Footwork’s Secret Sauce | Mike Smith and Nikhil Basu Trivedi

23:43It is, you have to hustle. It's extremely competitive. I woke up every day for 18 years competing against one of the biggest competitors out there in Amazon. But I think what is interesting about this job is you're competing against not just one competitor or one style. you're competing against all sorts of very, very talented people, amazing firms. The people that we want to compete against are the top tier firms. And that is a different rhythm and different kind of way I had to show up every day. And so stylistically, I had to pick up the pace and really understand sort of the rhythm of venture.

24:23And, you know, I was lucky enough that I had, you know, folks that had been doing the job for a long time. They happened to be sort of more famous folks like Jeff Jordan that had spent time with me as I was making the decision and Bill Gurley and James Slavitt and Alfred Lin. And, you know, they'd been at amazing firms. Many of them had shifted from operating to investing, but that, you know, they can tell you all that you is required to kind of understand sort of the pace and rhythm of venture versus operating. But until you do it, you don't really understand.

24:54Turner Novak:Some people say it's like retirement. like when you become a VC? I knew that wasn't true. I was like, you know, I had one of those four said to me, you know, this isn't a vacation or retirement job. I knew that that wasn't true because I'd worked closely enough with him and the people that I respected the most, I knew were busting their tails to do the job. Yeah. So I wasn't that naive or even walked into it thinking that. But I just think that there is like, you know, I remember early in our relationship where, you know, we met a founder that we both really liked And Nikhil's like, hey, we need to go visit this founder at their place in San Francisco today.

25:36And I was like, I don't think we need to go today. Why today? Well, we just do it on Monday. And he was like, no, today. And I couldn't move things around. So he ended up going today, that day. And you just realize when your instinct is this is a really interesting founder, an amazing business, the answer is now. and go today. And that just isn't like something that I had had practice with or sort of muscle building for that I do now. Because you just understand like this, you cannot wait. When you hear some of the best firms and the best investors and the way they operate and grateful for podcasts like yours and where people sort of share like how they operate, you're like, wow, if we want to be competing with and against the best, we need to sort of have a now mentality.

26:25Turner Novak:So is there a reason you feel like founders usually pick you guys if you're truly like, what are the most consequential term sheets being signed this week or next week? Like, how do you, why do you think people pick you versus, I mean, probably thousands of choices out there, really? I think both of us have actually been pleasantly surprised about our ability to win in this first four and a half, five-year period. I think we've won more than two-thirds of the times that we've given a company a term sheet where the founders have decided to work with us. And almost every time we've competed against great firms.

27:01And so what are some of the reasons? I think one is because it is just two of us, we can move really quickly. And so we're very often the first to have conviction about a company, to give the company a term sheet. And I think that independent conviction does matter to a set of founders and shows up differently than the many firms that are kind of waiting around for something to become competitive before they dive in. Second, we actually really showcase our thinking on the business as we get to know it. And so we will share our investment thesis with the founders. We'll tell them, hey, here are the questions that we're debating internally.

27:43Here are the things that we're getting excited about, but here are the things that we see as the risks. What do you think? We have a version of a mock board meeting that we do with almost every company before we invest so that they can get to see... This is before you even give them a term sheet? Yes, yes. And sometimes after we give them a term sheet, but usually before because it's a great test for us. What will they be like to work with? And we think it's a great mutual test for them to be able to see what we'd be like to work with. I think another thing that really resonates with a set of founders is that they get this combination of both operating and investing experience when they work with us.

28:23And both Mike and I, because we don't make that many investments every year, we can actually show up for every single one of our portfolio companies. We will both join the board meetings of the companies for the first year after we invest, which is kind of a unique thing that you actually do get both of us. We never think about, is it Mike's investment or my investment? We don't even know how to delineate portfolio internally. So every investment is our collective investment. And they do get both of us. And again, that matters for a set of founders. And then I think finally, fourth point here.

28:55So first was speed. Second, thoughtfulness and showcasing our thinking. Third, they get this combo, both of us. And then fourth, I think so much of this business ends up being about the human aspect of it and the relationship between founders and investors. And we've always met the company in person before we've invested. So we've tried to really get to know the founders and other people on the team as people. And so very often just founders opting into the trusted relationship they feel like they've already built with us. I feel like we're the people that they want as part of the journey for the next many years.

29:42that's what kind of puts us over the edge. Would you add anything else, Mike? No, I think those were well covered. But I think all four of those need to show up with intentionality, with kind of thoughtfulness. And I think we do a pretty good job of all those things. But nothing I would add. There's a few other tools in the toolkit. Maybe we don't have to disclose publicly. But we do also, we try to actually add value to the business. We showcase that.

30:11Turner Novak:You can't say there's other things in the dots. I mean, give us at least one thing. Well, one thing I'll just share is we have a document that we write up, you know, about how we'll work with the company that usually we end up sharing with the company. And so that's kind of our one pager, our sheet on sort of why footwork. And we tailor that to every single investment. So what's usually on the list? Well, it includes some of the things I just tried to discuss. And then, you know, specifically to that company, are there people in our network that we think will be very valuable, potential customers, potential hires, you know, based on the conversations and the back and forth that we've had as we've gotten into business.

30:58Here are the things that we think are going to add it to you and where we can actually be added. I mean, I think there's a level of diligence, even in these kind of fast processes, like of getting the nose and a kill reference, more people on the team. What are their strengths? Where do they want to develop? And then are there people in our ecosystem that would do anything for us that honestly would also be mentors, potentially, not on a monthly basis. And generally, it's like a couple of times a year. But being able to articulate, hey, we care about you both as founders in this duo, but we also care about the development of your team.

31:39And we care about sort of being able to map people in our ecosystem that we think could be good thought partners and good mentors for them. And I think that's gone over well because, as Nikhil referenced, they end up sharing the dock with the broader team. And the broader teams gets to see, oh, wow, this firm really cares about us as a company and not just the founders.

31:59Turner Novak:It's really interesting how when you talk to maybe just like an engineer and to like the 10th employee of the company, the investors are kind of this like mystical, like investors. I've only met them once or something or like they were in the office the other day, but like you didn't actually get to know them. But one thing I found is I just, anytime I find someone like an employee joins a portfolio, I just add them on LinkedIn. I'm like, hey, I heard, like, you know, Jacqueline mentioned you're joining next week. Like I'm an investor. Let me know if I can help. You just try to meet him if you can.

32:29Turner Novak:Love that idea. Yeah. We are very involved in hiring key folks on teams. And I think the feedback that we get consistently is for that candidate, even if they've been at an early stage company before, they're like, this is the first time I'm ever meeting an investor. And I appreciate that the investor cares enough about the company building side and cares enough about me as a person to actually spend time sort of in the interviewing process. There's, you know, bi-directional benefits to that. We're evaluating that candidate, but we're also able to sell the candidate with a broader portfolio of what we've seen works and doesn't work.

33:08And we're intellectually honest about sort of the strengths and the opportunities kind of of any opportunity that they're joining. I think they really appreciate that. And it's different than a lot of other firms.

33:19Turner Novak:Do you guys know why more investors don't meet the employees of the companies that they're investing in? Like it kind of seems like a probably should. I'm constantly shocked by how few investors, you know, spend time when they're thinking about the investment, getting to know more than just the founder. We see it even in our portfolio companies that go out and raise the next round that, you know, the investors are not asking to meet with more of the team. Whereas we met, you know, all three, four co-founders, we met a couple other people on the team in a very short period of time. You know, maybe it's just that so many folks have a bunch different priorities.

34:06And I think each slot for us is so precious that we think really carefully about each decision, opportunity cost of each decision. And so it does seem that other firms treat those decisions and then treat how they help the portfolio after they invest a little bit different. Yeah. I mean, I think it's just a different level of diligence. It's one, but one perspective I was also going to share is, you know, I think on the company side, having been on the company side, there's, you know, many founders that are like, you know, they just want to run their process. They don't want to involve the broader team.

34:49They just want to sort of like, hey, I'll be in charge of fundraising. You be in charge of like doing your job and building product or helping run the company. But in almost every case, when we ask to meet with broader people on the team, like we get granted that.

35:05Turner Novak:They're usually free because no one else is asking. Yeah, I think because no one else is asking. And again, I think the founders, the smarter founders also see the benefit of having the team feel like, oh, it's not just me, the founder, that cares about them. It's this broader group of people that are all going to help me be better in my job and help us succeed. And so I'm surprised people don't do it also. But I do think there were reasons on the company's side why you might look at it as like, well, why would I want to waste that engineer's time? I want them just to code. I've had probably like a third of the companies I've invested in, the CTO will be like, you're the only investor that he has to meet me.

35:50Amazing. I'm always just like, that's kind of sad. I feel like, I don't know.

35:54Turner Novak:But yeah, it definitely feels like a level of trust. There's definitely cases where you go and get dinner with them. You've already met the CTO before. And they're excited that you're the investor that they've met and that they know. Totally. I think in general, the better the founder, the more secure the founder, the more excited they are about having an investor meet more of the team. It might be also... Maybe I'm hyping this up. Maybe we're just in like a privileged position where the founder's like, okay, introducing us to the co-founders. Maybe some investors are like, I don't know about that.

36:32Turner Novak:Maybe, I don't know. Well, I mean, I do think a superpower or strength of ours, maybe not superpower, is that we do care and we are human. And, you know, one of our pillars of the firm is relationships that are human, not transactional. And I do think in cases of meeting people, we hopefully show up that way. And I think that that then earns us the right to get broader access and hopefully make better decisions around, you know, as a result of that broader access. And one thing I wanted to ask you guys about. So when you first started the firm and you announced it, it seemed like pretty clear we're doing this equal partnership.

37:12Turner Novak:It's there's going to there's two of us. There might be more people in the future. It's still just the two of you that are the GPs. How is this kind of like evolved over time? Yeah. We're both not in your heads. So our entire investment team is still just Mike and me. We have five people in the company, so we have three great folks on the operations side. The investment team is just the two of us. I do think that that has also shown up differently in the market and helped us move more quickly on decisions, helped us win decisions, win over companies in a number of instances. the fact that it is just the two of us.

37:50But our original vision was to build a firm that is more than just the two of us. And we continue to think about that every week. Since we started the firm, we've had several people who we've gone really deep with to see whether or not they should be the third GP here. And we just haven't quite gotten there with anyone. But that is still our hope. What we've realized is, in the same way that Mike and I got to know each other really well before we did this, we have to get to know that person really well. They also have to be entrepreneurial, excited to go kind of re-found the firm with us. And so the bar is very high for who that person is, but we're hoping that it does come together with somebody else in the next several years.

38:38Turner Novak:Is there anything particular you really want to add or that you haven't quite gotten there on some of the people you've looked at? I mean, I think the thing we want to add is someone that is accretive to the firm, that pushes us in different directions, that has, you know, sort of either the way they invest or the way they think about markets increases the surface level and surface area where we can invest. It doesn't, it's not particularly helpful to have someone that thinks, you know, like us and, you know, sort of we want people to kind of push our thinking. And so I think that's the most important thing to sort of seek is like someone that's going to sort of take us from what we think is on a track of being a really great firm to actually being a really great firm.

39:22Turner Novak:Do you run the risk of, I know there's like this whole, the more people are in the partnership, the more you might disagree on something. So it maybe begs another question of like, how do you guys actually make decisions? Like when you, let's say I'm like, hey, you guys should meet Footwork. Like they're awesome fund. You should talk to them. my intrusions and founders, what happens from there? Yeah, practically, one of us has to get really, really excited about every investment that we make. We actually rate companies on a one through four scale, four being strongly supportive, very excited to make the investment, one being strongly not supportive.

40:01I will leave the partnership if we do it. Very, very unexcited. What we've said is that at least one of us has to be a four, obviously. and we are okay with one of us being a four and the other being a two and still making the investment. In reality, in the last four and a half years, in most cases, both of us have been a four. In a number of cases, one of us has been a four, the other has been a three, and we've still moved forward with the investment. But we are very comfortable with disagreeing and committing because we respect the other's judgment. The person who's super excited about the spikes in the investment, feeling like we have to make the investment.

40:53And I think that that approach fits in nicely with the idea of having three or four GPs one day versus just the two of us. you know, there are things though that would have to change as we grow the partnership. You know, right now, we can just call each other and make a decision. And what you realize going from two to three is it's harder to have that happen because suddenly it's a three person group. That same day, we got to go meet these guys. That continues to get harder. Exactly. And, you know, the node between each person has to be really strong for it to work. And so, you know, that's why the time that we've spent with potential people has been a lot of time.

41:40It's been intense time. And will continue to be to hopefully find the person that we want to do this with long term. One thing I appreciate sort of connecting two dots about sort of as you're talking about sort of this idea that we would do a four or two investment where someone does a two is I even though there's only been a few where we've been four threes after the investment, we do not talk about who is the four and who is the three. You don't talk about like if something's not working in a company, like, hey, why were you a four in this case? Like it is a footwork investment. And whether it's working or not working, we are all in on sort of helping that company figure it out.

42:27And so I think sort of appreciate that about sort of the core values of the firm, of the idea of teamwork and no attribution. So in fact, I would say we're sort of accountable in the other direction. And we probably spend more time thinking about ones that we didn't do and which one of us was less excited about that company and why we therefore didn't do it. Yes. So thinking about like how you not make the mistake in the future. Exactly. And so, but for sure, every time we've done something, we have been all in. And, you know, I think you're right. Like Ellie ever talked about. Well, and I think that's what, where other firms, like it's more challenging for other firms to behave that way.

43:07It's like, you know, if something's not working and I said it was the best investment ever, you know, I think it's hard for you to trust my judgment. It's hard for you to support me in helping that company. And so I don't see too many firms have just such a short term view of, you know, performance and who gets the credit versus realized like this is such a long term, you know, game to ultimately have returns. So why do you think that is? Well, I do think there's just a lot of incentives that lead to that, right? Like, you know, if you gain more power in a firm, you know, you can bring more people aligned with you into the firm.

43:55You can have more economics in the firm. You have the ability to sort of do it for a longer period of time. And so a lot of these dynamics show up within partnerships over time, unless you are very intentional, I think, about trying to be a certain way. It's very easy to slip into a different position.

44:16Turner Novak:So you think that politics, like internal politics, you might think of for a large corporation, like a bigger company, is actually much more prevalent in venture capital firms than most people would kind of appreciate or realize? 100%. I mean, just look at how many changes have happened with venture partnerships in the last, you know, couple years as one proxy for that. And not just bigger firms where people have left, but even small firms, you know, DEOs that are now single managing partners. For somebody who's never, who's hearing this for the first time, like, what usually plays out in some of those situations?

44:50Turner Novak:Like, how do these things kind of develop? Like, if maybe if I'm a founder navigating this, like, who this, there might be some things bubbling below the surface that I should keep in mind when I'm choosing who I should work with for the next decade or two? Like what are some maybe some things to just think about and try to observe and kind of, you know, keep in mind as I'm making a decision? Yeah, I think that's a great question. I mean, I think looking at asking questions as a founder, you know, how do you do attribution? How do you decide who gets credit for something internally? is that a system that you have?

45:26How do you decide? So why is that one a big deal? Well, because that typically governs someone's longevity at the firm. And so if you know that someone at the firm is the person who did the cursor investment and cursor is working incredibly well, then it's very likely that person is going to be at the firm for a longer period of time than someone who doesn't get credit for that investment. And so I think understanding how attribution works, how the firm thinks about whether or not someone's going to be here for many years, the challenge is that everyone puts their best foot forward in the sales process as they're trying to win an investment.

46:11So they're going to tell you everything that you want to hear as a founder versus the truth. And so you kind of have to look at their actions over time to really judge them or you have to talk to someone who's more unbiased. Maybe it's one of your existing investors who has the intel. And so I think those are some things that you can do. But I think it's a great question because not enough founders have probably thought through this, especially for the person that they're going to have on their board and sort of the relationship they're going to have with the firm, if in a success scenario, it's 10, 15 years of working together.

46:52Yeah, I mean, I think that, to Nikhil's, using Nikhil's language from earlier, I think the best founders have other founders that are further along, that they ask questions of like, how did you pick that board member? I think the best founders do back channel references on the partner themselves.

47:10Turner Novak:Like, not just the firm. Not just the firm. Because honestly, the truth is like, you know, I don't know if it's like a spicy, opinion on this, but I do think firm matters less than individual. To Nikhil's point, is that person going to stay at the firm? Especially the way most firms work, where you're working with the individual versus we actually do both work at every company. That's very rarely how it works. Very fair. I once took a call from a founder who was making a very big decision about who was going to lead their series A. They were lucky enough that they had term sheets from three amazing investors and they wanted to know what a particular investor that we had worked with, what's that person like over the five years that you've worked with them?

47:57What are they like in the boardroom when you're having a bad day or you don't make numbers? What is their behavior? And I think those founders that do like that kind of bi-directional diligence and are really trying to figure out, do I want to be in a marriage or in a relationship with this person for a decade? They're doing that kind of work because they understand the gravity and the importance of the decision of who they're going to allow on their cap table. And I would encourage all founders to do that because it is a big, big decision. So I think not enough founders kind of take that process as seriously as I think they should.

48:34Turner Novak:Yeah, it's probably like what sort of, I guess, help you'll get from the group of individuals or what sort of support or care focus you'll get. Because there might be some cases where we can think of the biggest, most politically bureaucratic firm you could possibly think of that actually you do get a lot from. Yep. And they have a big team that they add all this value in all these different ways. and the firm will actually throw the support behind you. But that's probably like if they know they're going to make money from helping you. I feel like it's a pretty transactional in that sense of like, we know that you're doing really well and want to invest more.

49:14Turner Novak:We'll help you because you'll let us. I mean, very few companies have this up and to the right, very linear journey. So you go through these periods of being in a trough or going sideways. The other thing I was thinking about coming into this is, founders get pretty worked up and I understand about sort of valuation at each stage. Very few companies have like this perfect valuation, like every round they did was something that they were excited about. Facebook did a 40 % down round. Yeah. And so what you have to, as a founder, really think about is like, who are the people around the table when I'm going through these troughs?

49:54Like, what is their behavior when I'm going through these troughs? Trying to really understand, you know, are these people that really have my back and have the company's back versus or thinking about either their next fundraise or thinking about their own position within a firm? Like, that's not particularly helpful to the founder or the founding team. And so I think, you know, you can't obviously uncover all of those questions as you're making decisions about who you're going to allow to lead your Series A. But you can do more work to try to figure out, again, what are they like on their most challenging day?

50:29That's a question that I encourage founders to ask about us and also ask as they're considering other investors they're inviting onto the cap table and treating it like it's an invitation on a cap table without too much ego. But again, we are lucky for the best founders and the best companies to be a a small part of their journey. And the founder needs to sort of understand, again, the length of time and sort of making sure that they're inviting people into the kind of party and onto the cap table that they actually want to spend time with and actually can add value in these moments when they're trying to be great.

51:06This maybe begs the question,

51:09Turner Novak:talking about challenging moments, what's been the most challenging moment or period or thing about either starting your own firm or footwork Is there anything that's just way more challenging than you would have expected? I would say the thing that first comes to mind for me is because it is just two of us, we can't possibly see every company that we wish we could see. It's kind of random and lucky. Like just someone thinks of you in a certain moment and you don't know what's going to show up sometimes. Well, sure. We try to do sort of the input work that leads to it being less random. But you're totally right.

51:48There's like a massive amount of serendipity and luck that goes into just sourcing the next investment. And you kind of actually have to like maximize the surface area for serendipity for it to happen.

52:00Turner Novak:Yeah. But I think that's the area that keeps me up the most. Now, we do calendar audits to figure out like, are we spending more than 50 % of our time on finding the next investment? and we've been pretty consistent for a long time now of actually hitting that input metric. About 50 % of time is on sourcing. Yeah, so the principle behind that is we're only as good as our next investment. We need to be spending the majority of our time finding the next one and we can't just get bogged down in film building related stuff or portfolio work. We have to always be thinking about the next one. So we have little analyses such as that to try to drive the right inputs.

52:49But it's still, I think, the hardest thing about starting a new firm, about it only being two of us, about us wanting to be a great firm that many founders put on their list of the 10 firms they want to go to for their CEDO Series A. is just kind of that top of funnel.

53:11Turner Novak:Yeah. And I think this might be an interesting time to talk about what is a full work founder. Does that make sense? What's kind of the things you guys think about? And I know you have a pretty big track market of greatest hits. Mike, a little less just because you weren't doing it full time. I was not. As much. But maybe there's certain things you guys think about today throughout the course of your career, like what you've picked up on and what makes some of them great? I mean, there's several characteristics we look for. I think when we started the firm, we had these three characteristics that we publicly talked about.

53:44You know, founders that are hungry and humble, founders that know their business inside now, founders that are magnets for talent. I think some of the things that have evolved over time are this premium that we place today on a founder's slope of learning and how quickly they are able to learn and iterate on the business. Because in this AI era, and obviously the chat GPT moment happened post our starting footwork. And so the last three years, majority of the investments that we've made have been AI first companies. But we think because of how quickly that world of AI is moving, founders that are able to learn and adjust more quickly, you could say kind of have really strong footwork themselves, is just a super important gene for them to have.

54:32And so that's something we probably face a premium on today. How do you gauge that?

54:37Turner Novak:Yeah. Because you're meeting someone, you've got to move quick, make a decision in a week. Like, is it, oh, they got so much more in the past week? Yeah. Honestly, it's a little bit of that. You can tell if someone seems like they're growing and changing, evolving, even in the span of a couple of meetings that you have with them. Yep. There's questions that we try to ask about what has changed in the business or changed you're thinking about the business even in the last couple weeks or let's say in the last quarter actually one of the benefits of getting to know more than just the founder is sort of understanding the founder better in the lens of the people they've recruited to the company and what they're like and sort of as a proxy for the broader team and as a proxy for the things that the founder cares about yeah i've definitely had that before where you maybe like meet the co-founder and you get a little bit colder just based on how the conversation went We've had the opposite, which is we actually get warmer.

55:32I can think about several examples in our portfolio today where we were impressed by the founder's CEO, but we got super excited up to spend time with their co-founder. And then, yeah, Mike, what else would you say? I mean, I love a couple of the questions that you've introduced, which is, you know, this is act one of your business today. What is act two and act three? Like the fact that you actually are sort of asking the founders to think about, you know, you might have some product market fit today, but to build a category leading company that actually has a chance to go public, you will have multiple acts.

56:07And I think the best founders have given some thought, even though it's not super cogent, like to what those future acts will be. So that's one I think is a tactical question we ask. Another one we ask is, if there were a couple of challenge topics, and as Nikhil referenced before, we're going to simulate a board meeting, what would those challenge topics be? So what we're looking for is sort of vulnerability and actually things that aren't working in the business, but also that they've already thought through some of the ways that they are going to fix this thing. And they want just some thought partnership along the way.

56:44That's another question or set of questions that I think help us evaluate a slope. So the third one I say, and you have to be careful about this one, but most of these founders have a deck and they've presented a lot. And they are very... It's like a script. Yeah. And so what you want to do is to test some of the script. Not be rude, but ask a question as they're going through the script to see how they adjust to that question on a slide you have on go-to-market or on the financials. just to see are they able to kind of shift out of the script and into kind of really thoughtful, you know, sort of point of view.

57:26And so that's a third thing that I think we try to do to just evaluate against slow.

57:31Turner Novak:And it's kind of interesting when you think about the evolution, how you get stronger as a founder. Nikhil, I know Canva, you invested in their seed round. This was 2013? 2014. 2014. I mean, LLMs weren't a thing. It's like eight years pre-LMs. But when you use Canva, there's quite a few AI generation features inside of it. They've obviously benefited from it. And it's like, you first off, don't even know that AI is like a thing. Like AI wasn't invented in 20, like it didn't exist in like the same context. But then being comfortable with like, oh, they're appropriately taking advantage of and continuing to evolve over time.

58:11Turner Novak:I mean, I think that, you know, founders that are just so obsessed by the product about making it better about sort of You know, continuing to have some sort of a competitive advantage, not just resting on their laurels and resting on things that are working. You know, that's the type of founder that we just absolutely love working with. And the hard thing is that I think many of the best founders that we've worked with, it was very difficult to tell from their resume that that would be the case. You look at Melancholyt of Canva and there was nothing in their resume having grown up in Perth, having started a yearbook company and then a software company around design that they would be that way.

58:56You have to actually spend time with them and understand them and sort of question them to get that out of them.

59:03Turner Novak:Do you remember what kind of spiked back when you first met them and were making the decision? I think the thing that was pretty amazing about them in retrospect is the level of ambition that they had from the early days. Even as a yearbook design software? You know, they were talking about, you know, taking on the whole design market, you know, going after more companies like Google and Microsoft than Adobe. Like enterprise design tools, like in the sense of like, instead of using Google Slides, you'll use Canva. Yes. you know, so being the design software product for non-designers and how big of an opportunity that is, much bigger of an opportunity than Adobe.

59:52Like people always put Canva and Figma and Adobe in the same breath.

59:57Turner Novak:Yeah, I don't even think Figma and Canva, they're like maybe 1 % customer. Exactly. The use case is like not the same. Canva is a much closer business and total addressable market to Google and Microsoft. it's the everyday person's sort of work suite. Much like the G Suite or Office. You have video editing tools. Like I actually, the intro for this podcast episode, my wife made it in Canva. Like it says such a, and they have documents also. Like it's literally like the productivity suite you would use for doing professional work. They have it all at this point. And they were thinking that way in 2014.

1:00:35So did people just -

1:01:04And it was almost, I mean, we talk a lot about founders have to be crazy to go build something really big. What you don't want is for a founder to be delusional. But they have to be crazy. And there's a spectrum between crazy and delusional that Mike likes to talk about that every founder is on. And so what I remember vividly from that first meeting actually is they seem kind of crazy to me. Like, you know, two founders who are here from Australia, who... Dutch surfers. Like, you know, a bunch of people have passed on kite surfing.

1:01:37Turner Novak:Yep. But huge ambition. So Mike, that's a, maybe begs the next question, is just like, how do you decide? Like, because all, we all, all investors see these decks where it's like the TAM is, you know, it's crypto, it's$10 trillion TAM. Like, how do you decide? Like maybe that's a little too, too crazy, but this design software that competes with like a Google and Microsoft or this box that shows up with a bunch of clothes, like it's going to, you know, compete with in commerce. Like how do you just like delineate between too crazy and like truly ambitious that could actually work? Yeah, I mean, I think on sort of the market and the product, I'm pretty wide spectrum on what can be crazy and like actually delusional.

1:02:23Because you do want people that are creating sort of like these category defining companies.

1:02:30Turner Novak:That's how you build a big business. That is exactly how you build a big business. And so I like to hear it all. I mean, there's certain areas where we don't have certain expertise or interests or can't add as much value. But for the vast majority of companies in technology, specifically in AI, we actually think we have a right to sort of be good partners to those businesses. And I think we're looking for almost the craziest stuff in terms of like what their ambitions and Nikhil's point, what their ambition is for what they want to build and sort of the why they want to build it. I mean, it can't just be, you know, I was doing some market research and read this McKinsey report on how there's white space here.

1:03:12It needs to be some acute challenge that they really wake up every day thinking about why they deserve to be in the world. And you can kind of feel that in a meeting with a founder. It's like, are they going to wake up every day and say, this is my mission and this is my reason for being? And can they attract similar enough people to that mission and that craziness to sort of build a huge company? And I think most of the best founders, you see that. I mean, one of the things people ask me about is like, you know, why did you join Stitch Fix when it was just four people? What was so special about Katrina Lake, the founder?

1:03:49And Katrina shows up that way. She shows up on a good part of the crazy to the illusional spectrum. She knew her business like throughout. She wanted to have a completely different shopping experience. It felt like data science was an amazing way to do that efficiently and effectively. And she built this amazing company for nine years that she was the CEO and founder of. And you could just tell in spending, we spent multiple cycles together before I decided to join, that she was a very, very special founder.

1:04:24Turner Novak:So why did you decide to join? Was there a certain thing that tipped you over the edge? I think it was like 75 % her. And what I appreciated about her is that she was, you know, intellectually honest about what she was good at and where she wanted help. She was super clear on the vision. If I think back to the first conversation I had with her on the vision for Stitch Fix and what transpired over, again, a decade of working with her, it was pretty aligned. There were very, there weren't like bumps in that vision road. She was super clear on what she wanted to build, which then, as you get hit by fundraising challenges or just the growth, it went from zero to$2 billion run rate in nine years, a physical business that is very hard to do.

1:05:09There's challenges with growing that fast, but she stayed super consistent on the vision of what she wanted to build. That consistency was something that showed up early in my conversations with her. The last thing I'll cite is slope. I didn't call it slope back then. I just sort of talked about it as raw smarts. But when you talked to her about the business and you kind of talked about what was working and what wasn't working, and when you talked about what's the contribution margin today, what's the gross margin today, what's the gross margin going to be five years from now when we're at$50 million, which is what we thought we would be five years from now.

1:05:44It was a very different and higher number than that. You know, she just had like amazing answers for like what was going to drive margin expansion and why this was a great natural business to build. And that was something that I got very attracted to, like, try to work with her and partner with her on achieving that vision.

1:06:03Turner Novak:And so what did you do? Because you joined your, you had joined Walmart.com. I had been at Walmart.com. I was chief operating officer at Walmart.com. And I had been, I picked up my head to kind of see what else was out there for, you know, opportunities. And there were some CEO opportunities, but there are a decent amount of COO number two roles with these amazing founders. And I met her and just was blown away by her and was lucky enough to join. I think she was dating other people like Nikhil was dating other people and building a firm. But fortunately, I won and was able to work with her for a number of years.

1:06:40Turner Novak:So what's the biggest challenge or what was the biggest challenge with Stitch Fix specifically? Are we going to get to... Yeah, we are. We are I don't put the time to ask him, like, why are we so much? Did you guys actually talk about Turner and your leadership team and how cool she was? We did. Because Turner, like, had an amazing following on Twitter. And it was very loud and meme-ish and thoughtful, honestly, about it. I tried to spread all those. Yeah, so we had a good bunch of leaders that sort of knew of Turner. And we would talk about Turner and our leadership and, like, how, like, this guy's so bullish on us.

1:07:17And it was inspiring to have someone that was like in your corner. Like you, you had boxing memes, I think that you used to your own. So it did feel like you were physically in our corner.

1:07:27Turner Novak:We still, we still use it. I mean, my, my daughters, their favorite thing is going and getting the Stitch Fix box. I think we get a quarter. Okay. Right on. Yeah. And they like the app where you can like pick what you want. It's like their favorite thing to do with grandma. It's an amazing business. I still am really proud of kind of what we, what we were able to accomplish. I think the biggest challenges in the business, one was just scaling that quickly is hard, as I referenced before. It's like, you know, we had at the peak when I was there, 5 ,000 stylists. Those were the people that would pick the last five things that would go on your fix.

1:08:03We had 3 ,000 people in warehouse operations across five different warehouses in the U.S. and one warehouse in the U.K. When you're managing that large a team, it's like definitely not easy. I managed somewhere between 12 ,000 and 15 ,000 people at Walmart. And it's like when you're managing that many people, things break or it's hard. So it's just managing that level of scale, that many people and just the growth. I mean, the sales numbers, just so you know, before we filed were a million my first year, eight our second year, then we did 75, then 345, then 760, then 960 and filed. So like that kind of growth in five years is not normal.

1:08:47It was a ton of efficiency too, right? Yeah. We got to cash flow positive on$17 million of capital. And we only raised in private capital$42 million of capital. The last$25 million we raised was we didn't touch. And so, yeah, it was very efficient. I mean, part of the efficiency gets to the second point of like the challenge is people didn't really want to fund the business. Why not? Well, I think part of it, I get it now being on the other side, some of it. Most of it, I still get salty about. On the salty side, I feel like there were times when people dismissed her or dismissed kind of the team.

1:09:29This is where I do think going back to how we want to show up of engaged and ask good questions, I was a little to a lot disappointed by what I was seeing on the other side. You know, we'd go to these meetings, people would be late to meetings, they would ask

1:09:44Turner Novak:not that great a question. What if Amazon does this? I mean, that was one, you know, another one is like, Trump club's just going to do this and like, they wouldn't listen to the data science machine learning aspect of it. They wouldn't ask like additional questions to try to understand how is that differentiated. So it was, it was real, like actually was some like machine learning. Oh yeah. We had at the peak 152 data scientists and you could see in the data, like how getting more data and getting more scale and the way that the algorithm seems sort of understood information that we were getting in the style profile and a checkout was driving differentiated performance in the business.

1:10:21So you were like, people were buying more things. So you could see like if they figured out this algorithm and made it work more effectively, the contribution margin would go up. Yep. LTV would go up. So you could drive direct impact from ROI of the investment you're making in data science of machine learning to actual business results. And so people didn't really spend the time to sort of get that in private markets or sometimes in public markets when we talk to investors. So anyway, we failed to raise our Series A as a result of people not liking the business. We met with 65 firms, 60 of them I didn't want to be in the same room with after I left for some of the reasons that I cited earlier.

1:11:01And we had to develop, do a bridge and figure things out. But to the efficiency point, we were forced after all those meetings and being really close to the edge and like a few weeks from not making payroll to like figure it out. How did I get this business? Yeah. How did you bridge those like weeks of cash? I mean, we bridged it by having plans to reduce the team. But significantly, we were able to get a million and a half from one of our existing investors that allowed us to like extend that a little bit longer. But the most important thing is we got really focused on gross margin and contribution margin and what we needed to do to sort of own our own destiny.

1:11:42Same kind of stories that we tell some of our teams that are struggling now. It's like, you can do it. You have to make very, very hard decisions, but you can do it.

1:11:51Turner Novak:Were these like periods where the top line wasn't growing? So it wasn't like the contribution and gross margin kind of messy. So people were like, It was just when you're buying inventory to fuel the growth. When you see the growth, that is capital that goes out to buy stuff that you wait for customers to buy it from you to get that capital paid back. And so we had great turns and it was a super working capital efficient model. But you still had to buy the clothes in order to ship clothes to people. And that was the biggest issue is like you needed capital to do that. So people are like concerned if this is a bad run, you just run out of money.

1:12:30Well, there's that. But here's the reason where I did respect certain firms and people in particular's opinion about the business is on two dimensions. One is, you know, we're a venture capital firm. We're writing checks between a million and$15 million. If we're going to write a$15 million check, it isn't easy to write, have half of that, $15 million go to inventory versus developing product. We had some investors be like, that's not a business that I'm interested in. I'm interested in$15 million going to engineers and data scientists and not product. So I get that. And the second one was, this is just not a business that I wake up every day super interested in.

1:13:14And women's dresses is not a business that I'm super interested in as a business. And you want investors, having been on the other side, to intellectually be super curious about the business and wake up every day sort of thinking about how can I be helpful and where can I ask questions to help advance their thinking? And so those were two reasons that I totally could sleep at night and be fine with why someone passed.

1:13:39Turner Novak:Yeah. And I remember, I mean, I don't know if I probably told you this story at some point but the way this kind of like came about me tweeting about it I remember I was just in like a group chat like people sharing investing ideas and someone was like Turner what's your like craziest idea of like what could be a massive company that no one's thinking about and I'm like I don't know Stitch Fix like maybe like it could be wow and so I think I I was going to share it in this group and I was like I'll just make it like a thread and tweet it out because people might find interesting and they like it got really popular and it's basically just this thesis of like you have the permission to just ship things to people and they just buy it.

1:14:15Turner Novak:Right. And it's like, Amazon doesn't have that. Yeah. And no other e-commerce provider really has that and I think has nailed it. So I kind of was like, well, if this doesn't work, it could be like as big as Amazon or bigger. Like you could displace them. And there's a ton of questions around. You got to get there to do that. That's a pretty big opportunity. Yeah. And I just remember like my mother-in-law, when she goes clothing shopping, she's kind like kind of freezes like doesn't really know what to get like there's just so many options and when she would get stitch fix she would just get most of it it was like kind of crazy it's like wow you've you've solved that problem for her and she likes most of the stuff and then now with my kids they i mean they're younger but they just like get it all they just buy all of it and maybe it's like you've solved the problem maybe you like you've snuck in below the parents and the kids it's like a way for the kids to just spend and get new clothes and they maybe wouldn't have otherwise But it was just so fascinating that I always thought of it as the recommended bar on Amazon or any retailer.

1:15:16Turner Novak:And you convert very highly on this recommended bar that you're shipping to the people. Yeah. I mean, I think people... I mean, we sat in a very privileged seat of being invited into someone's home, not really knowing what you're going to get in a category like apparel that's very emotional. And so you get invited into kind of that home, but you have to deliver. And so I think there are, you know, entertainment brands that get invited in the home. There are other food brands that get invited to the home. But there's not a list of 100 companies that naturally get invited into someone's home. The home is a very special place.

1:15:54And it creates, hopefully, memories for your kids of like opening those fixes. And so we were very privileged to be able to be invited in there and worked really hard to deliver an amazing experience from that invitation.

1:16:07Turner Novak:Yeah. I mean, you can expand into other categories. You started with clothes, but I think you guys also do jewelry, I believe, and like men's, kids. Yeah. Jewelry, shoes, tops, bottoms. Are you doing makeup yet? I'm not on the board or involved in the company, so I don't believe they're in makeup. But yeah. There's a lot of stuff you can do. I mean, we would talk about a lot of different act to and beyond apparel because we felt like this idea of building trust where you can get data from the customer of like where their interests were and then delivering an amazing experience on the back end could be applied to a lot of different categories.

1:16:45Turner Novak:So I think maybe one more question on Stitch Fix. I think Benchmark ended up investing. I mean, they're a pretty good firm. Was that in the Series A or was that the seed? That was in between. mean? So when we failed to raise our series A, we changed the model of how we were going to do fundraising after we got the bridge. And it was Katrina's brilliant idea, which was, let's identify three partners that we would want to be in a relationship for the next 10 years. Let's make sure that we felt like they had the superpowers that could help us in our journey. And then let's bring them under the tent and treat them like they are existing investors, treat them like they are board members, do mock board meetings where we would talk about these challenge topics that we were having in the business.

1:17:32And then we would evaluate what their thinking was like. Not that dissimilar to the way we ask founders to evaluate us or the challenge topics that we asked them to weigh in on. We had these three more famous investors that we had picked. And Bill Gurley at Benchmark got very excited about the model and very excited about Katrina.

1:17:55Turner Novak:But had he kind of like passed in the traditional sense? He had not passed. He and I have this funny back and forth on this over the years where I sent him, because I interviewed with him for the Uber job with Travis. And I sent him a note when I landed at Stitch Fix and said, hey, I think you should take a look at Stitch Fix. And he said something like, Like, we're 0 for 33 on all e-commerce investments, so no thanks. And I'm clearly not a good salesperson in that case, because then, like six months after that email, he met Katrina, and I ran into him on Market Street, and he was like, oh my gosh, she is so amazing.

1:18:34Why didn't you tell me this? I'm like, I clearly tried, but failed, so I'll take that. I'll take accountability for that. And then he got so excited about it as he got brought in under the tent and decided to lead the round.

1:18:45Turner Novak:Wasn't there some story about like their EAs started using it and actually like convinced the team or something? I never really talked to them about that, but that is the story that's out there that I think Bill has talked about a little bit, which is, you know, he was seeing, you know, end customer love. Same reason I joined is I met a friend of mine who was on Facebook at the time. And she's like, oh, you're interviewing at Stitch Fix. you know there's six of us that get our boxes our fixes on a certain day and we all try on clothes together and we do like trading during that day we love we love the brand and this was early there were like 100 customers or something so to have like six at a company that were loving the brand was also like good quote-unquote signal for the company could be pretty interesting but bill was getting similar signal from from his cohort so actually hunter walk at homebrew brought this up to me.

1:19:42Turner Novak:He said, your office is right next to YC. Have you guys any interesting stories with YC companies just being so close? I don't know if there is one, but. So we moved to the dog patch and got our office, I think two and a half years ago, maybe just after YC also landed in the neighborhood. We have hosted YC companies after the batch at our office. So we've gotten to know a handful of them pretty well. And then we have just seen in general, a number of YC companies walking back and forth on our street and peeking in. And then I think probably each of us has overheard some interesting chatter from these companies over time.

1:20:23I would say the most interesting thing is just sort of getting to know this handful of companies post-batch and understanding kind of the pressure cooker environment they're in during YC and then sort of how that changes post-YC. And, you know, actually we've made an investment in a company, Confido, that was a completely different idea during YC versus what it is today. And so our belief is there'll be a set of companies that like during the YC batch take off and work really well. but we're more interested in the companies that kind of grind it out post YC and maybe they find something that's actually different to what they were working on during YC because a lot of YC companies end up pivoting and we're very excited about that characteristic of company.

1:21:15Oh, interesting. And so, yeah, you know, but it's a fun neighborhood to be in right now. Yeah. I want to give him some credit on this too because he, I don't remember, it must have been, you know, three years ago where he was like, hey, we need to stop meeting at Farley's and actually get our own office space. And I think you felt really good about this space and how it was going to develop. And it is really central to sort of AI and innovation. And it's nice to have physical space as you see the neighborhood developing. Yeah, we didn't realize that OpenAI was also going to move in pretty close to us, full blocks from us.

1:21:53Turner Novak:Do you guys do any of those? Like someone's leaving OpenAI and you just give them like a blank term sheet to sneak in. You guys don't do that? We haven't done that yet. But we have gotten to know several people at OpenAI well. So who knows what's in our future. Yeah, that's fair. And one thing actually maybe is in the future, you talked a lot about consumer health earlier. You were kind of mentioned that's something you've been thinking about is maybe like a new area for work kind of been exploring. What are you kind of thinking about on consumer health? So, you know, I think rightfully so, the world is obsessed with what's happening in AI right now.

1:22:27but I think if you were to press me and perhaps us on what's sort of a non-AI first area that you're really excited about, first thing that comes to mind for me is consumer health. When you look at what's happened in the last five years post-COVID, many more people sort of are thinking more preventatively, more proactively about their healthcare. We kind of all got educated in COVID by vaccines and masking and just understanding our health at a different level. Secondly, you've had this wave of new drugs that have come out in the last five years that people have started to see a lot of benefit from, such as GLP-1s.

1:23:12Thirdly, you've got now a number of companies that have gotten pretty quickly to a level of scale in consumer healthcare. I'm thinking about stuff in blood testing like function health, rhythm health. I'm thinking about telemedicine plus prescription services like HIMSS and Rho. And so there's a set of ingredients now in consumer healthcare that I think can yield a really interesting prop of new businesses, not to mention the intersection of AI and healthcare. So in the last couple weeks, ChatGPT has now got a specific ChatGPT for health product. And so we think there's a ton of opportunity there.

1:23:54We've made several investments in consumer healthcare. A few that we've publicly announced, companies like Honeydew, which is in virtual dermatology care. But a few that we also haven't yet announced that we're very excited about and that are growing exceptionally quickly.

1:24:08Turner Novak:It's interesting. I think healthcare is like 20 % of GDP. I mean, some of it's in insurance, mixing around, but it's basically like, can you just go direct to the consumer and can they make decisions? And maybe it shouldn't be 20 % of GDP, but it should be like 10 or something. It's still a massive chunk of what people spend money on. Sure, in some ways you want people to spend less money on it because they are more proactive and effective. But in that, it is an absolutely enormous opportunity economically and then just for our society more importantly. And you can watch, just we're all, I mean, this is what's great about it is we're all consumers of it too.

1:24:45And so when you go to the doctor and you see like how much work they're doing, that's not care work. And I don't feel like they're getting as much joy out of the non-care work. They became doctors to do the care work. And there's so much of the administration, administrative things and insurance things, it sort of takes away from their joy in the job. And I think technology, there's still a ton of opportunity, I think, for technology and AI to have the jobs be more effective and more efficient and also have people get more out of their jobs as a result of where we can make investment there.

1:25:19Turner Novak:Is it true you guys once organized a flash mob to win a deal? I think what happened is a flash mob came around us. Yes. Around us when we were trying to talk through the term sheet. It was amazing. What happened? And it was the only time I think that we've ever, we, for a number of different reasons, we were out in Salesforce Park in San Francisco and we were trying to give this company, H.E.R.D., a term sheet and suddenly people started dancing around us at the tables that were at. So Andrew and Vic felt like we had sort of engineered this to help our sales process and we did not. But I wouldn't say it hurt.

1:26:02It helped us lighten the mood and bring joy. But it was maybe an inopportune time of talking about terms. But fun.

1:26:15Turner Novak:Nikhil, what's it been like being a dad to young kids? How's it changed your views of the world, how you think about things, getting time for doing things? Yeah. I think it's an incredible joy to get to have kids. and I feel really grateful for my wife, Janneka, and our two daughters. I think what is difficult is if you want to be a good spouse and dad and to sort of show up for the family plus do this job at a really high level, it just takes everything out of you. And so, you know, there's been barely a day since we started Footwork that I haven't been looking. I still feel like I don't have enough time for the proactive work that I want to have.

1:27:05When we are really excited about something, I can still go very deep very quickly. In some ways, I feel like I can move even more quickly with having a family because I just have to. I don't have another option, but to sort of drop everything and work on it. But yeah, there are trade-offs and that's life. And I think this is a particular season when you have, especially when you have two kids that are both small. We were talking earlier about, you know, you have a nine-year-old and a five-year-old now and sort of out of the really physically intense times. But I'm also trying to favor this time because, you know, it only happens once.

1:27:45Turner Novak:Yeah, it's kind of like these weird phases where now, for me, that it's like a little bit easier to, like, you usually sleep through the night or whatever, but it's more noticeable. like when dad leaves or when dad is not giving you attention yeah I mean if they're eight months old they don't they don't know in the same way when they're nine yeah right like you're I'm trying to like send an email my daughter like wants to play like we made up we will our new thing is making up games so what we did like two days ago we were we made up charades and she just came up with the idea for the game like she would draw a picture that's amazing and then we'd write the word together that was on the picture and so I was like trying to finish something and she was like talking to me and it's probably looking back on it I just should have like closed my laptop because it wasn't like that important yeah it's just like balancing like yes just you know there's like so many different demands for your time and like you got to prioritize stuff at the right time so that's been challenging I don't know Mike what advice do you have for us?

1:28:48I mean, it is hard. I would say, you know, I'm on, as we talked about, a little bit on the other side of that. But I think, you know, sort of, I always had, I felt lucky that my better half supported sort of my ambition and work. And now I have a daughter who's a young adult who, like, knows I worked really hard to get to sort of where I was and really appreciate sort of that work ethic that's needed to be great. And so you don't realize, you know, at these younger ages, like how much these kids are picking up and some of it, you know, you don't want them to think that you're not, you know, dad, but they also recognize that your dad plus worker plus, you know, husband, and they really do pick up all a lot of these things.

1:29:36And sort of, you In my case, she's appreciated how hard I've worked and has her own ambition as a result of it. I mean, she got to meet Katrina Lake when she was 10 years old. And so to meet a founder who looks like you, is young like you, ambitious like you want to be, it's super inspiring. And so she wouldn't have gotten that privilege had she not had a dad that was pretty ambitious for what he wanted out of his career. But you need the right support system. And you also have to find time to reflect. And you also have to find time to take a little break here and there. Otherwise, it's very hard to do the pace for 40, 50 years.

1:30:20There are people that do it. I think it's very unique to be able to do that. And I think you just find these recharge moments where you actually end up being better on all dimensions as a dad, as a partner, and as a worker. when you find these small recharge moments.

1:30:38Turner Novak:Anything else you guys want to talk about? I think we missed. I don't think so. This is great. Thanks so much for having us. Yeah, this is a lot of fun. And this is the first time I think that we've done both of us in person on video as well in a podcast. So a special moment for us. Thanks for bringing us together. People that are still listening at this point, hopefully they realize how important this moment was in time. Yeah, totally. Well, cool. Yeah. Thanks again for doing it. Thanks everyone for listening. Thanks. Thanks. And thank you for listening. Thanks again to Flex for supporting this episode.

1:31:11Turner Novak:Upgrade your spending to Flex Elite to get$1 ,000 on your first card using code Turner with the waitlist link in the description. If you enjoy this conversation, please like, comment, subscribe, and share this episode with the friend you're considering starting a fund with. Make sure to check out the back catalog of over 100 episodes with the founders of companies like Robinhood and Mercury, including recent episodes with Chris Hlogic at Hanover Park and Scott Stevenson at Spellbook, the fastest growing AI company in Canada. Tune in over the next few weeks for guests like Sofia Amoruso, founder of Nasty Gal and Trust Fund, Nikhil Krishnan from out of pocket on how the US healthcare system actually works, and Alex Israel at Metropolis, who's quietly pulled off the most successful version of the AI-enabled roll-up bio strategy that everyone was talking about last year.

1:31:57Turner Novak:If you want to miss any of these, subscribe to my newsletter, the split link in the description to get each episode plus a transcript emailed directly to your inbox every week. Thanks, Sam, for listening. See you next time.