E32: Scott Belsky’s Angel Investing Lessons and Requests For Startups

0:02Welcome back to Turpentine VC, a podcast where we discuss the art and science of building successful venture firms, VC to VC. This episode is with Scott Belsky, angel investor, chief strategy officer at Adobe and founder of Behance. In this conversation, which was recorded in 2021, we dive into Scott's early investments in companies like Pinterest and Uber, the evolution of his investment philosophy, principles he acquired over time and more. We have a full house here. We're very lucky to have Scott Belsky, who many of you know well and many of you know and needs no introduction. But just for anyone who may not be as familiar as a prolific angel investor, chief product officer at Adobe, founder of Behance, and also spent some time at Benchmark as a venture partner for a few years.

1:00So Scott, by way of introduction, why don't you sort of introduce the beginnings of your angel investment journey, of your angel journey? Some people are pros here. Some people are starting out. you invested in Pinterest, you invested in Uber, you invested in a bunch of others. What were your first few years of angel investing like? And what was your philosophy and learning curve in doing it? Well, it's really from a product and founder perspective. So I started BNTS back in 2005. We were boot shopped for about five or so years. And we got venture backing out at that point. And then after two more years, seven years in, that's when we were acquired by Adobe.

1:39But in that last two years, after five years of doing this, I'd met a group of other product-oriented founders. And then at the time, I had a really good grasp of the design community and the design world, given the role that Behance was playing. And so companies that were either design-driven, their product was design-driven, or they had a design founder, or they were looking to hire great designers, I would try to help my friends out. Ben Soberman asked me to be a product advisor for Pinterest when he was just pivoting from something else into what became known as Pinterest. And so I joined him as a product advisor.

2:17And then when he was raising his seed round, which back then he was a$5 million valuation, but which now seems smaller back then, you know, for this small little image-based bookmarking site in the world of Delicious and all these other sites, I was like, I don't know, should I do this? You know, I put money in. I shouldn't be investing in anything. I'm the founder and I barely make my own salary. But that was my first angel investment. And I started working with him and the team on product stuff right out of the gate. And I then started in the New York ecosystem coming across other entrepreneurs that were friends and helping them either as a product advisor or investor.

2:59Another strange, crazy story is that my third investment ever was the second one didn't work yet. So we won't talk about that one. The third one, Behance had a big partnership with this company called StumblePod, which most of us remember. And Garrett Kent had just bought StumblePod back from eBay. He had sold it to eBay and then he had bought it back. And Behance and StumblePod were doing a big partnership together. He was in my office, which was also my apartment back then in 2000. And I forget the date, but it was after Pinterest. And he literally whips out a sketch pad and is showing me this side project he's working on to help summon a car.

3:40And he's like, do you want to help? And I'm like, dude, you just bought back your company, eBay, and you should be focused and I should be focused. But then I became just someone who would look at his prototypes and help with the early brand of what became Uber. And so that was, you know, that was the process of getting involved with Uber in the early days. So I think that my lesson learned has been, at least for me, I haven't focused on looking for investments for the sake of it as much as like following my product compass, you know, and the people and the problems and the products that I have affinity towards has been like a good guiding force for me.

4:19If you didn't invest in Pinterest or Uber, you would have had the biggest FOMO ever. Oh, yeah, right. I mean, having been able to be there and not, you know, I wrote a very, very, very tiny check into Uber because, again, I had no idea what the hell was going on. So, but not complaining. And, you know, since then, it's been just great to work with a ton of different design oriented founders or products and companies. And now, you know, probably almost 100 companies at this point. and then different plays, you know, throughout. Sometimes it was direct-to-consumer play. You know, Neil Blumenthal and Dave, either they were Warby Parker, but they were New York City entrepreneurs, you know, so I met them through this deco system here.

5:02And, you know, then early AI companies, this is called HyperScience, another New York company. So New York has always been, you know, one area where I try to, you know, be especially tuned in. But at this point, it's obviously, you know, both coasts and beyond. Yeah. So you've been doing this for nearly a decade, maybe more. How would you say you've evolved as you sort of professionalize as an investor a bit, the biggest sort of like principles you've picked up or as you sort of think about your non-obvious operating principles as an angel today? What comes to mind? Well, I think a couple litmus tests, if you will.

5:39You know, one to me is with people that I hire and work with or people that I invest and is just that idea of every conversation being almost a step function more interesting than the one before it, as opposed to having the same conversation twice. I like to try to talk to a founder more than once if I can, because that tells me something very quickly. I mean, Periscope was a good example of that. Like Jeevan and Joe, every time we started to jam about what they were calling something else before Bounty Act was a step function more interesting the one before it. And then in the chemistry just felt so good.

6:17I was like, I want to be a part of this. I feel like that's such a good signal. Also, you know, seeing how someone thinks through product, you know, is great. You know, it's one thing to see a prototype and click through yourself, but to be walked through and ask questions about why certain decisions were made. I feel like you can unearth so much. And I do believe every product is ultimately a representation of its team. And I think that even, you know, in my day job now at Adobe, where there's, you know, at least a dozen or so products in my organization, the products themselves almost look like their team.

6:50And I don't know if it's like we see a dog and it looks like its owner and we play that psychological association game that may be bullshit, but I actually do believe that a product is a manifestation of its team. And so if you can get to know the product alongside the team at the same time, you start to draw some of those connections. Yeah. One thing that some people are are thinking here is where exactly do they fit in as an investor? Are they an operator who angel invests on the side? Do they join or start a firm in some capacity? You've explored that in different contexts with your role at Benchmark.

7:27As an angel, you could have obviously started your own fund. How have you thought about frameworks for thinking about what's the best fit for you and any advice you'd give for other people about what makes the most sense in terms of what capacity to be coming investor? Yeah, it's a good question. I mean, let's talk about it in two different ways. So let's talk about first in terms of the market, where the market's going and what founders want. And then let's talk about it in terms of us as individuals and finding our kind of power lane or power alley, so to speak, in terms of what we're especially good at.

7:59But in the market, founders want to be surrounded by people that have empathy for what they're going through. They want to be surrounded by people that are maybe less generalists and more superpowers, in specific areas. As a founder, there's so many moments where you're lost, where you're facing uncertainty or ambiguity, and you want to have someone specifically who you can contact to walk you through it. And as a founder myself, folks like Chris Dixon, he helped me walk through my chat chart the night before the acquisition and see what equity I might want to shift in various places to make certain people whole.

8:38And he had done it himself. And so I think that people want to look for that. And these days when you have all these very large funds that can essentially be valuation agnostic and just get in early as an option for themselves to get in later, and also just the plethora of new funds. I mean, there's just so much capital in the ecosystem and anyone who doesn't know better will basically invest in anything that has all the right buzzwords. So I think that being an operator investor, you know, is a competitive advantage these days. You know, I've seen it time and time again where a route will be full, but there's always space for that operator with a background in a specific area that's going to be crucial for that company to succeed.

9:21So I think that when I see my friends who are great operators suddenly say, oh, I have to join a fund or I have to start a fund. In some ways, I almost see them as taking themselves off of the market of what they could have been competitive in. Had they just kind of stayed investing in their own name and in very small checks, maybe they would have gotten every piece of deal flow from their community and they would have been able to invest in anything they wanted. And now suddenly they're just making it more competitive for themselves. So for those of you that are operators or are thinking of investing in your own name, in a spearfishing-like manner, using your superpower, that's where the greatest opportunity is right now in this space.

10:01As for individuals and what we love doing, one thing I learned at Benchmark is I don't believe that venture capital is a very scalable offer. I think that the best firms are boutiques. They're not efficient in certain ways on purpose. As soon as you have someone making the agenda for you in partner meetings, all bets are off, as far as I'm concerned, because then you're not leveraging the forces of natural selection to determine what you should actually be talking with with your partners. As soon as you're dealing with operations and talking about the firm's website and all these other mechanics, all bets are off, in my view, because you're not focusing enough on what actually moves the needle, which is finding that one great deal and then making that founder succeed.

10:48So I think that as individuals, we have to kind of find the construct that works for us and the superpower that we bring to the market that no one else has. And also, last thing I would just say is curiosity. It's whenever I'm not sure whether to work with someone or whether to invest in something or whatever, it's just like, what am I insanely curious about? And if it's something I'm really curious about, it typically ends up being a good learning experience, nothing more. And one of the things that I think you learned from our conversation, that I gathered from our conversations, is that you're more excited about, or you gravitate more towards the pre-momentum than the post-momentum.

11:28Can you talk a little bit about that? Sure. Well, listen, I've invested in series A, series B before. And typically, I see it as paying the price for missing it earlier. But also it's just something that I, you know, if it's something I really love or it's a team I really love, I'll do it. But I, you know, I like, I like thinking about the potential of a product and the potential of a team. Whereas I think, you know, great investors probably way better than I are more focused on the present, you know, and what's the current state of the team and the current state of the product. And they're probably making a risk adjusted better and better bet, you know, than I am.

12:05But I just love, you know, that early stage. I think it's so fun. Hey, we'll continue our interview in a moment after a word from our sponsors. You've also, you've incubated a company, you've been an executive company, you've founded a company. How have you sort of come around just more broadly? Because a lot of people here are also just thinking about, you know, long term, what they want to do, where they best fit in, where you best fit in and what, why being an executive Adobe relative to all the other things you could be doing was, is the right? Yeah. You know, it's, it took me years to figure this out.

12:34and they were in the hard way. Behance was a seven-year journey, right? And then three years at Adobe, leading Behance, but also leading a lot of the transition from creative cloud, from software to service. I had a great time, but everyone was telling me, dude, you should be an investor, you should be an investor, you should be an investor. And then when you have the opportunity to join a firm like Benchmark as a general partner, it's like, I should probably do this. And then immediately, three to six weeks later, I felt like I'd hung up my spurs. I had felt like I was listening to like Johnny Cash music, you know, and it was just not a good sign because I was in my 30s and I just felt like I wasn't using my superpowers anymore.

13:15So what I realized is that actually having a big team and operating was always stressful. And then as soon as I was no longer doing it, I realized how much of me was, you know, engaged by that. I missed it. So I've come to believe that happiness is feeling fully utilized. And to me, that means 30 % of me feeling utilized with friendships and family. 30 % of me feeling utilized with the investing stuff and being able to help teams build products and build businesses. And the rest of me, just building products myself, building teams. I'm not doing a time breakdown. I'm doing more of a happiness breakdown.

13:56Feeling fully utilized means using all these muscles in unison. And so that's why, you know, some people might say, oh, it's a little weird of a hybrid, you know, doing this investing thing. And also the leading products are a big company, you know, why would you be doing that? But for some reason, at the end of the day, it makes you feel really fulfilled. What advice do you have for founders who are people who want to incubate companies and be chairman of them, but aren't the sort of day-to-day CEO based on your experience doing that a few years ago? Yeah, sure. And I've studied this, I've tried it, and I've thought a lot about it.

14:31I'll tell you, watching Garrett with Uber taught me a few things. Number one is you have to be obscenely generous in order to be a co-founder who's not operating and a board chairman in his case, and truly empower a team to succeed. And I've seen a few examples of this fail where someone says, oh, no, I'm going to retain this much equity because it was my idea. And then the company breaks down those cases. With Garrett, it was for him all about setting up the right people to succeed. And he knew that having much less ownership of a business that was worth billions would obviously be more valuable than half ownership or whatever, or something that was worth nothing.

15:15So I think that you have to have that attitude of knowing that ideas are worth nothing, really. And you can have an idea. And then if you build a founding team around it, be extra generous. And so there's never a doubt that they have that it's theirs and not yours. And then do everything you can to empower and help them succeed. And that's what I would try to do in that scenario. Incubations are tough because, listen, these are living, breathing entities. companies are like children they need to feel like they have devoted parents you know they need to feel they need to get all the nourishment and and you know and otherwise they'll get they'll be screwed up yeah i've heard from this um someone i'm actually forgetting his name he co-founded long game with lindsey holden he co-founded a few companies he's a professor at stanford one of his advice is basically that you have to have like one core value prop that's very hard to hard to replace and sort of justifies and so maybe it's you could bring a lot of capital in the case of like Josh Kushner or Keith Reboy, or maybe it's in his case, he has, you know, relationships with with with banks that merit sort of that equity because he's getting the first customers and stuff like that.

16:24It's interesting. Going back to your point around evaluating the market, I'm curious to get your sense for how you think that's going to change in the years to come. Like, for example, do you see the future as like, you know, rounds being put together? It's like one lead firm and then it's all, you know, operator angels and like, is it sort of a barbell? Are you long in the solo capitalist trend? How do you sort of think things evolve in the next few years? Well, there's a couple of companies that I've been a part of recently, their rounds that are second time entrepreneurs who are really well respected and known.

16:55And they just raised their seed round from individuals only. And usually one individual with a larger check set the terms and then everyone else just followed. And then for their series A, they went to meet with a lot of great firms. they got a term used from sequoia and they met a few others and they decided you know what we're just going to do another inside round with the exact same people and so they came back to us and said do you want to do a round at a much higher valuation but others you know were really like there were a number of people that still were able to write very big checks and and so you know we continue to do it that way and i think that you're seeing more and more of that because if you're an experienced entrepreneur or you you know not to say that firms don't add of value.

17:40They do. But if you can go to a hand-selected group of people who know you and you know them and who are capable of writing larger checks, and you don't have to bring on a board member if you don't want to, you need to have a little more authority. I mean, maybe people will just do that. And so there'll be a positive selection bias for some of the best, best companies potentially. And so I do think that being in the position where you can do that, I mean, in this case, funds were basically not even allowed to participate. So you had to almost be an individual angel or a super small solo capitalist type fund to really, I guess, in their eyes, at least be part of this.

18:22That's an extreme, and I'm not suggesting that that's the norm. But I do agree with what you kind of postulated, which is that you'll have more situations where one firm leads, and then they'll just round it out with a lot of value-added individuals. And if you're the folks that are going to suffer are the people who don't have a superpower, or maybe just from the finance world, we have a venture capital fund with money. You know, and I call that harmless capital. You know, there's a lot of harmless capital in the system right now. It's just people who will write a check and just, you know, stay out of your way.

18:56You know, there'll be a negative selection bias for that for those dollars. How do you think about being a thematic investor or going deep on spaces or getting up to speed on certain things? How do you approach that? And are there certain spaces you're excited about right now? Yeah, yeah, there are. And I think I go on whims, you know, where I'll get super excited about a certain concept. And I mean, right now, I'm really interested in this vertically integrated services idea where you essentially for small businesses. So basically, you go out there, you train people to repair certain types of appliances, and then you set them up as a business in their geography to repair those appliances, and you generate the leads for them, and you process payments for them, and you do marketing and SEO for them, you do everything for them.

19:49So it's almost like the reverse franchise model, where people don't come to you, but you go to them, and you basically build this, and in exchange, you take 7 % of their revenue forever. And I've seen this now at a few different spaces. And it's really interesting to me. I'm really interested in this SMB, very micro SMB trend right now. One company I invest in called Castrop. It's almost like a Shopify, but for super, super simple, I think taco trucks and that kind of thing. And just cleaning up the space because they have some very novel, no fee ways of doing this that are really interesting.

20:25So there are these little themes that I'll pick up on and I'll get obsessed with. And I'll try to meet, you know, the rest of the players in the space. But I try not to ever define myself by a thesis because the thesis is always changing. And they get old quickly. The company you incubated, it was in a similar space to the spaces that you're exploring right now, right? So you've been curious about this space for a while. Can you talk about? Yeah, sure. So this is also, you know, one of those big things that did not work out. So prefer. So prefer, the idea of prefer was, was to help people get referrals for every service professional in their lives from their friends.

21:01And so the idea being that you will trust if I tell you, there's a chef, or there is a hair stylist, or there is a massage therapist, or there's any service provider, actually, that you would ever need, that you might find online with 4.2 stars from strangers, you'll actually potentially irrational. always trust what I have to say over whatever the average online says. We just are, as human behavior, we just always go to friends for the referrals for everything. And when you go to any of the moms groups on Facebook, for example, it's a constant exchange of, oh, I need a babysitter or I need a tutor.

21:40I need this and that toilet trainer, you know, whatever the case is. It's all a referral frenzy. But the thing is, there's no structured product that helps us know the services that our friends use. And so the idea being that you showed me all of your service providers, I showed you all of mine, compounded by 50, then actually we have a full index of every service provider fully vetted by our friends that would fuel our lives and our needs for services. And so what ended up happening, I put together a team. I was just a board member, but I put together a great team. And the team explored this.

22:21We launched the first version of the product that actually was working extremely well, but had no growth mechanics other than the manual old school growing in with a field game. And so the team was also our CEO. It was from Facebook and from the growth mindset. But, you know, and so it was very important to the team that they found that kind of like, you know, viral growth mechanic from within the product. So you wouldn't rely on a field on a ground team. And so, you know, there were like three or four different pivots off of that. You know, the team, I've shared this publicly and, you know, the team and I talk about it still quite a bit.

23:01You know, my view is that maybe we should have kept at that first iteration more because it was actually people still come up to me and are like, I wish I had that back. but it wasn't growing. I wonder if we should have, rather than pivoting off of it, just kept tweaking the mechanics for it to become more shareable. It's just hard to know when to change and when to keep going. Your first example of the reverse, what do you call it? Reverse what? Reverse franchise model. It's almost like YC for the trades or something. You see it as education and then job placement or lead generation? Well, there are a few ways of going about it.

23:43And yet another team doing that is basically going to, you know, like painters that are out there that have their own mom and pop painting shops, right? And these painters and geographies all across the country and presumably the world, you know, these painters, they may make$150 to$380 million a year for their like painting business, but they have no penis technology. They don't know what SEO or SEM even means. They definitely don't have a social media presence. They don't have any reminders, CRM management tools for their customer base, no referral engines, like nothing, right? And so if you go to one of these companies and you say, here's the deal, I'm going to turn you into one of my franchises.

24:29So basically, I'm going to reverse, you're already an operating company. I'm going to turn you into a franchise of my parent's name. And so instead of Bob's painting, it's now like XYZ Bob's painting. And in exchange, I'm going to do all this stock in for you. I'm going to fuel your business. And I'm going to show you that you're going to actually grow 20 % to 25 % based on what I'm going to do for you. And I'm going to take 7 % revenue going forward. Then it's a good value proposition for everyone. And so that's one model. Another model is to actually go and find these people and train them up and then basically like to up on your platform as a business from day one, but you having trained them to do the craft as opposed to them having already done it.

25:09One company we co-invested in together a bunch of years ago was Greg Eisenberg's company, Islands, which is a messaging company. Maybe it was too ahead of its time. How have you sort of thought about consumer social over time and where are we at now and how are you viewing it as an investment? Well, consumer social is probably one of those forever themes for me, just because community building and social is a big part of my interest area. And there are always quirky ideas at first, as you know. And there are always an understanding of a user's psychology and what they're trying to do. And that's what I love about social products is there's so many nuances, like ego analytics.

25:56How does someone feel better about themselves proactively from the product as a result of using the product. And all these other principles that I think are fascinating. You know, they're also, of course, notoriously and increasingly hard to build just because A, the growth hacks that worked for the earlier versions of them are no longer either acceptable or legal. Number two is the walled gardens obviously are really powerful now. And Facebook has become very like dominant in the way that it flexes its muscle in this space. And, you know, but I actually think that new mediums are a new opportunity.

26:31You know, I'm looking at some social stuff in the AR space. I'm looking at audio social stuff. I'm also, you know, thinking about what's kind of the next, you know, personal human need that will be fulfilled by that technology. Yeah, there's a great social product when it comes out. You can't imagine life before it, whether it was Twitter or even Clubhouse. not you can't imagine life before it but just it's so elegant it works so well a couple spaces within that that i've been excited about to look for is one is like is there some version of a discord for sports uh yeah sports fans are just so you know engaged they they're willing to pay as sort of the athletic has shown and is there an experience i don't know if it's audio sort of play by play around the game or or or whatever it is but it seems like that's something interesting and then i've always wondered if there was something that could be done off of receipts this new data source in general, whether it's email or receipts that you could create an identity around the things you support.