Kevin Ryan: Are the Best CEOs the Best Fundraisers & Why Ownership Should Not Be a Focus in VC|E1138

Intro (00:00:00)

• There's a lot of VC money available that needs to be spent.
• Ownership can be a big price to pay for an incredible team and opportunity.
• If someone makes an offer you can't refuse, take it.

Background (00:00:40)

• Kevin Ryan was interested in student organizations, sports, and public policy in high school.
• He has always been a CEO from a young age, enjoying managing and working with people.
• He is still interested in sports and athletics, as well as public policy.

Early Signs of Exceptionalism (00:01:34)

• The best people show early signs of exceptionalism.
• Exceptional people are not necessarily crazy entrepreneurial.
• Example: P Pao Barbarito, founder of WAA, a mobile bank in Argentina.
• Went to Harvard, worked at McKinsey, and is now managing 1,500 people.
• Luck plays a role in success.
• Example: Guilt, a company that started successfully but faced industry challenges and was sold for less than expected.
• Despite having an incredible product, culture, and people, the company was affected by external factors.

Defining the Biggest Successes (00:05:09)

• DoubleClick was the most impactful for Kevin Ryan as it helped set up his entire career.
• Business Insider was the product he enjoyed the most due to his love for business news and media.
• Gilt was the most fun as he unexpectedly found himself in the front row of fashion shows in Milan.
• Moving faster than competitors and taking bold moves, such as opening 25 offices in 25 countries before the first country was profitable, led to DoubleClick's dominance in ad technology.
• Being the first mover doesn't always guarantee success, as sometimes the second player can learn from the first and execute better.
• The importance of being first depends on the business and the capital available. In some cases, scale and being number one matter, while in others, quality and adjusting to available capital are more important.

Lessons from the Dot-com Era (00:08:57)

• Kevin Ryan went through the dot-com era with DoubleClick.
• During that time, there was a lack of funding and many companies went bankrupt.
• DoubleClick had to go through seven rounds of layoffs and 70% of their clients went bankrupt.
• Ryan believes that the current economic situation is good, but there will be a reversion to the mean at some point.
• There is a lot of VC money available that will keep the industry going.
• Most things happen at a micro level, so focusing on long-term trends is important.
• Ryan believes that it is difficult to predict market timing and consumer adoption.
• He focuses on very early-stage investments and thinks about trends that will be relevant in 10 years.

Market Timing & Future Outlook (00:12:47)

• Market conditions, such as recessions, can significantly impact a company's success over a 10-year period.
• Investing in great people is more important than targeting specific markets, as markets are difficult to predict in the long term.
• Relying solely on backing good people in industries like e-commerce and media may not generate significant value.
• Past mistakes and challenging markets can influence future decision-making, even if investors try to avoid it.
• Companies that receive quick and substantial funding often have strong fundamentals and CEOs who excel at fundraising.
• The best CEOs are skilled fundraisers who can effectively communicate their vision and inspire investor confidence.
• Fundraising ability significantly increases a company's chances of success and allows for mistakes in the long run.
• As funding rounds progress, the focus shifts from founders to the business itself, with investors evaluating unit economics, turnover, and churn.
• Fundraising prowess alone does not guarantee a founder's ability to lead a successful company.

Insider vs. Outsider Founders (00:17:47)

• Prefer founders with a fresh perspective rather than those with years of industry experience.
• Most successful founders in the consumer internet space came from outside the industry.
• In the B2B space, most founders have experience in the industry.
• Dave took over a company with $50-100 million in revenue and grew it to $2 billion.
• Good news travels fast, bad news travels slow.
• Consumer businesses are fun but Enterprise makes money.
• There hasn't been anything great in consumer in the last five years.
• Incumbent advantage is less of a factor than the maturity of the business.
• New consumer businesses may emerge from disruptive technologies like AI.
• Media and e-commerce are sexy and accessible industries, leading to many entrepreneurs pursuing them.
• B2B businesses have more opportunities for innovation due to scientific breakthroughs and changes in regulation.

Concerns on AI Advantages & Startup Competition (00:21:52)

• Kevin expresses concerns about AI advantages and startup competition, particularly with large incumbents like Google and Salesforce.
• He believes that existing companies can easily incorporate new AI features, making it difficult for startups to compete.
• Kevin prefers large markets with little competition and advises founders to avoid crowded spaces like Stripe or Shopify.
• Kevin's investing style has shifted towards industry focus as his team has grown.
• He now has a dedicated team of five to six full-time healthcare professionals, which allows for deeper relationships and insights within the industry.
• In 2021, Kevin's team expanded to include a two-person robotics team, enabling them to evaluate a thousand robotics deals in the past year.
• Kevin believes that seeing a large number of deals in a specific industry makes him a better investor by providing a comprehensive understanding of the market.

Value of Investors in the Early Stages (00:24:51)

• 90% of a company's value comes from the CEO and the team.
• The board of investors' responsibility is to ensure they have the right CEO.
• In the early stages, investors play a significant role:
  • Guiding CEOs with little fundraising experience.
  • Providing valuable perspectives from their diverse experiences.
• Good investors can provide distance and a fresh perspective to CEOs who are too close to the business.

Significance of Serial Entrepreneurs (00:26:54)

• Serial entrepreneurs are valuable due to their experience and ability to learn from mistakes.
• A company's success depends on both speed and product quality.
• Companies often fail due to financial constraints rather than lack of growth.
• Kevin Ryan and his firm have invested in startups for over a decade and recently announced a $250 million fund, focusing on healthcare, tech, robotics, and social impact companies, primarily on the East Coast, especially in New York.
• They allocate resources between incubations and investments based on industry focus, with the healthcare team doing both.
• Industry knowledge and research are crucial for identifying opportunities and starting or investing in companies.
• To address concerns about hiring gun CEOs, they highlight successful examples, such as in their psychedelic company, Transcend.
• Common reasons for incubator failures include overextending resources, lacking funding, expertise, and credibility.
• To attract talented CEOs, they offer competitive equity and demonstrate their experience, success, and ability to add value.
• Their hit ratio exceeds the average entrepreneur, and they typically work on six to eight companies per year, with multiple industry groups and individuals pursuing different ideas or research projects simultaneously.

Why Do Many Incubators Fail? (00:35:13)

• Kevin Ryan's investment approach involves investing around $1.5 million and hiring a CEO. If there's no market investment after nine months, the company is usually shut down.
• Ryan believes investing in incubations is efficient as it provides learning opportunities and deal flow.
• Pricing and ownership percentage are not the sole determinants of a startup's value. Factors like team quality and market opportunity are also crucial.
• Low-competition markets can be attractive investment opportunities due to fewer great entrepreneurs competing in them.
• It's important to have a concentrated portfolio of investments, but not to be overly concentrated. A good rule of thumb is to invest until companies reach a valuation of $100-200 million and then leave some opportunities for other investors.
• The biggest challenge in liquidity management is the lack of liquidity and limited sales opportunities.
• Selling a company should be considered if a compelling offer is received.
• The best CEOs are not necessarily the best fundraisers.
• The focus of venture capital should be on building good companies rather than solely on ownership.

Challenges of Liquidity Management & Knowing When to Sell (00:49:40)

• The venture capital industry has shifted from a high-margin boutique industry to a low-margin commoditized industry, especially for late-stage investors. Multi-stage firms have efficiently commoditized seed funding, leading to increased competition and a lack of differentiation among seed investors.
• The venture capital industry is currently experiencing a bubble of money, with more funds available than there are viable investment opportunities. Unlike the hedge fund industry, venture capital money is sticky and takes a long time to leave the system, making it difficult to adjust to market changes.
• There is concern about the lack of liquidity in the market, with both the M&A and IPO markets facing challenges. Companies with 60% growth and profitability can go public, but it's not easy due to limited market appetite.
• Kevin Ryan's relationship with money has changed little over time, and he focuses on experiences rather than material possessions.
• New York City has outperformed expectations and is now a major tech hub, unlike Europe.

The Changing Landscape of Venture Capital (00:59:05)

• New York City has grown faster than any other city in terms of tech jobs and venture capital funding.
• In the past, Silicon Valley firms would not invest in companies unless they moved to San Francisco, but now every one of those firms has an office in New York City.
• New York City now has two publicly traded companies worth more than $25 billion and 10 more on the way.
• Google has 15,000 employees in New York City, despite concerns 20 years ago about the lack of tech talent in the city.
• San Francisco has an advantage in AI due to the strength of Berkeley and Stanford in that area, but AI talent is starting to distribute more across the country.
• The top tech centers in a country are determined by where people who went to the top 20 universities in that country want to live.
• New York City is the number one place that people want to move to, making it the top tech center in the United States.
• Miami, Chicago, and DC are not seeing the same level of tech growth as New York City.

Quick-Fire Round (01:02:27)

• The key to a successful marriage involves dedication, friendship, and shared goals.
• Raising humble, hardworking, and ambitious children requires instilling these values from an early age and treating them accordingly.
• The speaker's revised opinion on the recession suggests that fiscal stimulus and Federal Reserve management have prevented a deeper economic downturn.
• The upcoming election is predicted to be close, with Biden as the likely winner, but health issues and geopolitical events could influence the outcome.
• The speaker criticizes the generic "move fast" advice in the startup world, emphasizing the importance of situation-specific decisions based on product-market fit and judgment.
• Co-founding DoubleClick with talented co-founders is considered the speaker's luckiest moment, as their contributions surpassed the speaker's own.
• The speaker's investing experience highlights the significance of judgment gained from observing successes and failures, leading to more decisive decision-making.
• Kevin Ryan expresses concern about the potential normalization of corruption in government, contrasting it with the relative cleanliness of the Obama and Biden administrations compared to the UK government.
• Ryan's long-term vision for his business prioritizes personal fulfillment over asset accumulation or becoming a multi-billion dollar fund.
• His desired lifestyle includes athletic pursuits, attending Burning Man, making investments, supporting entrepreneurs, and spending time with his family.