will spend a lot of money on social games as you get the more skeptical users that are more expensive to acquire they also uh spend less in your games because they're less into the gaming thing so that their LTV is lower at the point where these two curves intersect, that's like the death point for your game.

20:40That's when like the game stops. Like you can't acquire anymore because your CAC and your LTV are break-even and then that's, it's over. So the whole time, every day we went into the office, the whole point was like, how do we change the slopes of these curves so that like our game lives on another day? You know, like how do we keep CAC down? Like how do we squeeze it down? How do we keep LTV up so that they never intersect and that was the whole thing that was the whole thing those the those three metrics and as well as what actually happens as you stretch it uh and actually acquired you new users the relationship between cac ltv what what have you learned i know that you don't invest in in gaming at at nea um i would say that what what have you learned from i guess these experiences that actually makes gaming incredibly hard to actually start a gaming studio or to actually launch a hit game today?

21:38Nobody knows why something goes viral. Why does one meme go viral and other memes don't? And it's not because they're spot on. There's a lot of spot on memes that don't go viral. It's the same concept. You can build a beautiful game. You can build an incredible game and it just never hits. And so I think the hard thing for me is I was in gaming for a really long time. I can tell you, I can look at a game that's a hit and tell you why it's a hit. I can look at some games that aren't hits and tell you why they weren't hits. But I can look at, but then if you show me an amazing, beautiful game and say it didn't hit, why?

22:11I don't know. Like sometimes I like genuinely, I'm like, it's beautiful art, great sound design, really great game economy, very well balanced, amazing gameplay. I don't know. Like maybe your acquisition strategy wasn't good. They're like, nope, we went through all the channels. I'm like, I don't know. Like, I don't know. I don't know. I don't know why it's not a hit. And then sometimes I look at games that are like hits, one hit wonder, like they're hits for like a moment in time. And I'm like, why this? Like, why this? It's like, it's like off. Like, it's not that great. I don't know. And it's also like songs, like some songs are hits and some songs are dud and some songs that are hits on the radio, you're like, this song sucks.

22:53Why is it a hit? I don't understand. And so, I mean, that's why I don't invest in gaming because if I knew I could reliably spot a hit with accuracy, I would just be building games right now. I wouldn't be investing in them. I would just go be doing it. I don't know. When there's a hit, they're so profitable. They're so profitable. Like for my little dinky Play Dumb game, we got to like 24 million in ARR in like four months off a 600K budget. And then I remember joining my first enterprise company and they'd been at it for seven years. And they're like, our revenues crossed 10 million ARR. I'm like, I'm sorry, how long have you been at this?

23:33They're like seven years. I'm like, and you're just here? They're like, well, we had to build it. And then I'm like, oh my God. Like in gaming, one of our studios got to a hundred million ARR in six months. Like, man, is this how the rest of the world? And they're like, yeah, sorry. Like what you experienced in gaming that's not the real world it takes years and years and years and years and years and like most people don't get to 100 million AR in their first year and it's like oh in gaming that's a thing that's a real thing you get to 100 million dollars in revenue in a year in gaming is that still is that still possible today I think so I mean I haven't spent a lot of time in the gaming industry since yeah yeah yeah I would like games that are hits make so much money so much money um so yeah if i knew what it would take to generate 100 million revenue in a year like mike it's been great being on your podcast i'm out like i'm gonna go do that right now like you know totally so i know so i know after after being gaming you then you then went to uh uh and and worked at Twilio and Box.

24:42Then that landed you at NEA. Why did you decide to become an investor? That's a good question. It was never part of my plan. I love building and shipping products. I think there's no greater joy than working really hard on something and then seeing your dashboards light up and seeing people use your product and getting the feedback. That is just awesome, awesome, awesome feeling. So I never thought I would leave that. I think NEA caught me at a really good time, which was it was right after a big launch that my team and I had worked on at Box. And I wanted to do something big and bold and risky again, like what the project had just taken on.

25:20And it wasn't extremely obvious to me like where I'd get like I didn't see anything that felt like a step function in risk and learning for me professionally in product. I mean, I talked to a lot of companies and I looked at a lot of things internally in box. And I just, I don't know. I was like, okay, if I leave box, I will be splitting the monolith at another midsize company. I'm like, no thanks. I just did that. Not doing that again. Or I can be like the first head of product at an early stage company. And I was like, well, if I'm going to do that, I'd rather start my own company. But I didn't have an idea.

25:58or I can go be like middle to bottom management at a huge company like Meta and Google. And I was like, that doesn't exactly sound like it's my cup of tea. So I just didn't know what I wanted to do. And NEA was like, hey, you know, I got to them over the years. They offered me to come join. And at first I said, no, I'm like, I'm not an investor. I'm a builder. And then Pete Censini and Forest Basket and Scottsendale. They were like, look, we'll teach you everything we know. And I was like, that's a pretty damn good offer. Like getting to learn from some of the greatest people who have promised me to teach me everything they know.

26:39Like, how do you say no to that? So I was like, okay, I'll go do this venture thing. I'll do it for two years and then I'll go back to building products. And gosh, it's almost been eight years. It'll be eight years in October and I'm still here. It's amazing. That's amazing. Congrats. What have you, because I know that you're, See, looking at your portfolio, seems like you're a generalist. If that's fair to say, you invested in enterprise SaaS companies. You've also invested in consumer companies. What's your overall viewpoint or approach to investing since you're investing in multiple different categories?

27:14Well, I would say that I'm... I would... My major, I call it major and minor. My major is B2B apps, formerly known as SaaS, right? But then I can't help myself on the consumer side. And I joke with my colleagues, I'm like, I'm a good consumer investor because I'm not supposed to be investing in consumer. So every time I do a consumer deal, it is one that I've like, I can't stop thinking about it. I'm obsessed with it. And I'm going to go to war for it because if I don't win this deal and if I don't get to work with this company, I am not going to get over it for a very long time. And so because I'm not supposed to invest in consumer, the deals I've done are ones that I have like enormous conviction in.

27:56And that's really fun. But they're all apps that are all like technology enabled in one way or another. But across both, for me, it's the user experience. Like the thing I obsess over is retention and engagement metrics and seeing people love a product. whether it's an enterprise product or a consumer product, just that product love is what makes this job for me really fun. 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.

28:38Well, 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. Some of the brands that they've worked with are Liquid Death, Olipop, Hems, 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.

29:16There's a link to Propeller Industries in the show notes if you want to learn more information. Love that. So talk to me on the consumer side of it. What are examples, and obviously you can use your portfolio, but what are some examples of the reason why you actually ended up loving the company or just really couldn't stop thinking about it? The truth is I, most of the time I just deeply relate to the problem they're solving and I want to see a solution to that problem. It's like not the most sophisticated thesis, but if I look across like what's the common denominator, it's that. I'll start with Robinhood.

29:52I met those founders in like 2015, way before I joined NEA and they told me about Robinhood. And at the time I was like scrambling to get up to speed on like financial literacy and investing because I'd started saving money and it was all in cash. And I'm like, this is dumb. I need to figure out how to invest my money. And I didn't have enough for like a wealth manager. Like that'd be like comical, right? And I didn't want to put it in like mutual funds because I saw the fees and I'm like, no. So I was reading books and trying to learn it myself, like books. And then also like some blogs I'd come across, right?