NYLP: Welcome to the New York Launch Pod, a podcast highlighting new start-ups, businesses and openings in the New York City Area. I’m Hal Coopersmith, and in this episode we are speaking to Charlie O’Donnell. He’s a venture capitalist and founder of Brooklyn Bridge Ventures.
Brooklyn Bridge Ventures is a venture capital fund that invests exclusively in New York City start-ups, so it’s a great fit for us. We have a wonderful conversation with Charlie. We talk about all sorts of things. Why he invests in the companies he does, what he looks for in founders, how he started his fund, who his investors are, and a whole lot more.
We even talk about our past guest in episode eight, Orchard, which Charlie invested in through Brooklyn Bridge Ventures. This is an episode you don’t want to miss, especially since you’re getting a perspective from the other side of the table. So let’s go right to the interview.
Stepping onto the Launch Pod, we have a real-life, living, breathing, venture capitalist, Charlie O’Donnell. Thank you for stepping on to the Launch Pod, Charlie.
Charlie: Happy to be here.
NYLP: So, you are Mr. New York, it seems. Let me make sure I get this right, you grew up in Bensonhurst.
Charlie: I did.
NYLP: Went to Regis High School, Upper East Side of Manhattan.
Charlie: Yes, long commute.
NYLP: And then you were up in Rose Hill in the Bronx for college.
NYLP: Have you ever left New York?
Charlie: I have left New York on occasion. A little ankle bracelet goes off when I do, but the longest period of time I’ve been outside of New York City, consecutively, is three weeks.
NYLP: Three weeks?
NYLP: Any reason for that? Is that like Speed and Sandra Bullock and Keanu Reeves?
Charlie: I drove across the country, at the time. It was a really great experience, I highly recommend it. And the thing you want to do is go east to west because the last thing you want to do is do all that driving and then wind up stuck at the Lincoln Tunnel at the end of it.
NYLP: So three weeks is the longest you were outside New York City?
NYLP: Driving across the country. And then you decided to start a fund called Brooklyn Bridge Ventures and you invest exclusively in New York companies?
NYLP: It seems like a perfect fit for Mr. New York.
Charlie: Absolutely, absolutely, and there’s more than enough work for me to do here.
NYLP: How did you come up with this idea?
Charlie: So, the goal when you’re in venture capital… or I guess I should back up a step. It’s not like I grew up thinking I was going to become a venture capitalist. And Wall Street looms large when you grow up in New York and so, to the extent that I knew that the stock market existed, my godfather had given me some IBM stock when I was born. So I knew that stocks went up and down from, you know, when I was about six and thought that, that might be something that I would go into.
I was a finance major in college but I actually wound up blocking out with a high school internship. Regis kicks you out in the third trimester of your senior year, at least when I was there, I think they still do. And you had a choice of doing community service project or an internship. So I chose an internship and I wound up at the General Motors Pension Fund, which is a wholly-owned investment subsidiary of GM that manages all their pension assets. A really, phenomenally interesting opportunity for a high school senior to go and see how all these different asset classes get managed, real estate, and fixed income, and trading, and all of that sort of stuff.
And the one area that happened to have an opening when I graduated was the Venture Capital and Private Equity Group, which is a group that I had never worked with before. And it was actually very fitting for me because I went to college in the late ’90s. I took an early interest in computers. My dad had brought a computer home when I was about eight. And to be able to invest in new technologies and get to meet all the people involved in that, which turned out to be a very fortuitous fit.
And once you’re in the Venture Capital, the goal is to become a partner somewhere where. You know, you want the autonomy, the economics, the ability to be at the forefront. To be at the board meetings, and to be a real key partner in trying to help these entrepreneurs succeed, and that’s where you’re aiming for. And sometimes, those opportunities have to be created because funds aren’t really advertising for partnership positions all the time.
NYLP: So when did you come up with this idea to create your own fund that’s based on New York companies?
Charlie: I spent two years at First Round Capital and going in, it was actually supposed to be a one-year thing and I was able to pick up an extra year for good behavior. But after a while, I mean, they weren’t necessarily growing as a partnership, and, you know, I had a conversation with the founder Josh Kopelman who’s the founder of Half.com and had started that firm. And he said, you know, “You should do what I did. Start a firm, put together a small fund, give yourself optionality. See whether you like doing this on a fulltime basis and where you want to go, what kind of investments you want to make, and then go from there. And if you want to build a firm or you want to stay as onesie and, you know, see how far you want to go with it.” And so that’s what I did.
And for me, the focus on New York, I mean, obviously, I was enthusiastic about the New York tech community. I was very fortunate to be early to it, to be one of the first 100 people at the New York Tech Meetup, to be the first analyst at Union Square Ventures. I mean I really feel like I was here for, you know, the very beginnings of the tech community here. And it became sort of a self-reinforcing thing as a solo GP. You know, how much deal flow do I want to be able to go through or can I go through, right? If I raise my hand and I said, “I’m doing deals around the world,” I’d probably get 10 times the deal flow to maybe do 10% or 20% more deals, and I have more than enough work to do here. I do 8 to 10 deals a year because the New York Tech Community is now the second largest venture capital community.
So I’m not hurting for deal flow, I’m not hurting for good opportunities. So there’s just a practical consideration that, at this stage, you’re going to do deals locally. I want a certain level of involvement with the companies. And to be able to help them make hires, that means obviously my local network is better than, you know, my outside-of-New-York-City network.
And I think the other consideration for me was just sort of personal, specific to Brooklyn where I want to put my office. I’m willing to do deals anywhere in New York City but I live in Bay Ridge. I bought my apartment a few years ago, I like living there, and why would I put my office in the city? And that’s actually consideration that a lot of entrepreneurs are thinking about in New York. If they live in Brooklyn, why are they making the commute into the city? So I decided to open up my office in Brooklyn and that may be the first Brooklyn-based venture capital fund.
NYLP: What type of opportunities are there for you to invest in companies in New York?
Charlie: I think, in the past, people had thought about New York in terms of specific industries, maybe adtech or fintech. But we’ve really seen a very big diversification of what’s being built here. So just about every industry is located here. There’s, obviously, a bunch of media and a bunch of commerce, but, you know, we’re seeing technology-based start-ups grow here. Database companies like MongoDB, and Cockroach Labs or companies like that, that are just starting with technologists.
And it’s due to the fact that Google’s office in New York now is 11 or 12 years old. And there’s a ton of technologists who have come from the banking world, who have come from the corporate world. There’s people coming out of the existing start-up base. And so New York’s technology scene isn’t homogeneous anymore where we’ve got food start-ups, and health tech, and lots of other stuff. So, I’d say, just about any industry is represented here in the start-up community. I can’t see there’s any industry that can’t be built here. So it’s pretty diverse.
NYLP: And you talk a lot about technology but we were talking earlier, you also invest in some brick-and-mortar locations.
Charlie: Yeah, absolutely. So for a long time, venture capital has mostly been focused on tech because that’s where the growth plays have been. You’re starting with a company that’s two people and a prototype and you’re trying to sell it off in the future for $250 million, or $500 million, or take it public for a couple of billion dollars. And most of those stories are in the tech world. But there are lots of stories that are brick-and-mortar retail rollouts, there are lots of stories that are big CPG companies that are growing.
You know, historically, in the medium term, they weren’t venture backed, but if you go back to sort of the early ‘90s, ‘late ’80s, they were. There are companies like Staples or food chains and stuff like that, that started out with venture capital dollars. Starbucks and those became, you know, big successes. And so I think we’ve seen a little bit of a return to that, particularly because of some of the direct-to-consumer CPG stuff that has happened and very successfully, right. So you have local stores like Warby where they went with a direct-to-consumer model and then they realized, “Wow, we’re actually spending a fair amount of money trying to acquire customers online. It might actually be economical for us to open up a retail store, right?” And so now, Warby has a whole retail strategy.
So on one hand, everybody is saying, “Well, retail is dead.” But now, you have these start-ups saying, “Well, you know, given the cost to acquire customers online, it actually makes sense for us to be in retail. And retail is still important part of our strategy.” Companies like Canary, which I was the seed investor behind, do a lot of business directly on our site. But, obviously, we do a lot of business through our retail partners, through Verizon, and Best Buy, and Amazon, and so. Retail is really an important consideration as well.
NYLP: So you wanted to go out on your own, start your own fund, be able to be pretty involved in all your companies in New York. What were the steps that you needed to take in terms of taking that leap and starting your own fund?
Charlie: Well, the most important step is the money, right. And so, you could do the steps of incorporating legally, and getting counsel, and, you know, creating a website, and a brand, and all that sort of stuff. But without money, you’re not a real fund. And that was really hard actually because my network didn’t overlap well with the types of people who would invest in funds.
I had come from the General Motors Pension Fund where my peer group was institutional LPs. So I had friends who worked at CalPERS, or UTIMCO, or the New York State Teachers’ Pension Fund, all of whom invest in funds with minimum checks sizes that are 10, or 20, or 30 million dollars. And so, if I was raising 8 to 10 to start out, that just wasn’t a fit for them.
The other half of my network was VCs who, generally, don’t invest in each other’s funds and so I was actually a bit at a loss. So I started figuring out like who is the prototype fund investor, and there was a lot of trial and error in that process. I mean I probably spent five or six months spinning my wheels going after some wells to try and anchor the fund, when I probably should have been spending more time just getting volume of people.
And what I realized is high-net-worth individuals trade wealth for interestingness. You know, they’re looking to make money but ultimately, these are people who already have money. And a lot of the reason why they get involved in the start-up community is because it’s fun, it’s interesting. You’re on the cutting edge, you’re getting to see hardworking founders take something from nothing to something…
NYLP: You’re seeing the band first.
Charlie: Yeah, yeah, exactly. It’s special, right? It’s special in a way that a private equity deal isn’t, right? I think it’s probably fun to make a lot of money if you’re Blackstone. But if you do it because, you know, you’ve gutted the family-based management team and replaced Uncle Bob, the CFO, with a professional. And then, you know, outsourced a factory to somewhere… I don’t know how fun that is. I mean maybe it’s fun but I think it’s a lot more fun to, you know, be at a company where day 1 at launch they have no customers at the end of the first week, but they’ve blown through their projections for the first six months, that’s fun.
It’s also fun in the bad times too and in a different way. It’s what you signed up for. There are difficult decisions where you’re sitting across the table and you’re like, “Wow, you know, maybe this co-founder is not the right person to carry this business forward.” And if you counsel a founder through that and you walk out and you’re like, “Wow, I did something good today. I like helped somebody.” And it’s difficult but that’s sort of fun in a different way.
So it’s the kind of thing that people want to get involved with. And I think one of the things that has helped me be successful in raising this fund is realizing that I’m not pitching, you know, fund returns. I’m not selling money to rich people. I’m selling involvement and engagement. We do a lot of co-investing with our limited partners. We bring them into meetings, we connect them to each other actually.
We just sent this survey out among my fund investors that’s basically like, “What are your interests, what things do you invest in outside of venture capital? Do you go on vacation anywhere, do you have a house somewhere,” right? Because maybe there’s a group of my investors that all goes to the Cape or, you know, summer somewhere, or whatever. That they could get together over the summer, and just, you know, make business connections, or friends, or partners through their engagement with the fund. I think a lot of that is just as important, in terms of what they’re looking to get out of it.
NYLP: So when you were approaching people to invest in your fund, what was your pitch? Because you were first going out on your own?
Charlie: Sure, I had a track record of seven investments that I’d made at First Round Capital. Two of them had exited in the time that had passed since I was there, right? So GroupMe sold to Skype for about $70 million, and Constant Contact bought SinglePlatform for about $100 million. So two out of five had returned significant multiples on their seed round. So while it wasn’t a very large track record, it was a pretty good one for a short amount of time.
So I seemed to be somebody… You know, I always think about it like I’m some sort of a big James Bond geek and to get your 00 status, you have to have two kills. And I always think that second exit, when SinglePlatform, sold proved that GroupMe wasn’t a fluke. That I seem to be investing in companies that are getting acquirer’s attention and so I must be fishing in the right spots. And on top of that Refinery29 who’s literally just right down the street actually…
NYLP: Right next door?
Charlie: Yeah, they’re at 250, I think.
NYLP: Two twenty-five.
Charlie: Two twenty-five okay. They’re doing phenomenally well. They have hundreds of employees. Chloe and Isabel is doing phenomenally well. And so for a short track record that was pretty good, but really I tried to simplify my bet. So rather than try and convince you that I was smarter than this person, or smarter than that person, or had some complicated fund strategy.
What I basically said is, “Look, I’m investing at the earliest of stages at the cheapest going in valuation. And if you believe that there are going to be a handful of impactful companies in New York, do you think, over the course of the next three years. That if I make 30 investments in capable entrepreneurs, at low-to-single-digit valuations, and big enough markets to sustain big exits, that I will get into two or three of those?”
And, you know, when you think about it that way, that doesn’t seem like a really difficult bet. If you start to look at the landscape of who’s investing in New York and how many seed funds participate that early, are willing to lead deals? And what does that competitive dynamic look like in New York, there just aren’t many. Right? There’s probably four or five seed funds that lead 60%, 70% of the deals here in New York between me, or First Round, or Lerer, or, you know, funds like that.
So it’s not a difficult bet to say, “Yeah, I might get into three or four of those important companies. “And the economics of a small fund are really friendly. You don’t have to be in $3 Billion exits to return your $500 Million fund at a sub $25 Million fund size. Two or three exits of a couple hundred million dollars actually return the fund in multiples so that the bar is lower as well. You know, I’ve set things up in such a way that realistic expectations actually get you meaningful returns.
NYLP: How are you finding your deals?
NYLP: The deal seem to be finding me, which makes things easier and harder. Easier in the sense that they show up on my doorstep and I don’t have to do a ton to sort of chase after deals and people who want me to come in. The hard thing is there’s a lot of them sitting at my doorstep and there’s a vetting process. And I think it’s mostly a function of I’ve been involved in the New York scene for a long time. And like the first tech meetup I ever went to was 12 years ago this month. And so, being out there, being associated with successful funds like Union Square, and First Round. Blogging for 13 years next week actually, and writing this newsletter for 6 or 7, and speaking, and doing always these podcasts, and all that sort of stuff.
Like if you’re raising a first round, I’m probably going to be on your consideration set. At least, hopefully by now, you’ve heard of Brooklyn Bridge, or me, or run into somebody who’s had a good experience. You’ve had one of my portfolio companies, Orchard on the podcast. And so by now, I’ve sort of cast enough seeds out there where you’re probably going to run into me in some way. And I hope the reputation is you’re going to get a fair shake. At least, you’re going to get a definitive answer. If anything that’s…you know, the worst part is the answer can be really definitive and sometimes, it may even border on a little harsh. But you’re going to know, I mean how I feel about something. I’m not going to come back and say, “Oh, that’s interesting” and you’ve got to chase me down for a few weeks to see whether I’m actually coming in or not. Which is probably one of them the biggest complaints that entrepreneurs have, is everybody sort of sitting on the sidelines and they’re not really getting a definitive answer. Which I’ve been there as somebody fund raising. It’s really frustrating when you’re following up with somebody for the sixth time, “Are you in or are you out? Just tell me no, just allow me to move on.”
NYLP: So deals didn’t just pop into you overnight, they didn’t approach you overnight? Twelve years, you said, in the scene, getting your name out. What were some of the things you were doing and how has that helped you now?
Charlie: So I think the most useful thing that I could do to ensure a future deal flow is just try and be helpful to people. Because the New York community is very connected, and a lot of times, you know, I don’t even realize that I might have been helpful to somebody. But it’s trying to do that maybe even in passive ways. So I’ll find out if somebody mentioned to me the other day, that the co-working space that they’re in, they discovered it through my newsletter. Because they’re in that co-working space, they found their CTO who was just a onesie, you know, operating on a contract basis. And they ran into each other in that space and they’re building a company together.
And what did I even do? Somebody emailed me and said, “Hey, we’re launching a co-working space,” I went, “Oh, great I’ll put it in the newsletter,” and I didn’t even really give it that much thought. But when there’s 12,000 people following along, actually the ROI on that help is huge. So I think just that repeated like, “Hey, is there anything I can do?” But also trying to manage that, right, because I don’t have a ton of time. I’m just one person so how do I kind of, you know, scale that help? Trying to make the interactions a little more personal.
Every year, we probably do about 20 dinners, local neighborhood dinners, where we go and we pick out a spot. We say okay, “Gramercy, right?” Draw a little circle around that and said, “Who are all the tech and start-up community people who live in that spot? Can we get 10 around the table, can we get somebody to host and allow all these strangers into their apartment?” We split the cost of a chef, the host eats for free and you’ve got a designer, an investor, an entrepreneur, a journalist, you know, all sitting around the table breaking bread with this great chef. It’s fun, it’s interesting but you get to know people a little bit.
And so two people break off and have a conversation about, you know, what schools they’re trying to get their kids into. And somebody else is talking about the new CrossFit gym that opened up or whatever. And those connections are meaningful. And so, I’ll have people come back to me and say, “Hey, I don’t know if you remember me but I, you know, came to the West Village dinner three years ago. And, you know, I remember you do early-stage stuff. I’m building a start-up and I’d love to get your feedback on it”. Because, I guess, I came off like a halfway-decently reasonable person to ask a question to. And maybe I’m only VC they actually feel like they know that they’ve run into. And so, it’s that kind of thing just slowly over continual basis.
NYLP: And 12 years, you’ve been building this network, now people are approaching you. In terms of investing in a company, what something that you look for in a company and a founder?
Charlie: I think, more than anything else, I’m trying to cut down the deal flow. I should go look this up because it’s the second time I’ve used this analogy this week. But it might have been Michelangelo, or da Vinci, or somebody who was obviously at the level of their craft that anybody can only hope to aspire to. But they take this block of stone and they cut away what is not the statue, right. Instead of making the statue, they just, you know, cut things away.
I think of my deal flow like that, right? As opposed to looking for positive signals, I actually try and look for negative signals and I try and say, “Okay, well, let’s cut away all of the companies where their market is not being enough. Where even if they succeeded in doing the thing they said they’re going to do to the, hipster jeans trading site just, there’s not enough money and there’s not enough people that want that thing. So, you know, let’s cut those off or…”
NYLP: For the returns that you’re looking for?
Charlie: For the returns that I’m looking for, right. Yeah. Actually, that’s a good point. There are some businesses that are really great businesses for you to own 100% of. And who might throw a couple hundred grand off a year or a million dollars a year. But that’s just not appropriate for a venture capital investor.
NYLP: What type of returns are you looking for?
Charlie: So it’s hard to get venture returns, at least at my fund size, without getting exits in the $250 Million range. And so, you’re investing at single-digit returns or you’re talking sort of the winners in the 25 to 50X category… Because they have to make up for the ones that don’t make it and 50% of the companies aren’t going to make it. They’re going to be absolute zeroes despite the best efforts of smart, motivated people who make all the right move. But the market turns on them, or they just don’t do it fast enough, or, you know, they realize they’re undercapitalized themselves because things were just harder, or took longer, or what-have-you.
Another key is the founder and product fit. So there are some really smart people who are really capable but their skillset doesn’t match the particular challenges of the start-up they try and create. And so, I remember talking to a technologist who had helped build a company in the adtech space, who, you know, I would want as my technical co-founder for just about any start-up. And he decided to become the CEO of a consumer-oriented company, that he had an idea as a consumer. And consumer start-ups are so hard to build because you’ve got to have real insight. And just a unique set of things has to happen for you to be the person who comes up with the idea for Snapchat or what-have-you, right?
That’s a design sensibility. It’s a sort of like human empathy kind of thing that you don’t find in very many people. And if you’re like, “Okay, well my qualification for going into this is scaling an adtech start-up to a billion impressions a day” or what-have-you, that may or may not be in the appropriate design insight to go into a consumer start-up, right? So, yeah, you’re awesome as an entrepreneur but not for this thing. And I think that’s a key criteria where I’m sort of cutting away and saying, “You’re not the person I would back for that particular company” and that’s a key as well.
NYLP: So market size and product-founder fit are the two main things that you’re looking for?
Charlie: Sure. And I think the other thing I would say is that, “Is this workable?” Is the idea workable in the sense that you’re raising a certain amount of money to get to a point that we could all agree is either profitable, fundable, buyable? So, you know, have you researched this plan enough and it’s actually an executable plan, right? It may be, in the end, economically viabl to build a time machine. But if you can’t make any progress without spending $200 Billion, there’s no business plan that works for that, right?
And if you won’t find out if you’re potentially on the right track until then, that plan just isn’t going to work out. So that’s not a viable plan and you’re not really a realistic entrepreneur who can execute on it. So it doesn’t sound like a big criteria but workable plans cuts away a lot of these opportunities.
NYLP: And at your stage of investing, certainly, these companies are very early, may not have a product entered, or just launching. And so there’s a certain aspect that I imagine that you’re investing with an entrepreneur themselves?
NYLP: And what qualities, in an individual entrepreneur, are you looking for? Because some people who may be listening to this may want to know, from a VC perspective, what are they looking at about me?
Charlie: Sure, so confidence is really important. You need to be able to sell me not only on the opportunity, but I’ve got to be convinced that you’re convinced. Because I can’t redo all of your homework. The homework that you did to start this company is six months old, a year old. Your whole life is leading up to this thing, right, your whole career is leading up to this thing. And so…
NYLP: Unless you’re 21 and just had…
Charlie: So that’s an interesting thing is like I haven’t really backed 21-year-olds. And I’ve been more likely to back people in their 30s who can tell me a story of like, “This is why I’m starting this company.” That’s not to say I wouldn’t. You know, when you’re backing a 21-year-old, you’re usually backing somebody who’s already built something, right? You’re usually choosing between somebody who knows something and somebody who built something, and at 21, I didn’t know anything. So if I were to convince somebody to invest in me, I sure as hell have built something say, “Look, this thing is working, where can I take it?” As opposed to being able to do something, you know, pre-product at that stage because it’d be hard to tell a story based on experience. So confidence is a really big thing because I…
You know what VCs do is they extrapolate out their experience with you into a future series of events. So however you’re like with me, I’m imagining you’re going to be like when you try and hire that top marketing candidate, when you sit in front of a reporter who’s writing a story about you. So if you’re not convincing with me, how are you ever going to hire that sales candidate? How are you ever going to convince a reporter that you’re the one to watch and you should be on that top start-up list? How are you going to convince that Series A investor or Series B investor to invest $10 Million when you have me on the fence at $350K?
So that’s really key and I think that’s something that a lot of people undercut themselves. You know, I get pitches that are, “Hey, sorry, I know you’re really busy, but if you can just spare me this amount of time?” How enthusiastic do you think I’m going to be if you’re hoping for 10 minutes of my time? When somebody else is like, “Hey, I have this thing that I know you’d love to sit down and go over with me, you know, for an hour.” Natural human response to that is going to be, well, I’m probably gonna be more likely to give time to the person who feels like they have something and they’re confident about it.
NYLP: Are you investing based off of a pitch?
Charlie: Sure, I’ve absolutely done that. I’ve invested pre-deck, I’ve helped the entrepreneur build the deck to get other investors involved. Yeah, sometimes pre-prototype and sometimes the company actually has customers too. So it spans the early stage gamut.
NYLP: And you brought this up earlier. One of your investments is Orchard, that was our guest in episode eight. Talk about how awesome they are, and when you realized how awesome they are.
Charlie: I think that I might be the first yes that they got when they were pitching. They might have had a couple of individual investors but I’m pretty sure I’m the first yes from a fund. Matt was introduced to me by Ben Barokas who was the co-founder of Admeld. And I was actually pitching him for my fund. Because one of the things that when I was fundraising, I was trying to figure out… And actually two great deals came from this process so maybe I should do this more often. But I was trying to figure out which New York founders had either achieved some success and they were doing really well, or who had sold their companies that were probably being hit up all the time to make angel investments, but may or may not be doing that.
You know, I think that there’s the expectation that you’ll do you that but maybe that’s not how you want to spend your time. So I thought maybe some of those people could be fund investors and so, you know, they could send their deals on my way. And so somehow, I got a connection to Ben and Bruce. So we’re talking about start-ups and what I was aiming at doing. And as part of that process, he said, “Well, you know, I’d love to see how you interact with the founder.”
There’s a guy who used to work with me, this guy Matt and he’s starting his company. And the thing that struck me about Matt was, one, his thoughtfulness around team building. You know, he started out with like four or five co-founders. And so, a, he was sharing the spotlight and saying, you know, “I’m not going to do this alone and I’m going to hire all these smart people.” And so, you know, between him, and Philip, and Jonathan, and Angela, and David, they each had a key role in the company. And he was very thoughtful about company construction. You know, he was taking people who had the finance knowledge but he was essentially taking a model that worked in the adtech world to enable this buying platform across all of these spaces where you could pick up supply. It was a pattern that worked elsewhere. He was the right person and to have that insight. You know, where you’re knowledgeable enough, but it’s not like you’re 30 years in the industry and can’t think about new things. And so I liked his team approach, I liked his insight into the industry.
You know, the platforms like Prosper and Lending Club were out there. And so, obviously, the beginnings of the growth of the peer-to-peer market were there and visible. And it wasn’t a stretch to imagine that the tools would be needed to get bigger dollars on this. If this was going to be able to grow, and everything that he told me about it made sense.
And I think that’s actually a key is can you convince somebody who isn’t an industry expert? You know, who’s a New Yorker and probably pretty good at detecting bullshit? And does it make sense to me, right. And then I asked him a bunch of questions, “Well, why doesn’t Prosper do this, why doesn’t LendingTree, you know, do this? Where they focused, and, you know, where is this market is going to go?”
You know, not having a need to like flip through his deck, and say, “Well, you know, here’s what my competitive slide looks like.” No, he just talked to me about it. In fact, I’m pretty sure he didn’t send me a deck. I don’t even… We certainly didn’t look through the deck when we sat down and met. And I think all those things were like, “Yeah, this makes sense to me” and I think I gave them a term sheet. The only problem was I was investing out of such a small fund that I, you know, could only promise them a couple hundred K. And they were looking to raise a million and a half and needed some bigger dollars around the table. As soon as, the bigger dollars found out about this team and this idea, there was a pile-on. And so their round grew very quickly and I was able to squeeze in, and hold on for dear life, and maintain my spot but it wasn’t easy.
NYLP: Anyone who wants to learn more, just check out episode eight, because what they’re doing… I don’t know if they have any competitors right now.
Charlie: Certainly not who have made the progress that they have.
NYLP: When you are investing, what type of money are you investing? And what percentage of the company are you looking for?
Charlie: So it’s US Dollars good at any local retailer.
NYLP: It’s a good thing to invest with?
Charlie: Yeah, exactly, no bitcoin. Generally, I’m writing checks now about $350,000. There’s really two types of rounds that that’s going into. One is what has become known as this pre-seed, which his sort of a strange term. Because you’d imagine that seed is the first thing, but it’s actually not. A lot of times, it’s the fourth thing after friends and family, an accelerator, a pre-seed around, and so there’s a lot of things that happen before seed. Not that you have to check all of those boxes. But generally, rounds of, I would say, you know, less than a million and a half dollars are what is known to be pre-seed rounds. And those rounds are coming in at low-to-mid-single-digit valuations. And so, you know, a one-on-three or a one-on-four pre-money valuation. And I wind up giving up you can call it 20% or 25% of the company at that point.
But there are people who are betting on a prototype, or, you know, PowerPoint, or initial customer who’s using a product that will not scale out to other customers, you probably need to redo it. And so they’re taking a lot of risk.
Another round is the sort of institutional seed. Two to three million dollars, usually after you’ve proven something out. You know, maybe you have some customer traction. You’re just starting to turn the flywheel, you’re not quite ready for a series A and there’s a sort of middling round that’s come up. My criteria is that the company has yet to raise $750,000 in a previous round so I want to be part of the first million spent. Sometimes, those later rounds actually also come at the prototype stage and it’s just a really compelling entrepreneur, maybe a repeat entrepreneur, or maybe it’s a space that’s really hot. But, you know, those investors are just willing to give that person more money. For whatever reason, the round gets a little bigger, and they probably raise at slightly higher valuation but still probably single digits.
NYLP: If someone has a company, and they think it’s scalable, where they can take it to the multiples that you were talking about. What’s the sell to them to take on a venture capitalist or someone like you as an investor?
Charlie: Well, hopefully, I’m worth more than just the money, right? Because if my value add is the money in a place like New York, you probably get cheaper money elsewhere and so that’s not enough. The money should come quickly without a lot of, you know, raking you over the coals to get it. You feel like you’re treated fairly and the questions I ask are reasonable questions. And not eight meetings spent on your year eight EBITDA because we’re just never going to get the answer to that question until year eight. But, reasonable questions like, “What would break first if you go twice as fast, and where does this thing top out, and let’s go through a… you know, how many reasonable customers are there for this? And, you know, when’s the payback of a salesperson?” And all those questions are really legitimate questions that I think it’s important that the founders kind of worked out.
For me, in terms of getting into these deals and my value-add, I think it’s a couple things. One is I’m pretty focused on helping the company turn all of their whack-a-mole problems into a process, right? So there’s a discipline that I bring as a lead investor and somebody who helps you to put together something that looks a little bit like a board. Whether or not I actually take a board seat, I’ll sit down with the company once every four weeks and say, “Okay, well what are we trying to do this month, and what did we to do last month, and did that work and not work? And should we change our strategy, and how much money do we have left in the bank, and it is worth, you know, raising some additional capital at this point? What we went in twice as slow, and what if we went to profitability and didn’t raise another round?” And asking all those types of questions. I mean I think that’s what a good coach does is just asks
questions from a different perspective Certainly, not there to tell you how to run the business, but to audit your thinking. And I think that’s very useful.
I think another important thing is recruiting, helping people build teams. I spend a lot of time building up my network. I run some recruiting events on the technical side, and the sales side, and the design side to build up a database of talented New York City talent that I could use with my portfolio companies. And that’s proved invaluable. I mean I’ve probably placed, you know, 100 or more people at various start-ups over the course of my career. And to be able to make a recommendation and to take a key hire off of somebody’s plate and say, “Here’s your person and it’s somebody who’s done it before, and has start-up experience,” or whatever. That’s just one less thing a founder needs to worry about and that’s invaluable.
NYLP: And we were just talking about that even before you came on the air, we may have thought about a match.
Charlie: Yeah, absolutely.
NYLP: We’ll see when this airs if this actually happens.
Charlie: Sure, sure.
NYLP: So how involved are you with your portfolio companies? You mentioned that you ask questions and check in every now and then, what is that involvement?
Charlie: The first 12 to 18 months, you know, they’re meeting with me on a monthly basis. Although, all of my companies have my telephone number and I’m getting texts throughout the day. And it could be something so much as, “Hey, I just came out of a meeting and I just want to walk through with you what the feedback from that meeting is? And how do I follow up with this investor who is thinking about my Series A,” or “I made an offer to that candidate that you sent over but can you back channel, you know, where their head is at?” and all that sort of stuff. You know, those are random stuff that comes up throughout the day. Or, you know, “I’m talking to a reporter about being on this start-ups to watch list and can you can nudge them and tell them how awesome you think we are” what-have-you. So, you know, there’s a lot of that stuff.
Every now and then, you know, we might break off and say, “Hey, you know, we really should take a look at our marketing plan. And, you know, we’re going to be launching in a month and we want to hit the ground running.” You know, “I can help you with that launch and connect you to the reporters, but what do we do after that launch? Right? How do we keep that momentum, and how do we sort of keep this going?” And so, you know, we might do a working lunch or spend a couple of hours sort of outlining a plan and a strategy for that. You know, I try to be helpful on those lines as well.
NYLP: I imagine that there’s not a typical day, but what does a typical, let’s say, month look like for you?
Charlie: So I actually measured this out once because one of my investors who was considering an investment in the second fund, who has already invested in the first. Said, “Well, you know, you have this portfolio of 30 to 35 companies and now are you going to invest another 35? How are you going to manage them all?” And time management just it’s not really an issue for me, but that’s not really a great answer and say, “Oh, don’t worry about it, it’s not an issue. I’m not gonna…”
NYLP: I’m the most efficient person.
Charlie: Yeah, that’s it, right? And actually, I’ve gone through this practice of instead of being dismissive say, “Okay, well, why don’t I assume that the person is right in what they’re saying,” right? If they say, “It’s going to be difficult to manage this additional portfolio, can I prove to myself that they’re wrong actually?” So let’s start from the assumption that they’re right.
And so what I did was I went over the course of, I think, six weeks or something like that. I made a composite in two weeks where I literally counted up the minutes and tried to figure out where they go, and not just professionally but personally, right? So from adding up the minutes, you know, how much time, am I spending with my family, and how much time does it take me to commute to work? And, obviously, I don’t just wake up and immediately bounce out the door. You know, I have to eat and, you know, I work out, what-have-you.
And what was fascinating was how much time was saved being a solo general partner. Because I’m not spending time in a long, drawn-out partner meeting. I don’t have spent time convincing my partners to go after a deal. You know, I think for other types of funds, that’s something that they really value. That, you know, sort of camaraderie and bouncing ideas off each other. And I think that works great, particularly in later stage funds, where you’re each committing to one or two deals a year. And you’re committing $8 Million, $10 Million just it’s… And you have some information, right? You have some information about, you know, the company has gotten to $150,000 a month in revenue and you’re trying to figure out whether they can scale that or not.
But I don’t have a ton of information, actually. There’s just not a lot of information to go through. You’re making higher risk bets and you’re making more of them. So there’s a different level of decision making that goes into that. So I probably do three, first-time-pitch meetings a week. I probably take, at least, that many meetings that are…you know, I just call learning meetings. I don’t know how to describe them. Just smart people who passed down the pipe for, you know, whatever reason. So it could be, you know, somebody who just seems smart about Blockchain, right? And I’d say, “Well, that’s something I should probably get smarter about. And I’m just going to go pick that person’s brain a little better.” Or somebody else who is a consultant for hardware companies, who, you know, just started following me on Twitter. And we sort of had a little back and forth about some Kickstarter projects that are out there. And I was like, “Oh, well this person seems really smart and I should just, you know, sit down with them and see where they’re going.” About scaling up food production or what-have-you, and so I’d probably take another three or four of those meetings a week.
And then I’ve got, you know, at any given time, maybe 10 portfolio companies that I’m meeting with every month or so. So that’s another two to three meetings a week where we’re sitting down in a board meeting kind of thing. And then some point, I actually need to do work. I mean, obviously, that’s work. But, you know, to actually look through the financial plan that somebody sent me, or to make those eight next-round VC intros that I promised this company that’s doing really well. So, you know, it very quickly fills up on time.
NYLP: We’re recording this early in 2017.
NYLP: It will air later in the year, what’s your prediction for the year?
Charlie: It feels really hard to make really positive predictions given everything that’s going on. I just hope we’re all still here at the end of the year, but…
NYLP: But, you seem like such an optimistic…
Charlie: It is brutally difficult.
Charlie: I would say, you know, if you grow up in New York in the ’80s and ’90s, I think you probably start out being more conservative, or because you… And you know what, and this is coming from the perspective of a white, middle-class male where when I grew up in the ’80s and ’90s, the thing that everyone was focused on was crime. Anybody who went after crime or promised to go after crime was like you’re a hero. So my view started out being more conservative, because I wasn’t forced to think about who committed these crimes and why? And why were those things crimes, and why did we punish them in that way, and what was the best way to prevent those people from committing crimes in the future? And all those things you’re not really forced to get into as a white guy, right?
Over time, I’ve gained a lot more awareness of well actually, some of these really complex issues. So I’ve become more liberal as I’ve gotten older. The point I was saying like, you know, on many issues, I’ve kind of seen both sides. And so my current thinking is not so much partisan but I’m actually really concerned just about basic government competency. Regardless of whether you agree or disagree as to you whether we should be at this trade deal versus that trade deal, I’m pretty sure you shouldn’t tweet that you’re supposed to be… You know, that you’re pulling out of a trade deal before you’ve actually sat across the table with this country and said, “Hey, this trade deal has some issues.”
So that kind of amateurish approach to doing a really important job and helping all the problems of the citizens are facing in this country, it’s really concerning. And it really casts a cloud on my enthusiasm for the tech and the start-up scene, right? And it’s very easy if you’re in the tech scene to think, “We’ll just code our way out of any problem,” right? But there’s a platform at which you’re building that on, it’s a people platform. You can’t code your way out of that problem. If all the smart people you’re trying to hire, a, can’t get into this country. B, we’re not producing enough smart people because the education system is not working because of who you might put in charge to run it. Like all those basic things we depended on, that type of thing really casts some serious doubt on whether or not we’ll just be able to operate this ecosystem. So it’s hard.
On the other hand, it’s like, “Do I go out and protest today,” or “Do I like take the start-up pitch?” Am I being overly optimistic when I should really be committing all my time to, you know, making sure the world is still here? These are real serious questions at this time.
NYLP: And how do you think it will affect some of the businesses that are starting out? Because you mentioned lack of human resources, is that…
Charlie: You know, people is a big issue. It was just really stability. Really instability is bad for the ecosystem, it’s bad for funding and financing. You don’t want to create an economic environment that’s so unstable that later stage capitalist says, “You know what, we’re going to sit this year out” because start-ups can’t handle that actually. They’re not funded in such a way to sit out periods of financial freeze for 24 to 36 months. They’re not necessarily profitable and, you know, that’s a problematic for the environment so I think that’s an issue.
Now on the flipside, you know, I have some start-ups that will have to interface with regulatory authorities. And there was this initial feeling that, “Oh, this might actually be good for us, because we’re going to be in a business-friendly environment.”
NYLP: Orchard is a great example.
Charlie: Yeah, absolutely, right but…
NYLP: Let’s just keep on plugging them.
Charlie: Yeah, right. But one thing that you count on is these regulatory authorities to have positions filled, and to run well as sort of many businesses, right. And so there are a lot of positions in the government right now that literally just aren’t filled. And there are companies that are sort of waiting in line for these governmental authorities to act and to get all their ducks in a row that… Yeah, but maybe next year, we’ll have all this sort of figured out. You know, there’s kind of a logjam in government now because we’re really not settled and we’re sort of behind the ball in that sense.
NYLP: So what do you want from people? Do you want people to come to you with more pitches? What are you looking for here?
Charlie: I’m just looking for everybody to be happy and content. And if they think I can help them get there, yeah, sure, they can absolutely reach out to me…
NYLP: That’s a tough goal for a capitalist.
Charlie: I think there’s an economic value to contentedness. So, yeah, there might be a dollar tradeoff for it, but, you know, I’m optimistic that multiple goals can be met at the same time. And then if I can help somebody, they can drop me a line. It’s firstname.lastname@example.org, and I feel like I am lucky to help people out with their problems and make some money while doing it.
NYLP: email@example.com. Social media, websites, how do people find out more about you?
Charlie: @CEONYC just about everywhere, those are my initials actually, and…
NYLP: Not like chief executive officer?
Charlie: No, no, definitely not. I’m just…
NYLP: You can own it.
Charlie: I was CEO long before I ever got into to business, and my…
NYLP: How old are you?
Charlie: I’m 37.
NYLP: So, 37 years, you haven’t thought once CEO?
Charlie: Well, I was CEO. I did a little start-up that didn’t quite work out so. I’m better as a CEO the Charles Eric O’Donnell than I am as a chief executive officer but… And they can follow my blog at “This is Going to Be BIG,” and there’s a link to our dinner series and the weekly newsletter that comes out on that too. So I’m findable.
NYLP: And the newsletter is fantastic.
Charlie: Thank you very much.
NYLP: Well, Charlie, thank you very much for stepping onto the “New York Launch Pod” and sharing your time with us. We learned a lot about venture capitalism, the New York City start-up scene and it’s been wonderful conversation.
Charlie: Happy to do it.
NYLP: And if you want to learn more about the New York Launch Pod, you can visit nylaunchpod.com, including a transcript of this episode. and you can follow us on social media, @nylaunchpod.