Platform Shifts, AI, and the Future of Consumer Investing

0:09Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. In this episode, I had the pleasure of speaking with Mercedes-Benz, who recently launched her own firm called Premise after spending time as an investor at Lightspeed. We covered a lot of ground during our conversation, including how AI is transforming consumer today and in the future, what informed the thesis for Premise, which is the name of her and her partner Vanessa's new firm, and the state of VC today. We hope you enjoy the episode, and don't forget to subscribe if you want more Venture Unlocked episodes straight to your inbox.

0:44Samir Khadji is the CEO and co-founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third-party investments or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or Allocate. Allocate or its clients may maintain relationships with or investment positions and guests, third parties, or securities mentioned in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

1:23Mercedes, it's great to see you and thanks for being on. Thank you for having me, Samir. Wonderful to be on. Yeah, this will be fun. So I usually don't start here, but I think your story is so interesting and all the different things that you've done in your career leading up to your fund now. Let's go back in history and go through your path of getting into venture. Okay, so that starts very early. I'm the daughter of entrepreneurial parents. I had probably the luckiest upbringing you could have to have my job today. My dad's an engineer. My mom's an accountant. They started companies when I was younger.

1:59My dad started a video streaming company. They worked on our RFID company back in the 90s and 2000s. My parents used to work at Apple. So I kind of just grew up in the Bay Area around tech all the time. And I thought that's what everybody did when they grew up. I thought everyone talked entrepreneurship and ideas at the dinner table. I remember when we were younger, they would say, okay, so what if you had a pet robot and it was talking? You know, what would you price it for? Who would you sell it to? Like, what would the kids use it for? Where would they buy it? And we would talk all of these ideas.

2:33And then two years later, Furby would come out. And I was like, oh, that's what we were talking about at the dinner table the last few years. And they were like, yep, yeah. And that was just constant. So I had a really lucky upbringing. My dad taught me coding when I was in high school, VBA mostly. And I went to Harvard for undergrad. I started out computer science. And then the great financial crisis was going on while I was there. And I thought that was super fascinating. I ended up working with my Harvard professors at the Fed, both the DC Fed and the Boston Fed. in 09 on kind of post-crisis cleanup work.

3:09And then worked at Goldman Sachs for a couple of years, did the asset management thing, got to do a lot of public equities and commodities trading. And then in 2012, I was like, you know what? I want to go back to the startup world and back because of my upbringing. I worked at startups from 2012 to 2019, lots of different roles in consumer frontier tech. I was the founder of my own company, got to see everything from zero to 100 million in revenue. I was leading really large teams, 100 people and P &Ls of tens of millions. So got great experience. And then I became a VC in 2019. And at that time, I was thinking this is a perfect amalgamation of all my experiences, part finance, part startup.

3:53And that was at Lightspeed. I got my shot from Jeremy Liu, who hired me in 2018. I started in 2019 and just had a phenomenal experience there. Tons of investing, but that was really kind of the upbringing that led me here today. And so now that I'm going back on the entrepreneurial route again, it feels like another continuation of all my life points have just kind of led up to this. Yeah. It's such an interesting sort of eclectic background that you've been lucky to have, you know, from the public side to working with the Fed to working at Goldman Sachs. And, And when I talk to entrepreneurs, and I do consider people that are running funds, especially emerging managers as entrepreneurs, you take all those experiences and it helps inform the type of firm you're building, the culture, what you're investing in.

4:44And talk a little bit about how those experiences informed the type of firm that you want to build with Vanessa. And maybe if we can tick off the culture, the thesis as two of those major points. Yeah. What we want to build was really largely informed by some of the gaps that we see in the market and as well as the decision on how we wanted to build a firm. Some of our guiding principles are always be top decile, always seek alignment, everything must compound. We really want to run it like a startup and rewarding originality. Those are really important to us. I have a little post-it note on my wall next to me right here that says live on an island.

5:27Originality stems away from the mainland. And that's how we think we're at large firms where sometimes consensus is more so what drives the agenda. But we always felt that our original ideas and insights into contrarian areas were what drove a lot of the returns. And so we are thinking about that for ourselves in terms of how we set up things like decision making frameworks, for example. But even more important was the gap that we saw in the market. We felt that also an originality is stemming from the type of founder that we want to back, that we don't think others are backing. It's a technical founder who has insights about how behavior is changing thanks to the new technologies that have been advanced.

6:18So if you get just a technical person, you end up getting someone who's building technology in search of a problem. We've all felt that's kind of what VR was. I worked in the VR industry for a while. And I always meet these incredibly talented engineers who have such depth on the primitives of the technology, but can't describe really why a customer needs it. And then if you get just the people who understand the behavioral insight, who understand the problem, then you get sometimes a lot of influencer marketing people or marketing execs and not people who really know how to ship and build and iterate.

6:53And oh, that foundational video model is out of date, you know, after only six months or three months. So, so we're really looking for this unicorn. And we felt like when we said, you know, we want to invest in consumer, people didn't understand it. They thought it was soda and apparel and, you know, things that people kind of classically think of influencers. And when we said we want to invest in consumer technology, people still didn't quite get what we meant. They said, okay, so maybe an influencer who's built a consumer product. And so really, we felt like we honed in on this gap of a unicorn that has become really our type of founder.

7:33And these people aren't being funded at nearly the levels that we think they should be. Last year, only 6 % of BC dollars went to consumer-backed companies, which is down from 34 % a decade prior. And so we find that, one, there's a terminology issue, but two, there's really an issue where people don't know how to underwrite these companies before they have revenue. Once they have revenue, everyone's on board. It's easy to write, you know, to analyze the cohorts. But before then, you really need to assess a low-touch, no-touch, go-to-market motion. And that's really what defines consumer, by the way.

8:14Not like, consumer's not a category. Yeah, low touch, no touch, you know, go to market motion and product pull and product engagement metrics. And we just felt we were uniquely qualified to do that. Also, given our backgrounds working in product and Vanessa's working as an engineer as well to really identify and underwrite that founder profile and the engagement that they start to build in their product. Yeah, and we're going to touch on because you brought up a number of things there I think deserve a little bit more unpacking. So one being consensus versus non-consensus in venture today. The second is really the role of consumer products and consumer technology and how that's changed.

8:56You know, 6 % is a very low number. When you look back in history, some of the biggest companies in the world have been consumer in nature, you know, whether it be the Facebooks of the world, obviously. And we'll get into what you're seeing from a shift standpoint with artificial intelligence. But maybe coming back to this thesis of you want to invest in things that are generally non-consensus. They're early. Consumer has been relatively non-consensus, especially pre-revenue. And one of the things that we always look at when we're evaluating, or when I say we, I mean at my company, Allocate, is not just the thesis, but it's really the GP thesis fit.

9:37So similar to when you're looking at a company, you have somebody that has technical chops that really understands, plus somebody that has that business mentality to understand consumer. How does that then align with the way you built your team and maybe some of the conversations you and Vanessa had leading into partnering to make sure that you are the right group to be able to execute on this thesis? Yeah, that's a great question. I mean, I always said our partnership has to be one plus one equals more than two, because otherwise we should just go be individual solo GPs. It really needs to be that the intersection of the two people together creates far better ideas than what they would have individually come up with.

10:20And that key criteria for a partner, in addition to having super deep trust and super deep foundation, has really proved true so far for us. I have more of the Goldman Sachs Federal Reserve financial background. She has more of the Georgia Tech computer science undergrad, worked in all technical PM roles for her first seven, eight years out of school. The marriage of those two is what allows us to do, and also both having very much so a product-focused mindset is what allows us to see founders really in the same way and And also to bring something unique to the table. So that's been a large part of the kind of partnership.

11:06I think another thing is we both have, as former operators, think about that value I said, everything must compound. We both want to run it like a startup. We measure our KPIs. We measure cost of acquisition of our founders. We measure the LTV. For example, when we are our sourcing funnel and how we think about building out our go-to-market on our founder side of the business. There, we really productize things because a lot of VCs throw events. It's a one-off, but that doesn't compound. And we're a small team. We need it to be bigger than just an individual event. And so what we did there was we actually created sub-brands of different things that have nothing to do with the name of our firm.

11:52They were runner-up names, actually, to our firm. And we created sub-brands so that it was an entity unto itself. One of the problems we've seen when firms scale is that their brand dilutes and they get bigger and bigger. And suddenly, I won't say the name of a firm, but they have these sub-programs. and everyone's like, oh, it's so easy to get into, you know, to be a founder in their firm. And everyone says they're a scout and everyone says they're a venture partner. It starts to mean less. We wanted to really protect that ahead of time. And we take a lot of our inspiration from enduring large brands.

12:28If you think about Tiffany's, for example, their silver bracelet is the entry, you know, brand to their larger catalog of products. If you think about Mercedes-Benz, similar to my name, but if you think about Mercedes-Benz, they start with the C-Class or the E-Class before you build up to the G-Wagon or the Maybach. And so we think it's important to have that. So our access brands are our event series where we source. And those are destinations in and of themselves. They have WhatsApp groups, they have websites, and people are going to come to them because they've been referred and recommended by future founders who are really high quality.

13:04And so we set that up intentionally from day one. That was not an idea I exactly came up with myself. And it's not an idea. She exactly came up with herself. It was through the co-creation of talking about the type of things we've seen that are important to us that enabled us to get here. We also said, okay, we don't like to just do a one-off event. It has to compound. And so it's an event series that meets every month where under its own brand, where you, over time, people who come to future events get priority if they've come to a past one. And we get hundreds of applications every month. And so that's a part of the compounding nature.

13:40Also, if you refer people, you get additional priority access to come to these events. That's also part of this self-perpetuating loop. We think about it like we want to productize our network because one of the other things I believe about venture is your network really gets stale. I think the shelf life is probably like three to five years of a snapshot in time before that network is superseded by some other hot talent node. And we already saw that happen in operating. Our operating networks are now at this point, seven, eight years old. Those are kind of stale now. And now pretty soon, our networks from our tier one BC firms are going to be stale in another three years.

14:21It's a snapshot in time. So we have to start building the engine for fund two, fund three and beyond. And that's why we really are being so intentional with how we set up this brand and sub-series, there's a ton that goes into it. We also, by the way, spent like, you know, 15 ,000 on it in the last six months and had like thousands of people apply. So we're very scrappy as well. But I think this is the type of thing that when I thought to your question of like, why are we such good partners for each other? And what did we bring as values to the table? That one example shares so many different facets of it.

14:58The focus having to be all in technical engineers, researchers, PMs. That was also something that came from the co-creation too. You know, what I really like about the story there is kind of this notion of like running a firm like a startup, right? And, you know, whether fund one can be like a seed round fund two series, like you're continuing to build, it's not just raising a fund, but it's building a firm. And in a world where the feedback cycle loops are so long, like it is, you invest in a company, It might be 10 years before you know, number one, if you're a great picker, because it takes time to see those companies continue to mature.

15:36And so these interim KPIs to determine like directionally is what we do working is really interesting. When you think about the different things that you're looking to solve against from a KPI, there's the sourcing, which is network is a big part of like seeing the right deals within a thesis. There's the picking component. And then there's once you see the deals, you have to win those deals consistently. Now, maybe a non-consensus feels it's, you know, it's easier to win those deals. But when you think about this event series and how you're tracking, do you believe that for, you know, seed firms, sourcing or winning are more important?

16:14Or is how would you sort of define like what you're indexing on? Well, yeah, that's a great question. There's a couple ways to answer this. I think the most overlooked role of VC is actually the exiting strategy and how you seek liquidity. So we'll come back to that. Sourcing, evaluating, winning, portfolio support are normally like the classic four people talk about. And I always think they forget about the fifth, the exit. I think that sourcing is table stakes. Like if you aren't sourcing, what are you looking at? You know, if you don't have a way to benchmark whether or not a deal is a good deal across thousands or tens of thousands that you've seen, That's also a big issue.

16:53I think the big firms actually, a lot of them have specialized into sector teams. And I think that specialization enables them to win most in terms of the eyes of the founder. Because when you're someone, we've experienced this as people who've raised money. When you get that view on the other side of this person understands me and they know what I'm talking about that is so powerful. That's one of the things that helps you win. And so I think a lot of the horizontal firms that have a broader mandate, maybe at pre-seed or seed, the area that you would struggle more with is winning because you are not able to totally zone in and say, I am the expert in, I don't know, XYZ field.

17:39And oh, by the way, here's the 10 different thesis maps I've done on your sector. You don't have time for that when you're looking at a ton of different categories. So I think that is where maybe the earlier stages of seed firms fall down on the winning that at the same time, if you get there early enough, it's less competitive. And so winning is less important. You ideally want to be competing against time and the founder's timeline of when they have fully decided to go out and make themselves known to a broader set of people versus competing with a founder who's an established known quantity in the field who is suddenly going to have a competitive term sheet right away.

18:24That's how I view it, at least. I view we invest pre-seed and seed. And pre-seed, really, if you're doing it right, you should be competing against a founder's own internal timeline, not the market. And so there's a lot of opportunities I'll work on for months or years where I am judging the founder as having been in three different stages. One is the first phase is where they have not really even decided to be a founder. I just think they're high quality and I'm hoping that they will get there one day. The second phase is kind of the founder curious phase. And this is a really optimal time that you need to be seen as the one guiding them towards this journey.

19:06And that is a period of, you know, three to 12 months oftentimes. Then there's the founder convicted and actually like launched, which is they've decided to go out there and do it. They may not have a team. They may not have the idea fully baked out. But actually both of those phases, if you get the timing of them right, are the area where you as a VC win and compete. And I think a lot of winning and competing is targeting that timeline correctly and understanding the signals and being the person walking the founder or the future founder down the proverbial aisle to the destination where you both say, I do.

19:49So that's to me, like if you get it right, you can pull yourself out of these typical comparisons of competition or winning. So this is a long kind of circuitous answer to your question, but ultimately, yes, I think it's harder for seed firms to win if they've now got into the stage of they're competing with a known asset. So they should play a different game. They should play the game of competing with themselves. Yeah, something that we have thought about a lot, and I go back and forth a little bit on this, but venture even from 2018, when you joined to where it is today is completely different.

20:30And it's hard to even know what is venture versus not venture. For example, General Catalyst, don't even refer to them as a traditional venture capital fund, but really private innovation finance, because they have all these different type of products now. And we're seeing that, you know, across some of the mega firms, and both you and Vanessa came from these larger funds in NEA and Lightspeed, which fundamentally are different business models. Can you shed the light on the difference in your mind of the business model of a big firm today, that is deploying billions of dollars and the mindset that you need to have as a seed manager to win in a space where you're competing with not only other seed funds, but now increasingly the bigger funds where consensus founders, consensus sectors may skip seed to go direct to the big firms.

21:21Yeah, I guess in terms of how I think about what different games we're playing, I think the largest firms, they have simplified the venture capital asset class question to, what can I put a billion dollars in that will give me three or five billion tomorrow? And tomorrow is becoming in the AI world a shorter and shorter amount of time. There was a tweet that caused a lot of consternation in all of my VC manager chat groups, which said something to the effect of, why are we all doing this? Why are we all doing VC on hard mode? Just find an AI company to put a billion dollars into that will be worth 5 billion in 12 months.

22:06And everyone could kind of stop and think about like, yeah, we all know there's a company that would do that. And so I think at the latest stages, the mega funds are playing a very different game. To me, it almost feels like a new asset class entirely. They're not playing the private equity game. They're not playing early stage venture. They're playing a kind of short term horizon returns gain, but it's actually the IRR on these is pretty phenomenal. The duration is more like PE. The IRR is more like venture, but it is highly cyclical. but the question is there's always something that is in the hype kind of growth category at that time and can you enter and exit quickly enough so really where more the exit question has become more the issue for them so then it's who are you what are you doing from a secondary's perspective what are you doing from a continuity funds perspective how can you enter and exit quickly at scale and hype be you know fast growing categories is now the game for some of the larger ones.

23:10And that is really where I think the innovation is coming as you know more than probably anyone is all on the exit construction. So I think that's a very different game. To your question about more competing on kind of known quantities, I mean, frankly, I don't view myself as competing on known quantities. I have zero business being in a Mira thinking machines round. Okay, that's maybe an extreme. But even still, if you take your random person of the mill who comes out of OpenAI or Anthropic and wants to raise$15,$20 million, I'm not in those either. Let's bring it down even to the ones who are raising$8 to$10 million at$40 to$50 post, which is becoming very common.

24:01I probably don't want to be in those either. So I do think there's a question of why would you as a seed manager compete for these things? I think most people have gotten very lazy on what constitutes a good founder in a world of more and more options, which the asset class has exploded, the number of founders has exploded. You tend to rely even more so on signals and rather than on actual kind of substance. For example, like Ivy League degrees are signal versus substance. They tend to correlate and they tend to mean something good. But just because someone had that on their resume doesn't mean that they necessarily are good.

24:47It's a lot harder to spend the time to figure out who's really good. And that's the problem that I think we're running into now. So I think you hit the nail on the head, particularly the bigger firms, which I do feel like they're a very different asset class than the pure play early stage venture where all of your exposure from an investor standpoint, an LP, into a fund is going to be kind of seed in Series A, maybe a little bit of Series B. Whereas the big firms, ultimately the entry point might still be Series A, in some cases seed, but they look very different. And the calculus at those bigger firms is, and I've heard this many times is can I plunk$100,$200,$300,$500 million into this company?

25:31Some models that are capital intensive actually work well when you're dealing with that quantum of capital. The thing that's, I think, challenged a lot of seed stage managers is if you go non-consensus, and when I say non-consensus, the way I'm kind of roughly defining it, it could be a sector that's not particularly hot. It could be into a founder that's a first-time founder. It could be a company that is well before traction is that the additional risk of downstream capital not being there. And so a lot of seed stage managers will do the consensus because you get the quicker markups. It's easier to raise that next fund.

26:05And that becomes this internal challenge of if I do non-consensus, what happens if the company doesn't take off right away? Is there going to be following capital? How do you think about that and maybe in your minds really work around that sort of reality? Yeah, we call it gifted TVPI and earned TVPI. There's the folks that everyone's going to agree with. And look, obviously, like Martin Cosato had that tweet that went viral and also caused a lot of conversation on VC Twitter. I think it's a lot safer for your VC career to be consensus. And if you don't have as much experience in venture, you should always, well, not always, You should certainly do a good amount of your deals to be consensus early on to make sure that you have something there.

26:54I did a lot of non-consensus. When I joined Lightspeed, I opened our Latin America region, and that was very much so not popular. But I was able to find diamonds in the rough. I was able to find companies that I met pre-revenue that are now doing hundreds of millions in revenue and worth billions. And so if you can find it, it works. But I think you have to have anything, a balanced portfolio around it. So we do have internally a way that we think about earned TVPI versus gifted TVPI. Frankly, we get a lot more excited about the earned TVPI deals. We're an investor. I don't know if I can talk exactly about the company we're an investor in.

27:37So I'll skip that part. But we've definitely done some there where it's people who have no name, you know, backgrounds, no pedigree, but it's their metrics that show forth. I think downstream capital is really architected by mostly a couple of things. One, true metrics that people can rely on. Sure, everyone will to call that the earns thing. Two is in addition to the founder's pedigree, I think the founder's pedigree by Series A, if they're not showing results, doesn't matter. So if I'm investing at the seed, I think that at least the person needs to have shown some type of market entry. And two, I think it's really comes down to what is the downstream capital think of my taste.