David Pakman — Venrock
We talk about how Venrock invest, Dapper Labs, his anti-portfolio, the GFC and more!
David Pakman is a Partner at Venrock, originally established as the venture capital arm of the Rockefeller family in 1969. Venrock partners with entrepreneurs to build some of the world’s most disruptive, successful companies. David focuses on early-stage venture investing in consumer and enterprise tech companies with a recent focus on robotics, crypto, consumer products and AI. He led both the Series A and Series B rounds in Dollar Shave Club and sat on the board until that company was acquired by Unilever for $1B. Previously, David was the CEO of eMusic, the world’s leading digital retailer of independent music, second only to iTunes in number of downloads sold. He was also the co-creator of Apple’s Music Group and a product manager at Apple.
NA: Hi David, I appreciate you taking out some time to chat with me. I am quite excited for the ensuing conversation. To start off can you talk about how Venrock invests, what are the types of companies you look for and how do you make investment decisions? Do you look at global companies?
DP: Sure, so we are divided up into two teams, a tech team and a healthcare team. The tech team focuses on Series A stage, early-stage tech companies and we are usually the lead investor of that round. We invest and join the board of the company and try to partner with the CEO to really help build the company, recruit the rest of the team, make key strategic decisions and just try to support the entrepreneur to be successful. We try and help them build the company they always wanted to build.
I would say 98% of the investments we make are in the US and they are pretty distributed around the US. It used to be pretty heavy in New York, Boston and the Bay Area but now we have got companies in Boulder, LA, Seattle, Montana, Portland and a few other places. We also have a few investments in Canada some in Toronto and in Vancouver, and I think one in China. We are pretty heavily focused on the US. Also, in terms of sectors, our focus changes over time of course. On the software side of things, we do a lot in AI for the enterprise sector, smart software, helping companies make decisions better. We have a focus on Robotics and automation, we do some stuff in space and defence-related industries. A bunch of stuff in crypto and consumer products and consumer services.
NA: It is great to get a breakdown of how Venrock works. You have had an amazing career in tech, and you have been investing with Venrock for over 11 years now, can you talk about how you got interested in crypto and blockchain and the journey to investing in this space?
DP: It’s really the story of following the developers. Crypto has been an active area, there have been a lot of smart developers that have been attracted to experimenting there. It holds a lot of possibility and potential. There is a chance to rearchitect the way web applications are built, turn them into more decentralised applications, where the data is held by users and not controlled by platforms. There are a bunch of other nice benefits of building on top of blockchains for developers, that things like APIs can’t be revoked, laws of the way the platforms operates are embedded in the software so they can’t change on a whim. Developers like that kind of certainty.
So we have been attracted to the Web 3 possibilities, and also digital assets in general, not just currency assets. They have a lot of potential, a lot of real opportunity around them. Whether that is as collectibles or currencies or the fractional ownership of real-world assets, there is just so much to like about it. The challenge is that it is pretty esoteric, it’s not been really adopted by mainstream consumers, there is still a lot of friction as a consumer in using a lot of these products. So, today I think it’s still largely more about possibility than about actuality, but that’s a venture investors job. To find companies that show a lot of promise and can be proven right over time.
NA: Being in the crypto space for over three years, a phrase I’ve heard quite frequently when it comes to criticizing the technology, is that “Blockchain is a solution looking for a problem”, and it’s interesting that as a VC you would be looking to find those companies that are solving great problems with blockchain technology. You are an investor and board member in Dapper Labs, can you talk about what excites you about Dapper Labs and why did you invest?
DP: First and foremost it’s because of the team. The team there is really an extraordinary mix of talented entrepreneurs and company builders that are less religious and more practical than other teams we have met in the blockchain space. They really are trying to tackle an interesting problem, which is they want to build gaming experiences for mainstream consumers on top of blockchains.
There are a lot of problems with that, as we just talked about, there is a lot of friction for consumers holding crypto. To date, there haven’t really been any scalable smart contract platforms that you can build a mass-market game on top of. So they really solved that problem by building one themselves called Flow, which will launch next month. Its a highly scalable game-oriented layer one protocol. They have a really exciting game coming out in partnership with the NBA next month called Top Shot. So they have really one of the worlds biggest brands, the NBA, built on top of their own highly scalable, transaction-oriented blockchain and hopefully they will be very successful, we will know more next month.
In general, I think what’s exciting about the world that they are playing around in, is these crypto-collectibles, which are the basis for a lot of the games they are building. These items that you can purchase and own indisputably and use in games yes, but also hold and choose to trade or sell later. A lot like real-world collectibles, so I am excited by that possibility.
NA: I actually signed up to NBA Top Shot as soon as it was announced last year, so I am looking forward to it coming out. As you already know gaming and E-sports is now a huge market with millions of people actively gaming and making money in a few ways like selling gaming accounts, live streaming and of course building the games. In your opinion what aspects of crypto and blockchain technology present new ways of making money in the gaming industry?
DP: The whole idea of crypto-collectibles, I put this in the gaming category, is novel. We can’t really do digital collectibles online today without blockchain. There are a lot of examples of us sort of doing it like virtual items in gaming, but the problem is that you don’t really own that, you have been given permission to have it by the game publisher, and they could revoke the rules at any time. For instance, there are people who have worked hard to win particular weapons, or armour, or outfits in Fortnite that are rare in Season 1, but in Season 2 they [the game publishers] make that item not rare anymore. That won’t happen in the crypto collectible world, where effectively the creator of the virtual item as said there is only going to be a thousand of these and there cannot ever be anymore, and you can check the code to validate that. So, I’m excited by the possibilities of having true digital collectibles where ownership can be verified and the scarcity can be enforced. That makes these digital collectibles most akin to real work collectibles, where those attributes are true. So, that is one thing I find interesting really interesting about this aspect of what’s called blockchain gaming. And then, of course, the collectibles can be used in a lot of different games as long as people code to the API, so we will see. I don’t think consumers care at all about the word blockchain or wallet or crypto, so the games just have to be great. The fact that they are built on blockchains is not of interest to the consumer, just the benefits have to be clear to them, and we will see if anyone can pull that off.
NA: Completely agree with consumers not caring about blockchain. We have seen companies that are using blockchain in the back end just as a part of their tech stack do quite well by not specifically talking about it. Do you think crypto is going to disrupt venture capital space?
DP: I think we’ll see, I appreciate that there really should be other forms of raising capital for building companies beyond just banks, private equity and venture capital. But doing pure crowdfunding doesn’t solve for some of the problems that VCs solve for, which is that we are more than capital, we offer advice, network and experience. So, I hope that crypto can open up the fundraising process to more people and allow more people as investors to participate. But startup capital is among the highest risk bets you can make, the odds are not good, they are against you, pretty heavily, I think a lot of people can get burned. So, you got to be careful.
NA: I saw that you joined Venrock in late 2008, in the midst of the GFC, how does that downturn compare to what we might be seeing now?
DP: I think we’re obviously in and will be in for some time, really negative economic environment and a really brutal recession or worse for a long time. So a lot of new rules apply, or maybe we can say the rules of the bull market no longer apply. I don’t think that’s fully sunk in yet, I think there are lots of entrepreneurs who have made some minor course adjustments to their businesses, a lot is going to change beyond that. Obviously valuations will come down, terms will shift to favour investors more than entrepreneurs, capital will become very scarce, it will be harder to raise rounds and the milestones to achieve the next round will go up. All at the same time while the macro-economic environment is really challenged. That is, the man will be weighed down for most things.
What usually happens in those environments, and I have been through it twice, I was an entrepreneur during 2001 [the dot com bubble] and then a venture capitalist during 2008. What tends to happen is first the tourist money leaves, the non-serious, non-institutional money that thought it was fashionable to invest in startups like Hollywood celebrities, athletes and real estate families, that all goes away, that money disappears very quickly, it is probably all gone now. What is left is institutions and some angels, what’s left are people who are serious about it, that are trying to actually build returns and they get much tighter with their capital. So when there is less capital, only the serious entrepreneurs survive, the tourist startups get weeded out pretty quickly too. You are left with a smaller number of startups, less capital and different terms, and also a new set of problems to solves.
So what we are most excited about right now is what new problems are there to solve as a result of the COVID and post-COVID world. Habits have changed, needs have changed, the whole world has been turned upside down, so its a very interesting time to find talented entrepreneurs that want to solve those problems. But businesses will grow more slowly and capital will be harder to raise.
NA: That is incredibly insightful. I want to get your thoughts on warm and cold intros. How do you recommend startup founders can meet investors and can get those initial meetings if they are struggling to find a warm introduction?
DP: I think the question should sort of be turned around a little bit. The question is, if you’re not connected why do you want to be an entrepreneur? I mean I don’t mean to make it sound harsh, what I mean is being connected and being able to build or use your network is a crucial ingredient to becoming successful as an entrepreneur. I don’t mean just to meet VCs, I mean to recruit talent, to find customers, so I think the time to start companies is when you have some path. You believe you have a much better solution or problem and you see a path to try to get there.
So, really entrepreneurs have to be unbelievably resourceful. One of the tests of how resourceful you are as an entrepreneur is can you find your way to customers? Even if you don’t know them. Can you find your way to sources of capital? I mean I think every VC has a twitter account, a website, they’re on LinkedIn, it’s just not that hard to see a path to get to one. We all blog about what we are interested in, so I would kind of turn it around and say why can’t you find a way to get a warm intro. Be resourceful and work it. Hustle is such an incredibly important ingredient to being successful. Being an entrepreneur is so hard, as I said the odds are against you. I tried it three different times, three different companies, and mostly stuff goes wrong. Very little stuff goes right, so the ones who survive are the people who can adapt to an environment where things always go wrong and find a way through it because you believe so strongly in what you are trying to do. If you don’t have that hustle, and that ingenuity and that resourcefulness I don’t know that you are likely to be successful as an entrepreneur.
NA: That is a very interesting point of view and makes sense. I’ve read that there is a lot of dry powder sitting on the side, ready to invest and over the past decade there has been a massive increase of venture funds resulting in a lot of competition to get into good deals. What do you think about what it takes to truly win the best deals with all the competition today?
DP: First of all I have not won all the best deals, it's super hard. I’ve only won a couple of really good deals. I’ve lost a bunch of good ones and then I’ve won a bunch of deals that weren’t the best deals. So, it’s very hard and you are right, that is a key attribute of being a successful VC. But one of the approaches I’ve taken to it, right or wrong, is I’m trying to play a different game. The game of “let me find the hottest deals that everyone else also finds and try to win those,” doesn’t feel like a game that I am likely to win. Instead, I’m trying to win a different game. The game I’m trying to win is, let me find the market verticals that other people don’t believe in, that are effectively non-consensus and most believe you can’t build successes there, and let me find the best teams in those verticals and try to pick companies that actually can win. Another way of saying it is, I’m looking for areas where there is less competition or where I have a domain knowledge advantage, I just know a lot about a certain area, that other people are less likely to dig in deep on. I think there are some examples of that, I don’t think most people were excited about razors and there were a lot of reasons why people stayed away from Dollar Shave Club (DSC), it was a non-consensus bet, but we turned out to be right there. We are doing a bunch of stuff in robotics now, its a very hard market, not all of our companies in the space will succeed but hopefully, we’ve picked some that might, but that is an area that has less competition. So hopefully, that gives you some ways I think about being a VC.
NA: That is a great way to go about it and I’m glad you mentioned DSC. I want to quickly talk to you about that, I started a subscription box company a few years ago inspired by Dollar Shave Club (DSC) and its success. Since the rise of the subscription economy, there have been hundreds of subscription businesses launched. Venrock invested in DSCs Series A in late 2012 and earlier that year Harrys another shaving subscription business raised a seed round. Could you talk about what really differentiated DSC from its competitors and led to its success?
DP: One of the theses that we have about consumer goods or consumer product businesses, Nest is another example where we were successful, is that the product itself has to be significantly differentiated. It needs to be proprietary in some way. If everyone can sell the same product, then you are only left with brand and experience as a way to differentiate and you can have a lot of competitors. In the case of Nest, this was a team out of Apple, that basically put an iPhone on your wall. There was just no way that Honeywell, that was the biggest manufacturer of thermostats, was going to be able to do anything like that in at least four years. That was our calculation, if we were right and build a great product, it will take them at least four years to copy us, which is exactly what happened. You can put a lot of distance between yourself and a competitor in four years time. So, there is some product differentiation and proprietary-ness that makes it hard.
In DSC’s case, there are only five razor manufacturers in the world. DSC has an exclusive with the number two, the number two by quality. We felt good that there would not be many entrants in the market, because there are only five razor manufacturers. You could build your own razor factory, with your own design and enter the market but it would take a long time because there is so much intellectual property protection around razors, you are going to be sued by all the other razor manufacturers and you may win eventually but it’s going to take at least three years of lawsuits. I would call that a market with supply-side scarcity, and that allowed DSC to innovate on price and on service with a convenience model, and have some great marketing and really attack the incumbents, but not worry about ten other copy cats showing up. That is why we were able to sell the company for a high exit value, but also a very high multiple for that category.
You know another company that I think has done an incredible job is Casper, who have built an amazing product in a really annoying category. Mattresses have had a disgusting set of brands and retailers forever, but the challenge they faced is that its a foam mattress and they don’t have an exclusive on the foam from the manufacturer. My concern there was they would be faced with a number of competitors very quickly, and that turned out to be true, there is more than a hundred foam mattress in box companies that have been formed to follow Casper, many quite successfully. There is an example, where there is a wonderful brand but don’t really have supply-side scarcity.
NA: Very interesting, and yes I have seen quite a few foam mattress-in-a-box companies on this side of the world over the past few years as well. This is going back to one of your earlier answers, where you mentioned you missed a few deals. It might be a painful one, it’s in regards to your anti-portfolio, what is an opportunity that you passed on or let getaway which you shouldn’t have?
DP: Oh quite a few. When I first started as a VC I was chasing Twitter. I’d only been at Venrock for about nine months or a year and the Series B round for Twitter was going around. I loved the product but it was expensive, it was going to be a $225M pre, which was extremely expensive for the time and also for Venrock. So, I never actually put a term sheet in and I don’t know that we would have won it. Benchmark won that round, I seriously doubt we would have beat Peter Fenton at Benchmark, but we talked ourselves out of it because of price and that was obviously a dumb thing to do.
When I first started, in the first few months, a company came around where we knew the co-founders because they were at DoubleClick, which is a company that Venrock had invested in before. The company at the time was called 10gen, they were making a cloud computing offering, we passed on it and it turned into MongoDB, which is one of the most successful cloud computing companies, so that was stupid. There are plenty more examples like that but its hard to get it. You can’t always see the vision and we make a lot of mistakes, but hopefully, we pick some winners.
NA: Wow, those are impressive features in your anti-portfolio. You must have learned a lot from not getting into those deals, and you mentioned you mostly missed Twitter because the price was too high, is that something you guys focus on quite a lot? Where you want the price to be within a certain range?
DP: Well we think of it more in terms of a multiple. If everything goes right we hope that the company can be worth ten times the price that we pay going in. So that is why price matters. What can the company be worth at its exit? And obviously low prices make it easier to achieve 10x returns but also remember you need to finance the company in the future. We are not going to be the last round of capital and so if you pay too much going in and the company doesn’t perform as well as it thinks it will then how do you raise money at a higher price later.
NA: Sure, you don’t want down rounds. My final question is what is the latest publicly announced investment you have made and why?
DP: I’ve made a few that haven’t been announced. The latest publicly announced one is probably Simbe Robotics. Which is a robotics company based in San Francisco that develops a robot for retail, that drives up and down store aisle to find what’s missing from shelves, what’s been priced wrong and what’s been displayed wrong? They mostly work with grocery and drugstores, but also can work in apparel retail. Apparel retail is not doing very well right now but grocery is off the charts. Everything is flying off the shelves right now.
They obviate the need for a human to do this job, it’s a job that humans don’t like to do, it's boring. Humans are not very good at it, we are not good at remembering what was supposed to be here, but computers are very good at it. The robot is running in all sorts of grocery stores around the US and in a bunch of other countries. They are trying to build more of them and ship them out, its a really cool robot. It uses sophisticated computer vision, its got to know how to navigate people, shopping carts, babies, spills on the floor, its got to get back to its charging base to recharge, so its a pretty complex machine built in a pretty friendly form factor.
NA: That is very cool, looking forward to seeing them in New Zealand someday. Thank you so much for you time today David, I think it was one of the most interesting conversations I have had yet.
DP: No problem, it was great to talk to you too.