Building a Venture Firm Like a Product | Jeff Morris Jr, Chapter One

25:10Turner Novak:Amplitude. With AI analytics, all you have to do is ask.

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26:21Yeah. I mean, since here we do a lot of data-driven sourcing. So James and my other GP is a data scientist her entire career. So we build a ton of software internally which has been true since I started chapter one. So when I started the firm, I was still operating at Tinder and I built a piece of software that kind of like did different scraping the internet and I'd wake up to every morning. It's just because I didn't have time to call founders all day. Like I literally had a full time job. And so it was a way for me to compete without having to be a VC all day long. And that's kind of bled into our DNA.

27:06And then for me, you know, the big thing too, maybe like two years ago, I've really leaned into geography has been a big advantage for me. So like six out of our last eight investments that I've led have been local to Los Angeles, as an example, which is funny because I grew up in the Bay Area and started my career in San Francisco I think I've like actually tried to not be in LA, DC publicly because I just think it's, I find like the more you brand yourself in different directions, it kind of boxes you in. So if you're like, Hey, I'm only investing in Los Angeles or I'm only investing in deep tech or FinTech.

27:50So I do my best to not have any labels, but I think if you were to label me today, I'd be like just pretty focused on what's going on in los angeles i didn't even know yeah i haven't

28:03Turner Novak:talked about very much because you like i feel like sometimes though you have you have been more thematic yeah you are kind of trying to stay general like how do you did you like mess that up at all or like were you too thematic at any points or like how do you think about staying general while now you're kind of sounds like maybe very recently all in on play yeah how does that go I think in 2021, we, at the start of our fund two, our crypto portfolio was marked at a free fund two, like a 22X. Okay. Like, actually. And the whole world was shifting towards people building crypto companies. Yeah.

28:45And so we kind of were like, hey, should we just focus on that? and then to raise the fund 2021 then the markets turned in 2022 and very quickly we're like no let's not only do that but I think that was probably our biggest moment where like hey we don't need to brand ourselves as being any specific type of firm like we're never going to be a deep tech fund we're never going to be like a fast fund and if you look at the best franchises I would argue all of them are generalists like yeah you could look at some firms are more thematic or thesis driven so if you have like usv is very thesis driven but they're all kind of generalists right and so this idea is how do you evolve with what's happening in the world to be relevant in any given vintage and so actually i've seen a lot of firms that have probably over-rotated being ai firms over the past three or four years yeah for sure again that's could be a good go to market, but at some point you have to evolve.

29:55So I actually think of building venture firms a lot like if you're building a company and you had to go to market, maybe going to market with a message or a theme is helpful. And at some point, if you have success, it's like, okay, you need to expand your business line so you have new themes or new focus areas and normally do that through getting a win in an area. So if you're feeling stuck by being an AI investor today, if you were to go do a great deal outside, say you did a great nuclear deal and like, oh, that guy's like a nuclear investor now. But you have to get a win within those categories.

30:36And then you have to hire great people in those areas. So if you're like, hey, I really want to do something new as a venture firm, the best way to do that is to hire somebody who's not at your firm who, or if you feel like you can learn quickly enough, but most of them it's hiring someone who has a great network or point of view within a market.

30:58Turner Novak:What you just described, that reminds me of maybe Paradigm, good example, where historically everyone kind of thought of them as a crypto firm, but they've been a little, they had one vocal moment where like, hey, we're not just doing crypto anymore. And then they went out and they invested in SendCutSend. It's literally a machine shop, essentially like a CNC machine shop, manufacturing company really. They kind of co-invested, I think, led around with Sequoia. And they kind of like branded themselves as like, hey, we're not just doing crypto. This is like the complete opposite. It's like a manufacturing company.

31:29Yeah, that was actually a big moment where people were like, wow, Paradigm's really doing things outside of crypto because it's not even adjacent. Like this isn't a fintech company that has stable coins and they're calling it a non-crypto investment.

31:42Turner Novak:I think you mentioned, you think that a lot of crypto firms kind of did that, where they sort of like waded into the waters and like did some fintech quote-unquote to kind of like make it acceptable to start expanding outside yeah i think that's what's happening today actually where you have a lot of branded crypto funds that are doing more fintech and you know that's because there is an overlap between something in crypto and fintech but i think also it's for some of them like culturally really hard to go do a manufacturing deal because that's so far from where the firm started right the dna where paradigm actually had a moment maybe two years ago that really changed their website to be more like generalist language yeah i remember this like it became a twitter it was like a meme it was like a huge thing yeah people were just like you know this is like the biggest day in crypto twitter in years yeah i mean i think a lot of people felt like it was kind of like for the rest of the crypto venture community it kind of like made their thesis and positions less like accepted to the lp community because it's like hey you have like the name brand crypto firm and they're pivoting like where does that leave everybody else yeah But with the SenCutSend deal, I actually think that was the right strategy for Paradigm to just say, hey, we're going to completely broaden the firm.

33:14And if you're going to pivot away from being crypto only in their case, why not completely refound the firm?

33:23Turner Novak:It's like the opposite of crypto. Yeah. If you map this thing out, manufacturing company and crypto completely opposite end of the spectrum. Yeah. I think there's a lot of companies who do a similar thing. They'll do like a soft pivot or like an adjacent pivot. That's like one deviation away from what they're currently doing when actually probably the right thing if you're going to pivot is to like actually refund the company. And that might mean doing something that's radically different from what you're doing today. and I think the mistake that people make when they're pivoting it could be their company, their venture firm, their careers is not being bold enough and kind of actually like what that new direction might be because you're I think it's primarily because it's almost like an admission that what you were doing before is wrong which might not be the case.

34:21It might just be what you were doing before is no longer the right strategy going forward. so they can, paradigm's case, maybe it was the right choice to be a crypto-only fund from 2017 to 2026. I don't know if that was, I'm sure there were moments where it's a good choice, bad choice, whatever. But you have to, you're not underwriting like your historical decision-making. You're taking a forward-looking view on what is happening in the world and how you should position your firm, your company. And that's what I think people get wrong.

34:54Turner Novak:I think there's actually like an academic research paper on this that talks about having one single pivot is actually a greater predictor of success for a startup than no pivots or a bunch of pivots. and I think like the practical reason that that becomes true is like you start kind of working on something and then you come across the big problem while you're working on a different problem and you're like oh we need to like adjust our product and company strategy around this like new thing that we discovered so like an example I'm just kind of trying to like back into like how this could be true like with slack right they're working on a game like built this internal chat platform to run the company on where they were building this game and then the game failed.

35:38Turner Novak:We have built this other thing. Not gaming anymore. It's like a chat platform, but let's do that. Or if it's like, I mean, maybe an example. I don't think this would show up in this research paper specifically, but with Facebook when they went all in on mobile initially. It was initially a desktop website and you realize, oh, mobile is actually a big opportunity here. and I think like that's that's like practically kind of how this plays out where it's like you're working on something that you thought was the big thing but then you come across an even bigger problem and because you're you're like kind of like attuned to and you're so accustomed to solving and like identifying these need for customers you like actually find the big issue I don't know yeah I agree I think especially in the past six years you think about think about when we started our venture funds there was pre-COVID there was basically the end of mobile as we mentioned kind of like you had cloud you had maybe like some interesting things happening in bottom up SaaS but think about how much has changed in the world back then and imagine if you as an investor hadn't evolved your strategy to where the world is today and I think the same is true for founders like the like that pivoting moment proving you can do that stuff once I think gives you the confidence to do it again and again and again.

37:04I think pivot's almost the wrong word. It's just like iterating and trying to find new markets or new products that can expand what you're doing today. And actually, we haven't talked yet about Flex in terms of the kind of like we're both investors in Flex, right? I think it took them two or three years to really find like the big market and kind of find product market fit. And it was kind of like initially this like really niche software, fintech software for construction.

37:35Turner Novak:Exactly. You could say that's like, I think, I think like a lot of Zaid got was like, ah, it's too niche. Like won't work. Not big enough TAM for us kind of a thing. Yeah. And I think that's what most investors get wrong with these initial, so you need a wedge, right? To go to market. In that case, the wedge was like so specific and niche. I think it was so illegible to the venture market. Very few people want to find that idea. But in going that niche, I think he was able to get closer to a set of customers, which gave him the idea to expand what they were doing. Yeah. I've been trying to reverse post-success, try to figure out why it kind of worked.

38:18Turner Novak:And a lot of people had started these online lending companies where you get a loan or whatever. And it's kind of interesting with Flex positioning, it was a credit card. So it was still like a loan, but it's something you used every day to run your business versus you go to this website, get a loan, you refinance your bad debt onto this new platform, and then you just stop using it. And you never log back in. You maybe make some payments, maybe don't. Maybe the loan defaults, maybe it doesn't. But if you want to... It's the lending company. If you want to re-underwrite another loan, you got to like you got to figure out how do you get another loan right maybe you're like running ads etc but with Flex it's just like a credit card that you used every day so you're like always re-topping up the loan balance like you're always lending them more money it was like kind of an interesting and is no one had really done that before in that specific vertical and credit either so it was like he takes what's like traditionally like a graveyard of like lending to small businesses or like the economics don't make any sense because you got like reacquire these customers over and over again for all these other loans and you're typically lending to like bad customer like you're you're bidding on keywords of like I need a loan like that's not that's probably not a person you want to loan for loan to right yeah there are two keywords you say which automatically create like the venture fire alarms right of a pitch it's like lending so most VCs hate lending companies and then most VCs hate anything that's like a SMB go to market yeah And so they had two of those within a single pitch.

39:55And it's so funny. There are these words that VCs dislike in a pitch, which automatically becomes a no-out investment committee. And then as a founder, if you tweak one of those keywords, then suddenly you become fundable, right?

40:13Turner Novak:Yeah. Then how do you know when should you be pivoting if you're working on something? And is it acceptable? Like what if you are building like a consumer thing, like a, you know, DC fashion brand, like t-shirts, but then all of a sudden you're making like developer software or something like that's like B180. Like, is that okay to do? Like, do you find founders, like, is it hard to say that and like come to terms with that? Yeah, I think, you know, probably in the last five years, I got that more phone calls with founders around the, you know, should I pivot conversation? And the one thing that I've heard 100 % of the time is like, I didn't know that I could have this conversation with my investors, right?

40:58Turner Novak:You didn't know you were allowed to change what you were doing. I think it was seen as a sign of weakness or maybe you're worried, like, are we losing faith in the company? Like, does this mean we won't be able to raise next round, whatever it is? But on those calls, I always say like, you should consider pivoting the company if it's at all a thought in the back of your mind. And most of the time, the conversation starts with you getting the same investor update for two quarters in a row, because hey, none of the metrics are moving, small iterations on the idea, and there's nothing that's going to profoundly change the business from where it is today.

41:38And so now I'm like, I think more investors should have that conversation. And it's when it creates a lot of trust with you in the team where, hey, we can have actually like a real conversation. But most of the time they're like really excited to have that conversation with you. And I think in probably every single case that they have ended up pivoting the company, almost all of them. and that just shows that they're like the team knows already that they need to pivot they just haven't been able to come to terms with that either internally or with their investors and so as if you see like we care about the like every month that you're spending time on the wrong ideas just like a bad use of dollars and also your time as a founder and especially right now when you have so many things that you can build, you should not waste any time.

42:35You should go work on really important problems and try and find those problems as opposed to just being stubborn about the thing that you pitched in your pitch deck.

42:45Turner Novak:Yeah. And I think you had an experience with this with a company that you were working at. I think it was one of your first jobs in tech where it took you a while to figure out like, hey, maybe this isn't working. Maybe we should pivot. Yeah, I worked at a marketplace called Zarly. It was a Craigslist competitor. We basically tried to be Uber for everything. So you could request any service or product on your phone and people in your community would be like, I need a ride to the airport. I need a place to stay. It's like a meta marketplace. It was all those$100 million companies you saw in one like Airbnb, Uber, etc.

43:23Yeah, we used to, like we would host parties in San Francisco. And I remember Max Mullen from Instacart was at one of the parties and he was telling us about Instacart. And we're like, oh, we do grocery deliveries. Or we had like a startup, like Beef. It was more on our side. We're like, we're going to beat Uber, right? Yeah. I'm sure they weren't thinking about us at all. But in our minds, we were like competing with all of them. And anyways, it became clear after like a year that that strategy of trying to compete in every market. By the way, we also launched nationally on day one and across the, like a non-local, completely horizontal marketplace wasn't a good idea.

44:07But we never really fully pivoted the company. We ended up trying like home services, but it was still like adjacent to what we were doing. And yeah, I think within like two years, I knew the company probably wasn't going to succeed at the level we wanted to. But I stuck around because I did love the people and kept convinced myself that we get this new feature out, we ship this new thing, it'll solve all of our problems. And I think you can get caught in that mindset at a company that's either a founder or an employee where you know in your heart that somebody's the core assumption of the foundation in the company is probably not the right idea, but it's really hard to pivot.

44:49And so my advice to anybody is to, when you discover that that idea is not going to work and you've obviously tested a bunch of different versions of whatever your pitch is, to then pivot the company and do so aggressively with the same intentionality and speed that you found in the company, like do that same thing for the pivot as opposed to kind of like soft pivoting i think the interesting

45:18Turner Novak:kind of arc with zarli too is you were you grew up in the bay area you had lived in la for school you went to school ucla and then you kind of moved back to sf but you like left like everyone's trying to move to the bay area you zarli was in kansas city right yeah exactly so i like how did that how did that process go i think usually had like a pretty quick interview turnaround i think yeah I saw the company on Twitter, which is, you know, what I was doing at the time was mostly just meeting people on Twitter. And then they put out a job posting for a growth marketer. But you need to be, I called them, well, I DM the founder and then we got a call the next day with the team and they said, you need to move to Kansas City tomorrow because we have all these other people want the job.

46:02And I left San Francisco and moved to Kansas City without even knowing if it was Kansas city missouri or kansas city kansas i didn't actually know the difference between the two to me it was just kansas city was a place and so i went there with just like one bag of clothes and i didn't have a place to live and i just moved from san francisco my friends thought i was absolutely crazy because it was like why are you leaving the tech ecosystem to go work in the Midwest at some company.

46:35Turner Novak:Why were they in Kansas City? That's just like super random. So the founder lived there and part of the idea was we were going to focus on kind of like the Midwest. It was really like the team lived there. The company came together so quickly in terms of getting funded that it just didn't make sense to be anywhere else at that time. They ended up moving back to San Francisco with the company eventually, but we were all there for about six months and it was it's a pretty pretty intense time but you know again i think the experience taught me that you can do crazy things pivot your career pivot literally leave the city and go to kansas city to start your tech career that seemed like a crazy idea at the time and you were doing door-to-door sales i think for zarli like what's the story with that.

47:30Yeah, yeah. So I think Jameson mentioned she might have my partner in chapter one. So no, I was doing growth and the story there is we did this Valentine's Day campaign where we were like subsidizing the cost but you could buy flowers and get them hand delivered to your door for like$30. It's basically marketing and we charge a nominal amount. So we launched this in San Francisco. new york and kansas city and i found people to deliver the flowers in san francisco new york and then realized like i was like i don't have enough people in kansas city so i flew there and i was driving through kansas and missouri and i just delivered all the flowers myself okay um but the idea was like i think at the time like i just learned how to do things that were like very unsexy and to have fun with it so like that moment i was like this is awesome like i'm in kansas driving flowers to people yeah they're all happy and this is you know i'm listening to good music or whatever and i you know i see a lot of employees at venture firms and companies who just want to like go straight to the top it's like i just remember like man i was delivering flowers like you have to do some of that just like really groundwork yeah grindy work and and you know back to the founders who who will like win i think they all do a certain amount of grindy work and and have fun with it like you can actually have fun doing that stuff if you just change your mindset and and think about hey this is a fun day in kansas city and you mentioned actually that now

49:19Turner Novak:is like the most fun you've ever had in venture? What's the most like, why is it fun? And I think, like, why is that such a bold thing to say? Like, do a lot of people not have fun? Or? Well, I think for me, it's fun, because there's so many things happening at once. So if you love, like, at the heart of why I think most DCs got into tech would be, well, maybe this is too romantic but would be like you love technology right like a very basic statement like i love technology i love seeing new things happening in the world that i've never seen before and today that's happening more so than any point in my career across you know probably 10 different like huge industries whereas so it could be defense manufacturing robotics energy ai fintech like you can name all the categories where i felt like when i started in venture maybe seven years ago it was kind of like hey we're in this like kind of like post mobile cloud world there's like a lot of like bottoms up software there's you know like some weird things happening in crypto and fintech maybe like some cool new like ideas in in bio but there wasn't this explosion of possibilities at the same exact moment in time.

50:43And that's all happening today. So if you like actually love the grind of doing this job and waking up every day and finding new companies, it should be the best time in your career. I think people can get jaded by the industry just being like so deep in the weeds or saying, Hey, this doesn't look like venture anymore, because everything's so financialized. And hey that round that's not a seed round that's a billion dollar you know like that's like an IPO round yeah and you can kind of like get way too lost in why you think that's not a good idea or why that's not the industry you grew up in to just like stop and say hey there's some really cool shit happening right now I want to go find that company and so that's I think what's going on

51:30Turner Novak:actually talking about something else I saw you say you kind of like offhand mentioned, oh, yeah, we raised our third fund recently. I guess this is the announcement of the fund. You didn't even say anything. So did you raise a new fund recently? What happened? Yeah, we raised our third fund, and we haven't announced yet, although I did. I just wrote on a random... It might have even been a Twitter reply. Yeah, it was just a random comment. You're like, I guess this is the announcement. Well, I did that because I truly think that nobody cares. Okay. Like, I think that everybody, like, is so self-involved with what they have going on in their firm.

52:11It's like, we're going to do the best and biggest announcement, and, like, the whole world's going to care. And you can spend...

52:15Turner Novak:Launch video, influencers, quote tweets, like... Totally. And if I was building a company, like a real company, I would... Could be valuable. But I think VCs tend to overthink how much other people care about what they're doing. Yeah. And it was, like, it's not a big deal. Like, we're not, if you compare the funds as we raise to the billion dollar seed round, it's like small peanuts, right? And so, yeah, the idea, I think, was just like, hey, let's just keep doing the work. And if someone wants to, you know, cover our fundraising announcement, that's awesome. but let's not spend too much time on sharing this message with the world.

53:01Turner Novak:That's fair. If there's like 30 seconds on the message, what was the fun? Have you thought through what you'd actually say if someone was like, what's the new thing you'd announce? Yeah, I think it's fun three. And so it's just doing the same thing we've been doing for the past couple of years with a slightly bigger fund. We raised$64 million for the fund and we have a small team still, great group of people who are doing primarily early stage investing. But it's across a bunch of different categories. I mentioned I'm very much focused on what's happening in LA, so that tends to be a bit more on the deep tech side.

53:47Jameson is in London. She's doing more.

53:49Turner Novak:Oh, I didn't realize she was in London. Yeah. and so she tends to do things that look more like AI and then we still both do a lot within financial services and so I think the big message is that we're not going to do a big announcement but it is nice I think why people do announcements is to tell the market A we have capital like you should come pitch us well I think part of the announcements too is like like for you and me, like I might just like tweet something. Like I have a couple tweets on my phone right now that like, I just have like hundreds of likes on them and I, you know, a hundred thousand views and like, whatever.

54:29Turner Novak:It's just like, it's just like another day. But some people that might like an announcement of a new fund is like a notable thing to like get attention around what they're doing. So they kind of, you kind of announce it as like, that's, that's the thing to remind people that we exist. Yeah. So, and like, I think some of my like fund announcements posted, like not done that when I've done them. It's like, Yeah, I think you and I have both kind of lived in the Twitter world for a very long time. Yeah. For better or worse, I think for better. Mental health has maybe struggled a little bit, like the phone addiction or whatever, social media addiction.

55:04Totally. And so I think maybe because of that, we just view a lot of fun announcements just being another tweet or content. Yeah. As opposed to something that needs to be...

55:17Turner Novak:Like a 10-hole strategy, like social strategy or whatever. Yeah. Yeah. Where people are probably more interested in like investment committee. Right. Yeah. And just like, hey, what were you guys like bullshitting about today at IC? So I think that's part of it. Did you expect it to do that well when you first posted it or? Like the IC. Yeah. Like, did you think people would care? Like didn't know? I normally, you probably do have like a pretty good idea of what content people, like I think inside, inside baseball content is always really, you know, like kind of like juicy, you know, people, people want to know what's going on behind the scenes at a venture firm or company.

56:00and so it's like if you share more of that and take that to almost like the logical extreme like I think you'll get more views so if we want to like open source literally the most probably like viral version of this would be what if we just like did like live stream our investment committee like that would probably get more views we can't do that for a bunch of different reasons but you have to figure out what the line is on okay like we want to publish content that's interesting and then we'll get traction. But obviously, we can't share everything. Yeah, that's fair.

56:34Turner Novak:And actually, so I wanted to ask you, after Zarly, you... I don't know if it was immediately, but soon after, you moved, I think, back to LA and you started working at Tinder. That's right. Yeah, so I moved at some point from Kansas City to New York to San Francisco with the company, Zarly, at the time. Okay. And then in 2015, I was debating whether I wanted to start a company or join a company. And luckily, I got a phone call around that time because the company ideas we were exploring were, in retrospect, not the best ideas. But to join Tinder as an employee 50 and kind of be like the second product person on the team.

57:18And so I moved to LA, thinking it was going to be a really short couple years just because I was like, go there. Tinder is kind of a crazy company. Like, what's this dating app? But moved back to San Francisco after and I just ended up, yeah, I'm still here, so.

57:35Turner Novak:Oh, yeah, yeah. We're still in LA. And I think you added like$30 million in revenue from like one feature, like your first week or something like that. What's the story? Well, my first week, basically our Tinder had no ability to send a push notification at the time. You couldn't send push notifications? We as a company, if we wanted to send a push notification, could not send the transactional notifications to like, you have a message or you have a like, like kind of like things. But we as a company could not send like a push notification. Just like, hey, check out Tinder, open it up. Yeah, exactly.

58:14Turner Novak:Okay. Like, was that like an Apple thing or you had not built the infrastructure? That was the company just had not invested the resources in the building. And so basically within a week, I came in there like, can you help us figure out how to send push notifications? I was like, okay. But then I was like, you know what, if I send our first push notification to 40 million people, I guarantee you we're going to have a big day. and so I got at the time they gave me like a CSV file of the like mobile IDs to send out the notification literally like exported a single file that was like lived on my hard drive at the time it was like something you would never do as a public company we weren't public at the time but and we figured out how to send a push notification and so this was announcing a feature called Superlike at the time which that's what you pay for that right you pay for that okay but i we sent the notification to so had to figure out how to get translated into you know what different languages 40 different languages or whatever and then had to figure out a bunch of things one of the things i figured out quickly was that you should rate limit the notifications because our servers weren't able to handle like the if we just sent 40 million people a single notification once or like Tinder would go down the servers.

59:42I ended up doing that by accident once or twice. We took down Tinder. But yeah, we sent that on. We had our highest day of the active day ever. So we had the most DAUs ever. That was within my first, I want to say two or three weeks, not first week. But everyone's like, Jeff is a smart guy. He knows how to like... Send push notifications.

1:00:06Turner Novak:It was amazing. I was like, literally, I can be a hero at this company. And so then from that, they put me in charge of revenue. And we ended up becoming the top grossing app in the world for many years. And so then I became the revenue guy at the top grossing app. And I think that really... That was like helped build your brand, right? Yeah, definitely. It'd be... you know, if you're at a, well, we were the fastest, one of the fastest growing consumer companies at that time and definitely the largest within, within the dating space. But if you, if you're like one of the key people at a company that's growing that quickly and you're, you're being vocal online about what you're doing.

1:00:52Turner Novak:Yeah. Like people will take interest in your career. And that happened for me at the time. Yeah. I want to talk more about what happened next, but I know you get asked a lot. starting a dating app. I'm assuming every pitch, every pre-see they're raising why you start a dating app. So how do those conversations usually go? And what do you usually help people think through? And is it a good idea, bad idea? Yeah, luckily I used to get pitched a lot more dating apps than not as many anymore. But when I was leaving the company, I think, yeah, whenever you leave a company, people think of you as being a certain category.

1:01:27So a lot of people thought of me as being a consumer investor and then like a sub category was dating.

1:01:32Turner Novak:I probably did do that too. Like, hey, I met this cool dating app. What do you think? Oh, I got so many. And the mistake that every, almost every founder made was pitching a slight, like a slight tweak on the swiping model, which is like, you know, you have a stack of profiles and you swipe right or left on them. And I was like, no, we're going to add this, restriction of this feature or we'll build it for some different audience and people just need to be shown something that's like a totally new form factor or like a very new experience or they're just not going to care like it's kind of back to the content conversation earlier i think people are just just don't tend to have like a lot of attention for anything anymore and so if you're going to build a dating app or new product consumer product especially it needs to just like shock people.

1:02:30Turner Novak:Because no one cares. If it's just a little bit different than something else, I've already seen this before. Nobody cares and nobody wants to download a new app. And so there's also just app fatigue. There are some exceptions. I think Polymarket and Kalshi have become obviously huge because they help people presumably make money or bet. A lot of people don't make money using those products. But hey, the data. They put out data that says that their users are profitable, is what they say. But I think anything finance or trading is the exception. But if you're building a consumer social product, people really need to see something new.

1:03:16And most products I've seen dating-wise have been not new enough. And so we, like, categorically, I don't take dating pitches at all. Like, most of the time we'll just say, it would be a better use of your time to... And I also don't really want to give, like, a ton of feedback because my feedback, I've, like, seen too much. And so, like, part of the, like, the person who builds the next great dating app will probably be someone who, like, just is so naive to how hard it is that they... just do it and it like catches fire and my like my feedback would generally be to not start a new dating app on the whole so although we are we haven't shared it publicly but we've kind of got involved in in incubating some that's in the kind of in the relationship space but but we yeah that was like a really rare reason why we did that and you still do you still pay

1:04:20Turner Novak:attention to what's happening in the consumer technology landscape like are you are you still kind of interested do you think more people should be building and investing in there or no or yeah i think the like josh elman rejoining a16z is kind of the mindset i'm in which is hey there should be some really cool new consumer products around with ai kind of as a foundation that emerge in the next you know three to five years within this the current fund we're investing there should be some really cool consumer products that come to market The V1 of consumer AI has been way too predictable, where it's been a lot of like, hey, we're going to take the same activity feed that is on Instagram and just put like generative content in there.

1:05:10And people just love it because it's, you know, like people love watching like the AI version of what Instagram is. And in most cases, like that's just not going to, that's just not going to work because if you press on the same form factor, then the content needs to compete on just like how fun and interesting is this? And most AI content, at least consumed in like a single feed, if you just show people all AI content will become really boring pretty quickly. And so, but I think that what we're seeing consumer now, which is pretty exciting, I I think probably the best design space would just be like how we use context and memory to create better experiences that are more intelligent and more predictive and personalized.

1:05:59And that's starting to kind of happen where we're starting to see a lot of that. A lot of the products that I use are just things we've built, primarily for work reasons. but it'd be like giving agents or any AI tool complete access to all of your basic, everything that's happening in your life and in your firm and helping them have that context to create really cool products. I think that's like intelligence is a pretty big unlock to how you would design a product for consumers today versus five years ago.

1:06:44Turner Novak:Anyone who's done that well, like good examples. so people kind of know what you're talking about? Yeah, I think there have been a couple like SMS-based products that are trying to do this. I'm trying to think of, like Poke was like the most recent example of like hinting at what this is, which is, hey, you're going to give us access to your email account. You have like all your tools in your life and we're going to create as much context as possible as quickly as possible. And so in that case, by giving someone access to your email, they'd know where you travel, what airline you use, who you talk to all day long, types of things that you're thinking about, what you subscribe to.

1:07:29And then they can start to just automate different things in your life pretty quickly. I think that's probably in the shape of what things might look like, where I think sometimes founders get things wrong is assuming that people want to automate everything in their lives.

1:07:46Turner Novak:A lot of people like the humanity of shopping. Some people like just scrolling and or walking around the mall and trying on clothes. Totally. Actually, I think about this a lot. So it's like shopping is entertainment, right? And so you, it's very visual. It's very personal. You as the human one almost feel like you're the curator too. Yeah. Because if you have good style, you want that to be like your choice. I see a lot of founders building like agentic e-commerce products. And I think for the most part, they're not understanding that piece of psychology, which is or like travel is actually a pretty good one too where like some people just really love to plan trips right and so not all trips where like business travel people don't care as much about as you know planning like the next epic trip for your family but i think there's a broad stroke that's applied to these categories where it's you know we're going to try and do everything and ignoring kind of like the entertainment aspect which we know is true for a lot of things we do in our lives.

1:08:59Turner Novak:Yeah, I feel like it's been tough in consumer because when you just think about this purely from the spreadsheet side of how valuable and how profitable is this thing, on the consumer side, you think of the canonical ChatGPT where somebody's using ChatGPT as almost like glorified Google. It's like better Google, basically, and or like a therapist. And you're maybe not even paying for it. And if you do, you maybe pay 30 bucks a month or something like that. like just, and you have to go to acquire all the users versus on the other side, on the enterprise side, you can like land Google as a customer and you have thousands of underlying employees who use it and it's like a$50 million contract.

1:09:41Turner Novak:And just like the math of that business is so much better. And on the consumer side too, like the inference costs historically has been like insane to where like the customers are unprofitable. Like a consumer business is like, I mean, OpenAI has been public about this. It's like, it's hard to make money and be profitable as a consumer business. So hopefully that starts to flip. Yeah, I think, look, a lot of people are going to try. And again, as Claude and OpenAI kill more and more enterprise companies, the logical next place founders would spend time would be doing things in consumer. And so I actually think probably one of the most underrated themes of company, you know it's like the simplicity of network effects which we seem to forget and you can i think with ai today build network effects potentially faster than before in consumer businesses have you seen it happen yet or what do you think it could happen i think it could happen much faster because for a lot of reasons but the one is you can just build software much faster so if you identified you know a segment or market you can really kind of like go more aggressively after those customers.

1:10:55And then two, it's a little bit more nuances. Like non-human web traffic is going to become such a bigger piece of the internet than humans. And there are network effects with how agents interact with each other and the decisions they make as to what products they choose to use. And so a non-consumer version, this would be like, Like Supabase has great network effects within agents spinning up databases. And it's like this whole new category of company building on the enterprise side. But building products that really appeal to the non-human customer, I think is going to be a really interesting place to spend time to.

1:11:42Turner Novak:And you think that there is also like the existing database company that is not built for agents. they're not like positioned to capture that market in a lot of cases or in not just in database but like a lot of these like human made products are not custom tailored towards agent needs or something like that or well i think in in super base's case they were built for humans but the product position and the experience was like based on you know like reducing friction and simplifying the integration time to set up a database. And so that same framework applies to agents. So it's almost like the bottoms up companies that really lean into AI over the past three or four years are in a pretty good position.

1:12:34So yeah, but if you just look at web traffic as a whole, and if you look at their growth, the Levitt spend due to agentic enterprise software decisions. Yeah. They're just like calling things. They're looking things up. Yeah. So we'll see. I think this is, again, like why it's so interesting to invest in, to be a venture investor right now. There's just so much going on.

1:13:01Turner Novak:And then when you first kind of got transitioned into venture, you started posting about what you were doing at Tinder, lessons, started investing in sort of like, you were kind of sort of branched out sort of like a product driven investor. How did you kind of transition from working at Tinder to say, you've got chapter one? What was that arc? Yeah. So we, well, it's just me at the time, but launched the firm from my desk, still at Tinder. And a lot of the reasons why I was getting on cap tables as an operator was because people need help with their push product very simple things like come to us it was like product growth and monetization and so that really meant in kind of the shape of like what i want to do is build a firm that's very product driven and stuff and i did like the like silicon valley interview tour where i talked to different venture firms about do i join them or start chapter one and what were some of those conversations like like what was your biggest takeaways I think it's just the pace at which a lot of them moved was much slower than I liked across all aspects one was like hiring was a really simple one where there's like this lag between the first conversation and second conversation and a lot of venture firms that can take a while and you know on the other side I kind of understand why because when you're hiring an investor like you really want to get to know them as a person, like why they do what they do, how they think.

1:14:36But at the time I was like, you know what? I know how to move quickly. Like I've been moving quickly for the past, you know, 10 years as an operator. Like I just want to get going and I want to find people who moved at like a, the pace I'd expect at a engineering organization or product organization and people are really hungry to do that. and then kind of the second part was i wanted people who were really iterative in terms of how they approach their work so yeah i think like my career as a product person was very much like here are 50 experiments i don't always know what's going to work but i'm just going to try them all and kind of follow the the customer and i think in many ways how we've built chapter one is is similar like we're you know we're gonna launch like 50 different experiments within a fun cycle and most of them won't work most of them will actually probably be a really bad idea but really well but we're like very okay with that failure rate and then we need to kind of follow the things that are working and so i think that's been a staple of our firm like we don't overthink anything on the experiment side where like if you have a good idea let's test it and almost like you would at a product org and and so i actually think our lps to their you know they've like followed us on that journey and understand it but if you're just watching you know outside and you might think it's all a bit random what's been you said some of them failed spectacularly so i'm curious worst thing that you tried or like just like didn't work or like embarrassing.

1:16:21Turner Novak:It was like failed, whatever. Like what's been like the worst experiment that you guys were on? It's a great... I don't think anything's been the worst. It's just like they weren't the thing that was going to like get us the next... Like it just didn't do anything. Like it just like ended up kind of being a waste of time. Yeah, like I wouldn't call it a waste of time at all, but we did in Fun One, we launched an accelerator called Product Club. Oh, I remember that. Yeah. Didn't you do demo days for that too? We did a demo day. Yeah, I did some of the demo days. And it was actually like hugely gratifying.

1:16:51We had like that is to build the world's smallest accelerator. Yeah.

1:16:55Turner Novak:There's only a couple of companies, right? Three per batch. Oh, yeah. Almost like ridiculously small batches. Yeah. Actually, but it was interesting for me because there's a lot of accelerators. There's like 50 companies and they're like, hey, we've got our demo day. Here's a list of all the companies. And there's like 50 of them. And I'm like, I just don't even know where to start. Like it's going to take me a true day to go through this. But if you just give me like two that you're like, hey, these are the best ones. Then you'll pay attention. Yeah. So it was kind of nice. There's three. You're like, I remember like each one.

1:17:29Turner Novak:I was like, oh, this makes sense. I actually remember two of them. One of them was Medify coaching. One of them was a Brazilian Yellow Pages. Yes. Oh, this is impressive. I can't remember the third one. The Spline was the third one. Oh, yeah. And I actually did meet the Spline founder too. Yeah. Yeah, it was so that was those more like, hey, do you want to like really commit ourselves to doing it? I think the lesson was to be an accelerator. You have to probably only be an accelerator like, yeah, or, yeah, if you're a smaller firm, like we only have so much time and and capital, people, money, everything else.

1:18:07Yeah. And so it's more of like, hey, do we think this is really going to be our thing? And we moved on. It was great. It was a ton of fun. I think Spline and Medify were standout companies. You became really close to the founders. It's almost like that experience showed me why I wanted to do a bit more concentrated investing work because I was helping Alejandro with literally everything you can imagine at the time and almost like thought of him as being a teammate where a lot of the fund one investments, you do a 50K check or 100K check and it's just kind of how it works. You get the founder updates, but you don't necessarily have deep involvement with the companies.

1:19:02Turner Novak:Yeah. And then so you guys have evolved that model where you're not doing... So how many companies did you invest in out of the first fund? It's 56. It's close to 60 companies. Yeah. Okay. I actually... I think I did 64. The advice I got was actually from David Lee at SV Angel. He was kind of like running it for a couple funds and he told me, he's like, hey, you're going to do a diversified fund. Yeah. You're going to make a bunch of mistakes. You're going to do a bunch of dumb things and just make sure you get a lot of shots on goal. so that the ones that work, and the things that don't work don't sink.

1:19:36Turner Novak:Do a diversified fund with a lot of smaller checks. And looking back, he was right. 100%. He was right. And then with the second fund, I went more concentrated because I basically took all the lessons I learned and was like, okay, if I just chop off the companies I wouldn't have invested in with these lessons I've kind of learned, I'm at like 25 companies. And I'm like, that was the second fund. What was it like for you? is a little bit the same where I see the main differences we have we actually still have like a large number of companies being like our goal is to have really concentrated positions in a small set of companies but to get there we're not like precious about how we get there being like we'll probably invest in close to 60 companies per fund but our entry point on those or the initial check size can vary quite a bit.

1:20:28And then we kind of like funnel it into, can we really get like 20 core positions that, and that's ownership, dollars deployed.

1:20:40Turner Novak:Percentage of the fund. Yeah, it's like, can we concentrate our dollars in a smaller set of companies? But we're like totally okay with the number of companies being large. And that's just about can we be close to the teams and the founders to, one, just know what's working, which is, and then two, earn the right to get more capital in those companies that are starting to work. And that's been, and then, you know, I think a lot of this is just a response to what's happening in the market, right? that strategy I just described might be very different in three or four years because venture might look a lot different and so again I think you have to have like a open mind be very open minded about what's happening in the industry I would say right now it's like much much harder to pick a winning company at the seed than it was five years ago is my theory and so you so what's changed just the number of companies and ideas that come to market and then the pace at which those same companies can be disrupted and so if you were to build a fun model based on like actually when i started the firm i went and spent time with mike maples at bloodgate and he's super generous gave us like access to all their historical data and some data from other firms who gave them permission to share, but it gave us the picking rates from the best firms, then you could kind of back into your own math on what your portfolio size should look like.

1:22:18I'd be willing to bet that data, while directionally useful today, is not as relevant because my idea is that the picking rates have gone down quite a bit across the board.

1:22:34Turner Novak:Oh, you think so? Yeah. So maybe what is picking rate? If somebody is listening to this and is like, what does that mean? And then how has it kind of changed over time? Like, what was it and what do you think it is? Yeah. So picking rates is just, you know, what percentage of companies you invest in end up becoming fund returning investments. So does it return 1x? The entire pool of capital you're investing out of? Yeah. Okay. And the picking rates historically for some of the best venture firms, I'm talking like the best, the best, the Sequoia, USV, etc. The general range between those firms would be anywhere between 4 % and 7%.

1:23:12And so you can kind of model in... Again, I don't know if this is their picking rate today, but if a tier one fund has a 4 % chance of finding a return on the fund investment, they need to have 25 companies in their portfolio

1:23:25Turner Novak:to just return the whole fund. And so you have to ask yourself as a newer manager, is my are my companies that I'm seeing are they as good as the best firms in the world for most people obviously the answer is no and so you'd have to construct a portfolio to be probably have more companies because you have to have more shots on goal I think everyone literally every investor I talk to thinks that they're on average exactly everybody does yeah that's true they source better companies or they have better judgment and i think there's like a a self-awareness that comes by saying like hey we're actually we don't know if we're we we we have a feeling we're like you know fishing the right ponds but we can't say for a fact that our companies are better than the best firm in the world and i know a huge number of companies that we think fortune the phone won't and so maybe we need to have a bigger portfolio size so i guess what I'm like in long form saying I think bigger portfolios are in most cases really good a good strategy and then so does that mean you should just have a bigger fund like you should raise a hundred million dollar first fund kind of like get going so you have enough like money to work with or like what do you usually see people do and like how do those conversations go when somebody asks like hey Jeff I'm like I'm starting to start my own firm what should I do I think you just want get in business.

1:25:01And so you could be in business with a$3 million fund or$5 million fund. Like the mistake I see too many people make is coming out to market with a fund one that's just way too big. And then in regards to check size, you would just, if you raise a$100 million fund and you were doing$1 million checks, if you were to raise a$10 million fund, you just just adjust the strategy proportionally and to have$100 ,000 investments in the same number of companies. But I think smaller funds can be fantastic. You can also do things that are more illegible because you can do, as an example, if you were doing a smaller fund, so you did a$10 million fund, you could actually make the case that CPG is a great category to invest in.

1:25:49You could totally make that case because the$500 million exit for a smaller fund is a fantastic outcome where the bigger fund size gets the more, it's almost like the more legible the categories need to be because there needs to be the trillion dollar exit opportunity which only exists within a couple categories today, theoretically.

1:26:14Turner Novak:Yeah, you need to make the next anthropic, I guess. You do. So then your aperture narrows. Yeah. Yeah. So then why are more small funds not investing in CPG? Or insert other illegible category? I think it's just because they're trying to do exactly what the big firms are doing. And also try raising money for a CPG fund right now. Yeah. So they're buying the big funds and then they're also in the categories they think they can invest in to raise an ex-venture fund. Yeah, that's the trick of threading that needle is like you kind of have to invest in hot categories because those will raise fall on capital, which keeps you in business.

1:26:59Turner Novak:And or I feel like a lot of times you kind of have to raise money from downstream investors. I mean, like one strategy that people use is like, is a fund to fund. You invest in a seed fund and you want to participate in the Series Bs of those companies. so you want them investing in specific categories that will raise Series B rounds that work for your fund also. So probably not CPG or some of those other categories. Yeah. Agreed. I think this all comes down to like the manager needs to get in business and to do that, most of the time they need to invest in categories that the LP community wants to fund.

1:27:39And it's a hard thing to do. It's hard to be original as an investor. it's very hard to be original

1:27:43Turner Novak:how do you do it? how do you keep yourself as divorced from the FOMO as you can and as creative as you can I would say I'm not totally divorced from it I'm on Twitter like everybody else but one thing I've done which is intentional is I live outside of Silicon Valley full time and so there's a distance between kind of like what's happening in San Francisco that creates, I guess, original thought. Although I go up there all the time. So like, you're still in there. Yeah. Yeah. You're in it. You're like in and out of the bubble. You're in and out. So I can go in and out. But I think also just being a newer fund, like we need to be more creative to compete.

1:28:37Like you, I look at our fund when we're turning companies. none of them were in Liberia. One was in Singapore, one was in New York, and one was in Miami. And so, and then I look at fund two, our likely fund attorney investments will be, two of them are coming from Canada. And so, and then if you, so, and then fund three, I think probably, will again, probably be like, maybe one in Los Angeles, just based on like, how things are and so so i think there's i think as a newer fund you need to look outside of the bubble i see i actually really admire rooms that can go into san francisco as like newer funds and just like compete head-to-head extremely hard to do probably like two or three of them can actually do it and but there's a few of them have done a really great great job and you deliberately try to avoid doing that

1:29:41Turner Novak:in a sense like going to San Francisco going head to head in the consensus hot rounds that would require you to go head to head um I'd say like we we can like do that occasionally but I think if I think if we were to well it depends on who we're going head to head against but for the most part that's just not what we tend to do because those rounds end up just being like huge rounds where it's again like we don't do that many of these like mega seed rounds you know we haven't invested in any Neolabs or but I think on the whole the best strategy for a newer manager would be to not try to compete head to head unless you actually can do that repeatedly and that's like the firm's goal but I'd say for 99 % of new funds like you should not try and compete with the sequoia or benchmark on a seed deal yeah well it's probably figuring out what are you the best at and just doing what you're the best at yeah exactly it's like you know you have networking this thing you help with this thing you have experience with this thing you gravitate to these specific types of founders and markets like just figure out what that is and then and you can actually probably compete and go head to head if that Venn diagram overlaps in that middle.

1:31:08Yeah, totally. It could just be like, again, we're going to go really focused on day one company creation and doing more pre-seed investing. We just did a pre-seed defense company in LA and we talked about it earlier. We did it at a$7.5 million post and then they ended up raising... the last one was like 60 from like well-known barrier firms and so there's like a an art to being early but still being in categories that you know will be like fundable in the near term yeah i think i think kind of like pin yourself in a position to see see founders earlier than other firms and say yes faster is probably probably like the simplest way to do that.

1:32:01Turner Novak:Yeah. Do you have a favorite like founder, CEO, like business, historical person from history that you've gotten a lot of inspiration from? Whether it's an investor, could be like athlete. And when you've like, you get inspiration from it that you've learned a lot from. Yeah, I would say to my grandfather is probably like my favorite businessman of all time. Okay. Who's your grandfather? He started a store or something? He was like a retailer? Yeah, he was a retailer. So he started, his name was Mervin Morris and he started Mervin's, which became a public company. Mervin's? Yeah. I don't know if you ever heard of that department store.

1:32:38Turner Novak:I don't think so. What did they sell or what was like the, their differentiation in the market? It was, so he served in the military and came back from, he actually never was deployed, but he was a, he grew up in a, his family was based in Delano, California and owned a, Like the local store, there was like a single store in Delano. Okay. The general store? The general store. And so he got to the army and he was really good at retailing. And so they put him in charge of, this was in Arkansas. And they put him in charge of the bases store. And he got back from that deployment and being in Arkansas.

1:33:23And it was like, everybody's going to be coming back from the war. and they're all going to need clothes for themselves and their family. And so he just started a store that became like the store that... The idea was to build a store that everybody in your family could go shop at. It's like a kind of like family-oriented department store.

1:33:42Turner Novak:But it's kind of for veterans or not specifically? No, he just had that insight. It could be for anybody, but it's kind of like just... Yeah, there's not a single place where everybody, your kids and your... can go to. So it'd be like today, it'd be like, Target or Kohl's or something. Like back in the day, it was just like a department store specifically for women or men or something like that. Or for adults. It was more adults and it wasn't as, like the pricing wasn't as affordable too. Because also these people aren't going to have a lot of, you know, huge amounts of money to spend on clothes.

1:34:17So building like an affordable family first retailer in California was the core idea. He, He grinded his way to one store. He took up loans to open the store. His family was very poor. They were poor and ended up building a public company. So I got to see him and spend a lot of time with him.

1:34:42He lived until I was under one, but I was very close to him. He taught me a lot about business. Also taught me a lot of his employees were very close to him. and a lot of their families were close to him. So he's also just like someone who people loved in the company. He treated people really well. And so it's just, you know, being around that from a young age was pretty, pretty informative and cool.

1:35:07Turner Novak:And he loved to be 101. He did. Yeah. Yeah. He stopped going to the office when he was 96 and he ate really well. He's like Brian Johnson before Brian Johnson. I was going to say Brian Johnson would love this guy. He's the original Brian Johnson. He had a heart condition that he discovered in his early 40s. It might have been late 30s. But he just started eating really well. And he was obsessed with cardio and going to doctors. All these things that you read about now. We have become in industries, but took care of himself. And then I think going to work was pretty helpful. He never let his mind go.

1:35:49Well, it's been a lot of fun.

1:35:50Turner Novak:Thanks for coming on the show. This is great. Thank you. And thank you for listening to my conversation with Jeff. Remember to check out this episode's sponsors, Numeral, Flex, Amplitude, and Monaco. If you liked it, share it with a friend who's building a fund, or anyone who still thinks venture and product are two different jobs. Make sure to check out the back catalog of over 150 episodes with investors like Gary Tan from YC, Ali Partobi at NIO, and Eric and Chathan at Benchmark. Tune in over the next few weeks for conversations with Tomer London, who started Gusto, Jamie Simenoff, who founded Ring and has since scaled it to over$1 billion in revenue inside Amazon, and Dara Buckley, the first employee at Stripe, who since started a company called Increase and bought his own bank.

1:36:34Turner Novak:If you don't want to miss any of these, subscribe to our newsletter, The Split, linked in the description to get each episode plus a transcript emailed to your inbox every week. Thanks again for listening. See you next time.

1:36:51you