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Story Ventures is a $5 million fund, putting $50k to $200k into pre-seed and seed stage startups
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh how times have changed. While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Jacob Yormak is Managing Partner and founder of Story Ventures.
VatorNews: What is your investment philosophy or methodology?
Jacob Yormak: When we thought about launching the fund, one of our focuses was on how we could provide value to the broader VC ecosystem. We wanted to develop a brand and a reputation, and we felt the best way to do that was to position ourselves at the top of the funnel where we would be able work closely with entrepreneurs and also be lead generation for downstream investors. We especially saw a lot of opportunity being an early stage fund in New York.
I previously worked as a lawyer at Gunderson with tech companies, and it was while I was there that I started to see a lot of my smartest friends in finance, consulting, and other fields move towards having their own businesses and startup companies. I saw a broad sea change towards a startup culture in New York, so we felt the timing was right to launch a fund.
VN: What do you like to invest in? What are your categories of interest?
JY: We started the fund a bit more as generalists. At the beginning, you want to turn on deal flow and there’s a fear that you’ll miss deals by being too focused; but I now feel that’s the wrong approach. We quickly learned that when you do that, even though you feel like you’re giving yourself a better shot to see more deals, you're actually not top of mind for anything at all. If we say, 'Send us any awesome deal you see,' when Uber and Airbnb come along, the reality is that entrepreneurs and other investors are not going to think of us. On the other hand, if we say we focus on intelligent mobility, we almost definitely won’t see Airbnb, but we have a legitimate chance to see Uber.
With that in mind, we focus pretty specifically on a few categories. Some of the categories are: smart sensors, autonomous vehicles, computer vision, and data infrastructure and aggregators which we see as enabling the flow of data. We probably spend most of our time at the application layer looking into machine learning companies, IoT, and cyber security.
Within AI and machine learning, I'm very attentive to natural language processing companies. We have a thesis around advancement in natural language processing and how people interact with machines. There are a ton of really valuable companies based on that wave, and we are in the early innings of that. What people can do now with the Amazon Echo, Google Home, Airpods and Siri, we are entering a world where humans can control a machine through voice. There's a lot of churn and lack of functionality for smart speakers and Airpod headphones, and the conversational AI is not good enough yet, but we see a ton of value as the consumer experience improves.
Another area I'm interested in is identification in the digital world. When I met a friend in person, it’s pretty easy to validate that the person is actually my friend. But if I’m e-mailing or chatting, it's a lot harder to verify the identity of a person. One of the companies we invested in is Pinn, solves this problem through behavioral biometrics. If you hand me your phone and tell me your pin, I wouldn’t be able to access the phone even if I typed in the correct pin; the software can read the keystrokes, how hard they were pressed, how I hold the phone, the cadence of my voice, etc.. There are multiple modes of biometric output to determine the ID of me and you.
There’s some funding and some competitors in the space right now, but one reason I'm bullish is the proliferation of sensors that make behavioral biometrics possible at scale. As more sensors are embedded in hardware, i.e. phones, those multiple modalities of recognition are possible where they weren’t possible before. Also, for a bunch of companies, cyber security has become more of a problem since passwords are so vulnerable. They're super weak. People thought for a long time that two step authentication would solve the problem but it's not doing that. The bots that are hacking are doing a much better job, and now it's about really trying to figure out, thematically, how do you increase security and decrease friction? Many of the solutions such as putting a thumb print somewhere, talking to a phone, and typing in a password create friction around the user experience. Phone sensors that can passively attribute your identification while simultaneously improving privacy and security, since the password is you, is a better solution.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
JY: With Pinn, the founder was 17 when he started the company; he's in his early 20s now. What we saw with him was such a young founder who had done an exceptional job getting talented advisers, both technical and non-technical, to help navigate the space. He has partnered with institutions, partnered with network providers and is working with the government on critical infrastructure. Those two components, someone who sells a big vision and who has the ambition to create something far reaching with a specific plan on how to go to market with their company. He had big vision and he knew which people to surround himself with.
Another is Stae. You see taxis, ambulances, traffic lights, all with sensors embedded that create vast amounts of data, especially in crowded cities. The hardware comes from disparate vendors so the data they create is siloed and fragmented, and there's not a good way to do anything productive with it. If you want to compare housing pricing with bike locations with foot traffic, you don't have an aggregated data set. Another problem is that autonomous vehicle companies put cameras on the cars themselves, so the car now knows when to start, stop, turn. If a fleet optimization company wants to know where the streets are closed, where's there's an accident, where sanitation trucks are going, there's not a good way to access the broader urban data set. Stae is a creating back end aggregation platform to normalize municipal data. It's an API that private companies can use to consume that data, and that cities can use to analyze the data to provide good governance. Smart city companies are working to create value by creating apps, and those companies have to pull data from siloed data sets; by having Stae, they are able to build on top without having to worry about pulling from disparate sources.
As I mentioned before, one necessary component when we invest is that we always invest with tailwinds, as opposed to headwinds. We see Stae as operating with tremendous tailwinds. The need to consume different types of data is going to be tremendously valuable. It's also really difficult which creates a moat for teams that are capable of doing it well, and this team is really great. John Edgar, the founder, was the VP of Strategy at Digital Ocean, and his co-founder is one of the smartest tech people I've ever met. They did a great job recruiting other exceptional team members and we invested based on a business with tailwinds, a moat, and a strong team to execute on the vision.
VN: What do you look for in companies that you put money in? What are the most important qualities?
JY: When it comes to investing, we are pretty similar to entrepreneurs. We focus on the team itself, which breaks into two parts: first is why is the founding team starting the business? That's a big question. But the bigger one is, why now? We are really trying to understand what's changed in the technology or business landscape, that makes something possible that might not have been possible two or three years ago.
We want to see a big vision, but a narrow focus. We see a lot of similar companies, with founders that have really broad visions, but the entrepreneurs we invest in combine that with intense attention to detail, the ability to execute. From an investment standpoint, those are a few of the more crucial considerations.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
JY: It depends on the type of company. For a large portion of our investments, they really are early and their technology takes a lot of time to build out. More than half are post prototype but pre-product, so there's something you can see but it's not in the real world. That's generally the case.
In B2B, because of the stage, we invest more often with less traction, if any, because the product takes longer to develop. There are higher expectations with B2C, where it's easier to release the product into the wild and will more often have traction. Generally speaking, we're more interested in the team, the vision, the tailwinds for opportunity, and the go to market strategy. If we see something that validates our thesis, and that somebody is willing to pay for it, we'll invest on the belief in a founder and a vision and, to the extent it's possible, some kind of external market validation.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
JY: The way we meet with founders is mostly inbound from our network of entrepreneurs and advisors.
When we stated the fund, we hustled every second of every day to be top of mind for everyone, and to find as many opportunities as we could. We sought to provide value with every interaction and relationship so that people would want to work with us in the future. After six to nine months a switch flipped and we were less reliant on outbound hustle, and more on the organic deal flow from our network. We had developed a few of core theses such as those around digital identification and natural language processing. Brian’s focus since he joined is around intelligent transportation and mobility, connected car, and cyber security. In those areas, we’ve found a few interesting companies by going outbound through email and mutual friends.
From a diligence standpoint, one of us takes the initial call or meeting and then we have a partner meeting. We usually try to be respectful of time, and we don't take a second meeting unless we're legitimately interested. From there, we loop in a tech advisor who's specific to that sector and we work with him or her to develop a list of questions based on that conversation. We have one to two follow up meetings, and do customer calls. We do a lot of background research and work as well. We try to move quickly and make a decision as soon as possible although the typical length depends on the timeline of the company. Usually the whole process takes place over a few weeks.
VN: These days a seed round is yesterday's Series A, meaning today a company raises a $3M seed and no one blinks. But 10 years ago, $3M was a Series A. How has that changed where a company need to be to get their Series A round?
JY: It depends on the sector and business. We try to invest in companies that we truly believe can be multi-billion dollar opportunities; startups working on big, impactful visions. For seed funding you need a founding team, a compelling vision, and a go to market strategy.
To get to a Series A, companies need some kind of traction. Given what we invest in, it's less about standardized metrics, like $100,000 MRR, and more about an exceptionally strong team, a vision that investors can believe in, some kind of product market fit and the beginnings of revenue. What we work with our founders on is making sure they can do enough testing to be able to show investors that they are not just a big vision with a great team, but there's actual product market fit.
When investing in emerging technologies, in no time you'll have 20 competitors doing the same thing. So we have to believe in the founders' conviction around how they see the world. What we invest in not vanilla; it's about founders with compelling visions that can build awesome tech.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
JY: I grew up on the East Coast, in New York. I went to Penn for undergrad, where I studied psychology and writing. I went to law school at NYU and worked at Cravath, one of the pre-eminent white shoe law firm, with some exceptionally smart people. I was hard working, I loved the people, but I didn't find the work fulfilling. I was figuring out what I wanted to do next, and I wound up at a law firm called Gunderson Dettmer, where I focused on startup companies. I was working with tech companies from their formation, fundraising, structuring their board of directors, the full spectrum of taking a company from inception to IPO. It was great and had a huge impact on my ability to start a fund.
When I graduated from Penn in 2009, we were on the heels of the great recession, so I saw very closely how people can worked their entire careers to make money and then lose everything they have; this wasn’t uncommon during the crisis. It was fascinating to me that people can work so hard, with so much focus and ability, yet not understand money well enough to protect it from a downturn. I became obsessed with understanding the broader system and capital markets, particularly through a macro-financial policy lens. The other thing I was interested in was the impact tech companies were having on the financial system. My brother Brian was at a Detroit-based VC and he and I started advising a few angels and VCs in New York in areas that were particularly interesting to us. We put together a thesis on how we saw the world unfolding and where we thought there were opportunities to make strong investments. It was this thesis plus credibility that enabled the creation of the fund. I launched Story Ventures in July of last year and Brian joined me full time this past August, so now it's the two of us.
Having my brother as my partner works great. He and I had done some side projects together and the most important thing, is that although we have strong opinions on investments and business, we both know that we are not always right and we’re always open to hearing other viewpoints. We have respect for each other and, from a personal value standpoint, we are more inclined to listen than to express opinions. We have heated conversations, agreements and disagreements, but we have the exact same goal: to work hard to create a sustainable business.
VN: What do you like best about being a VC? What makes you excited?
JY: My two favorite things are to think about the macro level, to see where value is being created, and I love reading, thinking, and observing behavior to figure out where things are headed.
On a day to day basis it's awesome to meet entrepreneurs, to see how they want to change the world. Most investments come from meeting brilliant entrepreneurs who tell me what's going to happen in the world. They share with us, and we work to help them create it.
VN: What is the size of your current fund?
JY: We have a $5 million fund.
VN: What is the investment range?
JY: We do a $50,000 to $200,000 initial check.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
JY: It is something we think about, but we don't have as much control since we are not leading rounds. We generally target 2 to 5 percent.
VN: Where is the firm currently in the investing cycle of its current fund?
JY: We've invested 11 companies for about 40 percent of the fund, just over a year into investing. We always said we’d put our heads down on this first fund for a year and a half, so we'll probably start thinking about building the next fund in January 2018.
VN: What percentage of your fund is set aside for follow-on capital?
JY: The fund is structured to allocate more to initial check to build a track record, but we do reserve a portion of our capital, around 15-20 percent.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
JY: We are focused on pre-seed and seed investing. Half of the companies in our portfolio are raising their first $500,000 to $1.5 million, and the other half are in the $1.5 million to $3 million bucket, or maybe a little more.
VN: In a typical year how many startups do you invest in?
JY: We made 10 investments last year.
VN: Is there anything else you think I should know about you or the firm?
JY: The only thing that I think has been somewhat meaningful that we didn't discuss is that, because of my background as a lawyer, I work with companies in a slightly different way. Often around financing, when one of our companies is raising a Series A, I’m able to help founders understand the nuances of a term sheet, option grants, etc. Founders have a lot of anxiety around the legal and structural challenges of running a business, and I'm able to work closely with them to navigate those issues. Like any startup business, when we invest we make sure the founder knows we’re here, and that we're hustling alongside them.
Thanks for having me!
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