E16: Lessons From Co-Founding First Round, Idea Lab, and B Capital with Howard Morgan

0:01Welcome back to Turpentine VC, a podcast where we discuss the art and science of building successful venture firms, VC to VC. For today's episode, we sit down with Howard Morgan, the chair and general partner of BeCapital. Howard is a pioneer in venture, having co-founded firms like Renaissance Technologies with Jim Simons and First Round Capital with Josh Kopelman. In this interview, we discuss how Howard picks the right people to work with, how he thinks about trade-offs at the different firms he's built, and how his experience in the last six venture cycles informs his predictions about the next 10 years of venture.

0:35Howard shares his earned wisdom with remarkable candor and offers advice to anyone who wants to build a lifelong investing career. Howard, thank you so much for joining Turpentine VC. Welcome to the podcast. Thanks, Eric. Glad to be here. So Howard, you have an illustrious venture capital and investing career at four different institutions that you've been at over the past four decades. Why don't you give a quick tour of the four institutions that you helped start or were investing at? And what was the story that inspired you to start each successive one? Sure. The first was a Renaissance Technologies Corp, which I started with Jim Simons back in 1982.

1:15It's known mostly as a quant shop because he is the premier quant investing group. But from 1982 to 1989, when we started, half the money was in venture. And Jim and I had done two private companies in the late 70s, beginning of 1980. And he was still a professor. I was still a professor. And in early 82, he said, well, why don't you take a legal absence and we'll start Renaissance Technologies? I've got $70 million. I can only invest 35 in quant and we'll put 35 into venture. And so we did that between 1982 and 1989, we had top decile return, 25 % IRR. Fortunately, but also unfortunately, the quant was returning 38%.

2:01So we took the venture out of Renaissance. And for the next decade, I invested my own money, his money, same physical location, and helped start Idealab with Bill Gross. And from 1996 and even through today, perhaps still on the board, helped create a huge number of companies at Ideal. Bill Gross's ideas, investment dollars of mine and other people's, and, you know, paid search, for example, became Overture. Google ended up paying$600 million for the patent rights. We did it at the time when everyone thought paid search was evil. uh walt mossberg wall street journal at one point called the eagle why would you allow people to alter your search results by paying for them but we and and larry and sergey all figured out that actually you get better results not worse results because people wouldn't pay unless they were getting value back so uh we did all of that and then um in 1992 one of our investments was a company called Infonautix.

3:08And it was started by two people, Marvin Weinberger and Josh Koppelman. And Josh, and I was the sort of lead investor. I also did some technical design for them and so on, having been a database expert. And we took Infonautix public in 96. It created what's called ProQuest. Today in 97, 98, Josh said, gee, I want to start something else. I see how Amazon is doing and we could sell used books for half when Amazon's charging. So I'll start half off Amazon.com. And we bought a whole number of different URLs, half off Amazon, half off eBay, et cetera. But eventually it just rolled into half.com. And half.com was quite a phenomenon.

3:52Josh is an amazing entrepreneur. And one of the things, at one of the marketing meetings at Half.com. Somebody said, how do we get Half on the map? And somebody said, oh, let's get it on the map. So we went to a town in Oregon called Halfway Oregon, paid them some money and computers for all their schools to get them to change their name to Half.com Oregon for a year, which they did. And because we got them on the map and it's such a clever start, we got on the Today Show, we got all sorts of media and Half did really well and was bought by eBay during the height of the bubble. And they paid a lot of money for it, but because it's the basis for buy it now, they actually made money with it.

4:37So even though they paid a lot, the only thing they didn't get was Josh full-time. Josh was there for a year, a couple of years, two years. He just didn't want to move west. And so he came and said to me one day in 2002, 2003, gee, I want to do some more angel invested. So he and I did some angel investing together. And in 04, he said, I think there's time to be able to start a seed stage fund because it cost us$5 million to get Infonautics to his first product shipped. We had to buy servers, big gigantic sun machines, big Oracle licenses. We had to build our own data center. We had to hire people to run it 24-7.

5:16By the time he was building Half.com, it only cost$2 million to ship the product because you had open source software. We had much cheaper computers and you had rack spaces and people who were willing to host those machine stream and hire the people from Monitor. We realized that you could start companies cheaper. And I think you could start a company for$250 ,000 in 2004 or 2005. So we figured out a way to get some deal flow and we started to see whether we would like it a one-year fund called First Round Capital 2005. And over the next two and a half years, as we sort of felt we liked it, we ended up hiring some partners, Chris Freilich, Rob Hayes in San Francisco, Chris in Philadelphia, New York, ended up raising about$50 million in total for that first set of funds.

6:03And in 2007, we went to the big guys, namely Dave Schwentz at Yale and people at Princeton said, we're going to do$125 million fund. It ended up slightly higher,$130 something, to invest in seed stage. And they said the same thing to us, which was, that sounds great. We like you guys. You've got experience. Howard, I was at the time 60 years old. Josh, exciting entrepreneur. But if we can only put in$20 million, I can't move our needle because we got 15,$20 billion endowments, but we'll do it anyway. And let's see what happens. and that was first round capital. And I told Josh when we started, I'll give you 10 years because I'll be 70 in 10 years and who knows what I'll want to do and what you'll want to do.

6:48And I know that funds will have had traditionally typically a difficult time with generational transition. So that's what we did. Now, first round capital two ended up with 70 companies roughly in it. roughly 68 of them returned kind of 5x the fund. We had companies like Square, now Block, Inmere. Uber. Square was an interesting story because in 2005, we did Odeo, which was a podcasting company, and the founders, Ed Williams and Viv Stone and Jack Dorsey came and said, we're giving you your money back. Apple's about to announce our product, and so we won't have any, but we'll come to you with our next deal.

7:27And the next deal six months or less than that later was Twitter. But they wanted 20 million free money. And we said, no, we don't do anything over 10 million free money. Sorry. So we didn't do it. I mean, fortunately, I was an investor in Union Square Ventures, which didn't do it. But then when Jack came to us with Square a couple of years later at a higher price than 10 million, we said, you know, we learned our lesson. I think we'll do this one. Yeah, we did. So those 68 companies did quite well, but the 69th company was started by Garrett Camp, who was in our blank check club. Garrett had started StumbleUpon in Calgary.

8:04It was a web discovery company. eBay bought it. We'd made a lot of money and we said to Garrett, whenever you're finished with eBay, we'll give you a desk and some money, whatever you want to start next. And so he came to us, we gave him some money and we said, now what is this thing you're going to do? He said, well, I'm going to call black cars in San Francisco. I'm calling it Uber Cab. And we said, well, how big is the market for that in San Francisco? He said, it's maybe a hundred million dollar total market. He said, that's not so big, but you're a good product guy. Get it started. He and Ryan Graves got it started in built and the taxi commission made us change the name to Uber.

8:39They wouldn't let us use the word cab. And three or four months later, he brought in his friend, Travis Kalanick, and the rest is history. So Uber returned in the order of 20x the fund by itself.

8:55But Uber grew very quickly. I mean, from 2010, 9, 10, at 4 million pre-money where we invested, at three years, it was at 3 billion. And then it did routes even higher. And of course, when it exited, it exited higher than 4 million by a fair amount. But we invested at the same time in another company, which we turned down first. We turned it down. Chris Freilich had brought it in. Chris came back to us a few months later, a few weeks later, and said, you know, you made a mistake. I'm going to bring in my son to pitch you on this. And he brought his eight-year-old son, Max, in to pitch us on Roblox.

9:30And we did roblox and roblox took from 2009 10 to 2018 to get to a 100 million valuation but when roblox went public in 22 it was even bigger than uber and so in the end e princeton and yalee got a billion dollars back which in a 20 billion dollar endowment moves you need uh yales is bigger now but but still that we got we got awards from them and so on but i did stick to my a promise to stay, to do 10 years. And so in year eight, nine, we started figuring out how to do the transition. And I stepped back and I got a lot of emails of, would you join my seed fund? And the answer to that was, no, been there, done that.

10:13I'm still an advisor at first round. I'm still a good friend, big LP, et cetera. But I got a call from another friend, Raj Ganguly. Raj had been at Penn. He was an M &T student. He was an entrepreneur, built a company, sold it to Keyback, then went to McKinsey, then went to the Harvard Business School, where in the same building he lived in, there was this two young kids, Mark Zuckerberg and Eduardo Savarin, and he became friends with Eduardo. And after Harvard Business School, Raj White then helped start Bain Capital Asia and was based in Singapore. And Eduardo had moved to Singapore in 2000, about 9, 10, and something like that because he's pretty white and started investing with him.

10:58And so they came to me in 2016 and said, we're starting a fund and I want to tell you about it. And I said, Stuart, come on in. I'll give you a half hour. And three hours later, I said, great. I want to be a big LP in this fund. And they said, that's not what we want. We want you to share the fund. We want you to basically help us make new mistakes and not repeat the mistakes you made building Renaissance, Ideal Lab, and First Round Capital. So we'll get a head start. And the three things that excited me about B Capital and the opportunity was, first of all, it was East Age and later. So I wasn't competing with First Round.

11:35I didn't really want to compete with First Round for at least for a while. Eventually, we started an early stage fund. Secondly, it was B2B focused. First Round had done a lot of B2C. And for me, I just like learning new things every day. And so spending more time on B2B, I had worked as a consultant for the big giant Fortune 500s when I was a professor for 15 years. I had been in the 2010 period for about 13 years on John Deere's Global Advisory Board. So I understood big companies in B2B and they were getting digitized and there was huge opportunity. Third, it was global. It was going to be headquartered in LA and Singapore with offices in Delhi.

12:16We now have offices in Delhi and Bangalore and Jakarta and Beijing and Hong Kong and LA and San Francisco and New York. So pretty global. Although two thirds of the fund goes into the US, the rest goes overseas and there's great opportunity there. And finally, the icing on the cake was it was a partnership with the Boston Consulting Group, VCG. And I spent a lot of time with Rich Lesser, who was then the CEO of VCG. He's now the chairman, understanding why they would do a venture fund because they had gotten burned in the bubble in 2000. They did a venture fund with IBM and JP Morgan. It was a complete disaster.

12:52And he said, no, no, we need to have companies that we can show our clients new technologies that are actionable. So we want companies, if you're in a later stage where you're going to be, that we can say to a client, here's an interesting company, here's a new technology, and we want you to try it. And they could try it. And so the relationship is a very strong one. That's grown to a third of my time, which if you ask my wife, she said that means eight hours a day. But that's what we've been doing. And in 2021, we decided we could start an early stage fund. So I gave up my first round affiliations in 21, but we've done a number of deals which we've co-led with first round.

13:35So the relationship is still very, very positive. So that's kind of the background of how I got here to B Capital, which now by the way has about six and a half billion under management. That's a great overview. And talk about B Capital when you think about global investing. How do you get comfortable sort of understanding not just sort of the macroeconomic, but also the geopolitical situation in this kind of crazy geopolitical environment, it feels like you have to know so much more to be able to invest there and things fluctuate so much. How do you think about building a global firm in that way?

14:11Sure. I mean, the geopolitics are very critical. Obviously, China, we didn't start with China. We went into China in 21. We hired a CEO partner there. We've been with SoftBank China. And we still felt and still feel there's huge opportunities in China, even staying far away from any of the geopolitically sensitive areas. We don't do hardware, so we're not doing chips. We don't do military technologies. We don't do dual-use technologies. But we do a lot of things like the biggest auto parts distributor in China, which just went public on Hong Kong too, and textile marketplace and something called Geek Plus to give users advice.

14:55So it's very tricky. So India, Indonesia, Singapore is a lot simpler in the sense that there's great technology. There are giant leaks, explosive markets. India's now population rise bigger than China. And in India, there's a billion people now with cell phones and bank accounts on their cell phones. And government has finally created an environment in India which has much less corruption than it did 20 years ago. And so we've been taking advantage of that. But you do have to be careful of the geopolitics all the time. For example, we did a fair amount of stuff in three crypto areas. And we were very careful in the particular where the government was not pro-crypto, to be careful of what kind of things we would do there.

15:47Most in China, for example, we stayed out of education completely, because we knew that the government was concerned about education for several reasons. One was the parents were spending too much money on it. Two was it had 400 million people learning English, but they were learning English with American materials and American value systems. And President Xi decided at one point, oh, he didn't like that. So he basically shut down online education in China, created the stock market for all those companies. We were fortunately, you know, had stayed away from things like that that can get sensitive.

16:23So we're mostly B2B, you know, real industrial kind of stuff over there. And we have to be cognizant at all times that there are geopolitical risks. And you have to be cognizant of how can you get your money out. Most of these countries, you can always put it in. Can you get it back out again if you have a big win? And right now that's possible. So we're pretty comfortable with that. But I would say that this, in 2012, essentially all the unicorns in the world were in Silicon Valley. In 2023, they have about 20 % of the unicorns and the rest are widely spread. New York and LA and Austin and Chicago and Delhi and Bangalore and obviously all over China and a couple in Europe, not that many.

17:11But technology has democratized. It's all over the place. You can build companies anywhere. So the theme that you chose was global. I'm curious if you had to pick a different theme, maybe once you do 10 years at B Capital in your 80s, or when you think about emerging managers, what are other themes or angles of building a venture firm that you're particularly excited about or you think are still ripe or have opportunity? Remember, one third B Capital, one third is family office. And my family office has seeded or funded almost 30 underrepresented minority managers, women then underrepresented minorities.

17:52So I feel that that's a great place to build a venture fund because just as there are unicorns built now in cities that never had them, you know, and most of the unicorns were built in the Valley in 2012. Most of the big venture companies are built by white guys. but now that you have people all over the world building things, women, African-Americans, indigenous people, Latinos, everyone can build and there's brilliant talent in all of those places and some of these firms are seeing deals that I would never have seen, my networks would never have seen. So that's one important place. Second thing to say is this, when I was in college in 1965, I was about to go to MIT for physics graduate school.

18:39And I was advised by a very wise fellow, Dick Hamming from Bell Labs. And he basically whispered in my ear, computers, the way the graduating says plastics. And I listened to him and I went for computer science. And when people ask me that today, the places I talk about are genomics or bioinformatics or something in that space and longevity. Because we have more and more people living longer, we want to make them live healthier. And the space is monstrous. And the final place there is space. Obviously, SpaceX has done amazing stuff, but there's a huge opportunity to invest in technologies related to space and space exploration and space utilization, not just exploration.

19:28Whether it's asteroid mining, whether it's communication satellite technologies, whether it's going to Mars, I'm not going. I don't expect to anyway, but I don't doubt that we will in fact do that. Hey, we'll continue our interview in a moment after a word from our sponsors.

19:49Are you not as bullish on AI or crypto for venture opportunities? AI, usually, AI is in everything. AI is table stakes. So it's not a question of being AI. It's just that you've got to build a company to doing something. Fundamental foundational AI technology, large language model stuff, that's for the giant players. But using that technology in a vertical area for a company that has a proprietary data source to train on, that we're doing a lot of. And we have three investments in AI for drug discovery, one called Atterwise in the Bay Area, one called InSilico, which is based in Shanghai and London and New York, and another called HiFiBio.

20:31We think they're using AI with huge libraries of data about molecules. They have drugs going into clinical trials and so on. So, yeah, I'm very bullish on AI, but I don't want to invest in the fundamental technologies of AI. I want to invest in the companies using AI higher up in the stack, if you will. So I'm not buying the operating system company. Although in my private portfolio, I certainly continue to accumulate Microsoft stock. I think they're going to be a big win here. But that's one area. And the other area is the longevity space. And in crypto, Josh and I bought our first Bitcoin in 2012 at$90.

21:12dollars. A year later, I don't know what he did, but I sold 10 % of it for 900, so I was in for free. And I still have those Bitcoins. I've watched them go to 65 ,000 and 5 ,000 and 20, whatever it's today, 28 ,000 and so on. I'm a believer in crypto, but it's a long haul. So I've done some recent investments with Sunnigold Ordinals, which puts sort of like NFTs on the Bitcoin blockchain, not using Ethereum. So I'm an investor in Lightning, which is able to speed up the Bitcoin blockchain so that you can actually use it for transaction purposes. But on the venture side, we're not doing a lot of...

21:54We are in B Capital, we're in Falcon X, which is a Vibro Prime broker. We're in some fixing shovels in that space, but we have not been playing the token game. Yeah. That makes sense. You mentioned earlier that when B Capital invited you to join, one of the things they said is you'll learn from the things you would have done differently. Obviously, with First Round and the others, you've had immense success, but there's always things we would have done differently or mistakes we made. What's something that you can share that maybe you would have done a bit differently that might be helpful to emerging managers out there?

22:29No, I get the question. I mean, I think, look, One of the things that worked well was first round was a multi-location fund that tried to operate as a single fund. So we were in video conferencing very early, 2008. We went to every video conferencing system possible and ended up on Zoom by 2015, 14 billion, which was the best of it. At Beach Capital, we operate as a global fund. And so our investment committee meetings are typically 5 p.m. Pacific on Monday, 8 p.m. Eastern, 8 a.m. Singapore and China, which means that everybody who was on the call, all the partners, are probably on at home because at those times of day, they're probably at home.

23:14So COVID is no difference to us. Everybody was still working from home, still on Zoom. And we built a Zoom culture. And I had seen some of the mistakes in building those cultures. And so we had some rules about, you know, you have to have your camera turned on because if your camera's not turned on, you're probably doing something else, at least partially. You know, you'd make everybody speak and rotate and so on. So a lot of things about that kind of culture, I think, were lessons I had learned that we would have taken too long to learn. A lot of lessons about how to make sure that you're getting the unvarnished opinions of the people on your investment teams.

23:55When we started First Found, when we first brought in additional partners to Josh and I, we realized that they were starting to hang back and try to wait to see which way we thought. And we said, we hired you. So we went to a system, which a lot of firms have ended up going to, what Big Capital certainly does, where you have to put a written vote in before this discussion, and you'd have to put your questions in and you'd have to rate. And that way, everybody sees sort of open as to how they really feel about the particular deal. And then you have a lot of discussion about those issues, but you're not able to hide and say, I wonder if Eduardo wants to do this deal.

24:34Maybe I'll wait to see what he says. No, you can't do that. You have to commit early. And I think that's an important lesson that a lot of firms learn late. There are things about portfolio construction I wish we had done differently at first round that we're doing differently at Pete Capital, and also the things that we learned about focusing and having enough ownership in companies. Because the reason that first round two did so well is we had enough ownership in Uber and in Roblox, so that even getting diluted in later rounds, which we did because that fund was too small to continue to keep pro ratas all the way through, we still owned enough at exit so that they were really pretty gigantic.

25:19And I've tried to enforce it be capital at different stage funds, our early stage fund, our opportunity fund, our growth funds that we maintain and focus on ownership. And focus on the other thing here is focus on putting the dollars out for investment sort of weightably over the fund life. If it's a 10 quarter fund for investment period and invest 10 % each quarter. Don't, because 2021 is so exciting, invest 60 % in two quarters in 2021, which some funds did. Some funds invested 100 % in 12 months, one invested 100 % in nine months. The performance of those funds is not very good. You really do need to know that dollar averaging over time in a venture fund is really important to do.

26:08So I think a first round is the best seed firm of all time. I do too. My guess is that things like Y Combinator or Andreessen Horowitz, just because of their sheer AUM, have returned more capital. Maybe not the same multiples. but I guess I'm curious why you didn't start an accelerator to compete with Y Combinator or why you didn't you guys go multi-stage and and sort of collect more more AUM when you guys had the opportunity given your brand is so great we we had we had that the up at first round we had the opportunity but Josh and I both felt that we were doing something really well we saw Andreessen, they built a platform team copying from us and trying to help how you help entrepreneurs grow things.

26:58If you have a smaller fund and you have a big winner, you get carry much faster. So from a personal economics point of view to the partners, we were not in it for management fees. We were in it for carry. We were both big LPs in our funds. And if you're a big LP in the fund, what you want to get to is return and carry, and you don't worry about the management fee. When you get as big as A.H.U.s now and others, where you look at the Giants, the Black Rocks, the New Carol Atlantics, the management fees are much more important to them. And that takes your eye off the ball of trying to find great investments, investments they're going to have.