The Games Fund is a Moscow-based $50 million early stage fund that launched last weekRead more...
Johns was previously President of Wealthfront, and also worked at Facebook, Twitter and Quora
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.
Andy Johns is a General Partner at Unusual Ventures.
Johns joined Unusual Ventures two weeks ago from Wealthfront, where he started as Director of Growth and became President of the company. Prior, he worked at Facebook, Twitter and Quora. At Facebook, he worked on growth and user engagement tactics that took the company from 100 million to over 500 million users. He did the same at Twitter to take it from 40 million to 140 million active users. At Quora, he helped establish the growth team and helped get the product off the ground beginning with its first 10,000 users.
Johns was an advisor in residence at Greylock Partners, and as an advisor and investor for companies like Blue Bottle Coffee, Opendoor, and Poshmark.
VatorNews: What is your investment philosophy or methodology?
Andy Johns: Let’s start with the Unusual Ventures piece, beginning with the name and the reasons why it’s a bit unusual. The core of it is that we don’t want to just provide capital; what the best entrepreneurs want is actual help building their company. So, we created the Get Ahead Platform, or “the gap,” as we refer to it internally. The Get Ahead Platform is a team of in-house, season operators that we have hired, and that are part of the Unusual team, that our companies can temporarily bring in-house on lease, or on loan, to do some of the company building work for them. I’ll give a specific example: let’s say we invested in an enterprise company; enterprise startups typically have three core challenges at the early stage. First is they need to hire more engineers, because it’s very engineering intensive, and hiring engineers is incredibly hard. The second is they need to figure out their go-to-market strategy, which is how do they message and position the product and into what segment of the market should they do so? The third is they then need to build a sales engine; once they figure out how to position and message it and to who, they need to run through the process of creating that sales engine so that they can land their first couple of customers. We’ve built the Get Ahead Platform to provide experts who have a significant track record in providing all three of those services. So, if we invest in that enterprise company, we have an in-house recruiter who is recruiting and filling engineering roles for them. We also have an in-house expert on go-to-market strategy who has more than 10 years of enterprise marketing experience and was most recently the VP of Marketing at Okta; he will engage with the founders and build their go-to-market with them. And then we also have director-level, experienced in-house sales folks who will then help build the sales engine and land the couple of customers for these businesses.
I will be building out a similar set of services on the consumer side sometime later in 2019, so that we we can also help the consumer companies we invest in get up off the ground. So, one of the things that makes Unusual very unusual is we don’t want to just write a check and disappear, or occasionally sit on a board meeting; we want to write a check, do all those things the founders would expect of us, but then go above and beyond by helping them build the company from the get go.
Another thing is that we wanted to be thoughtful around who our LPs are and who we want to generate returns for. We have some of the expected LPs, like large university endowments, but then we also have LPs from Historically Black Colleges, United Negro College Fund, women’s colleges and a host of other non-profits that, historically, haven’t been able to participate as an LP in venture capital in the past. As a result, they haven’t been able to participate in the wealth creation that happens here in Silicon Valley. So, we’ve baked that thoughtfulness around diversity and around who we want to generate returns for, into the firm from the beginning. That also includes the people that work here: 50 percent of our staff are women, and that’s something that we’re proud of, that we can feel good about, and it’s another aspect that makes us unusual.
VN: What's your investment thesis and categories/stage of interest?
AJ: Our firm is focused on both enterprise and consumer; it started with enterprise because the founding partners come from the enterprise world, so it started with that focus almost by necessity. Then I was able to join recently, as they were on the hunt for a consumer partner for the last eight to 12 months. Moving forward, we’re going to be investing fairly equally in both enterprise and consumer companies.
There’s three business models that I’m very familiar with that I also like working and that I’m also going to be focused on. The first is subscription businesses, so the Netflixes of the world; these are apps where somebody is happy to pay a nominal monthly or annual fee in order to get access to the product. The second is network effects; a network effect is a product like Facebook or Twitter or LinkedIn where the product becomes more valuable as each new user joins. The third is what I call ‘propitiatory content platforms,’ which is a product where the content that exists on the platform is contributed at large scale by users of their own free will, Quora being a great example of this, Yelp being another great example of this. Users are engaging at such a high rate, and creating so much proprietary and unique content, that it is that flywheel of content that is driving the organic growth of the business. That’s another business model that I understand well. So, those are the three types I’ll be predominantly looking for.
My overarching philosophy is I don’t believe that I have some superpower, where I can predict where the world is going. I try and be reasonable and humble with myself that that’s not where my intellect is. Rather, I try and find amazing people who I think they know where a certain part of the world is going, and who have built a killer product and they are so compelling that I would actually go and work for them. If that’s the case, that’s what guides my investment philosophy, in addition to the other things I mentioned previously around business models. That’s what my philosophy is: find incredible people who are compelling around their visions and then I just try and get behind it.
VN: What's the big macro trend you're betting on?
AJ: I have about 15 years of operating experience. Most notably, I was fortunate to be a part of Facebook, Twitter, Quora and Wealthfront as a full time operator focused on growth and product, as well as a handful of other great consumer companies that I was either an investor or an adviser in. The thing that’s consistent from all those products is they grew organically, meaning they didn’t have to spend millions and millions of dollars on marketing or buying ads in order to promote the product. Rather, they built a product that was so compelling that users were delighted by it and couldn’t help but tell other people about it, and that’s how the product spread. That was built into the growth of the product to begin with, and so I’ve seen how multi-billion companies can be built off of almost purely organic growth just by building something incredible. I’m taking this into my perspective on investing.
So, here are a few of the trends that I’ve seen and I think a few other investors have also seen and commented on. There are three in particular that stand out to me; the first is it’s easier than ever to create a startup, especially on the consumer side and that’s because there are more underlying technologies today than there were 10 years ago. That makes it easier to create a new consumer software app. The second is there are more and larger distribution platforms online for those new consumer startups to then gain traction. That includes massive search engines like Google, and it can also be earned distribution through advertising or marketing on top of social media platforms like Facebook and Twitter and LinkedIn and Snap and Instagram. That can include app stores as well. So, there are a variety of ways in which new consumer startups can gain distribution through massive channels that didn’t used to exist.
The third trend is there’s more venture capital dollars today than there has been in the past and, unfortunately, a lot of those dollars are being spent on enabling these consumer apps to just buy ads. The end result is they can spend millions of dollars buying distribution on these new and large platforms, and, on the surface, it looks like they have significant growth and traction because maybe they have millions of users now using the product by virtue of the advertising dollars they spent. But, when you peel it back, and you try to assess how deeply these users are engaging with the product and how much they care for or love it, there’s very, very little true engagement that’s happening. Those are the investments I don’t want to make. I want to focus on those that are growing organically and who are built by founders who are obsessed with building the best product in their sector. They’re incredibly hard to come by, they’re very rare, but, when you do find them, they’re valuable. Those are the businesses I’m looking for.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
AJ: We’re focused on seed and Series A. Our typical check is anywhere between $1 to $6 million. Although we do do smaller checks in the $100,000 range in a few situations, our preference is to write checks of $1 to $6 million and to take meaningful ownership of 10 to 20 percent in a company and be heavily involved.
VN: What kind of traction do you look for?
AJ: 10 or 15 years ago, seed investing was a couple of people with an idea on a napkin. I will occasionally do that when the founders are exceptional, because sometimes you are just making a significant bet based on the quality and the capabilities of the people. There will be cases in which we make those investments when there’s virtually no traction. In other cases, the preference is to see some traction.
What I won’t say is that there’s a magic number around how many users. For example, I don’t really care if they have 100,000 or one million users; I don’t see a distinction between those two. The thing that I actually care about, at what level are those users engaged? To lay out a hypothetical, if I see an app that has 10 million users, but five million of them use it every month and only 20 percent of them use it every week, so, if one million of the 10 million use it every week, I’m not that interested, in most cases. That’s not user engagement that’s indicative of customers finding immense value in the product. If I saw an app that only had 50,000 users but 40,000 are using it every week or every day, I would be much more interested in taking a deeper look at that product than the one with 10 million users that only had one million of them using it every day.
When it comes to revenue, I get pretty excited when I see a small team grow to $1 million of annualized recurring revenue and they do so organically. I saw a company recently that we’re likely going to invest in that I can’t say anything about yet but that’s exactly what they did. It’s two co-founders who grew it to $800,000 annualized recurring revenue entirely organically, beginning with just a mailing list. If I can find a product that’s in that sort of range, that becomes very interesting very quickly.
VN: What other signals do you look for? Team, product, macro market?
AJ: There’s a couple of things and some of it is team related but it's more nuanced than just saying, ‘The team.’ For example, something I’m going to look for is someone that has a contrarian point of view and who doesn’t get dissuaded when they hear somebody disagreeing. In venture capital, in order to be a great venture capitalist, you have to place bets that are contrarian. You have to make an investment in cases and situations where the vast majority of people don’t see the opportunity or disagree with it, because that’s where all the returns lie. If I’m chatting with a group of founders and I can easily dissuade them from core parts of their product or their strategic beliefs, and talk them off of that ledge in the first conversation, I’m going actually to be a bit concerned because the great founders that I’ve worked with are the ones that have an incredibly clear and concise perspective on something. They choose to disagree with other folks because they’re absolutely convinced that they see things evolving in a certain direction and they remain committed to that.
The other thing that I look for are the characteristics of the market. What I mean by that is the obvious; first, it needs to be a market of significant scale, in the range of ten of billions, and, ideally, what I look for is what I call ‘demographic discontinuities,’ meaning there’s a changing of the guard that’s happening. For example, in the case of Wealthfront, and why I chose to join that company early, over the next 10 to 20 years there’s going to be a significant changing of the guard where younger investors are going to become the bulk of investors in the market and they’re going to own the bulk of assets. Right now, young, Millennial investors may only have $1 to $2 trillion of investable assets, whereas people aged 50 and above have $10 to $15 trillion, but, if you fast forward 20 years from now, that’s going to almost be entirely flipped on its head. Also, the incumbents are not set up to adequately serve the next generation of customers, in particular because the incumbents are not tech companies and what the next generation of customers wants is a technology company. So, that’s what I call those demographic discontinuities within markets, where I can see a changing of the guard happening. That’s another way of saying there’s a very big wave that’s about to come and I want to get on the beginning of it.
That can be in finance, healthcare, transportation. Whenever folks occasionally start conversations about bubbles and trends in the market, like was happening a few years ago and they were saying, ‘It’s another tech bubble.’ Sure, there may be periods of time in which valuations get out of whack but when you take a step back and say, ‘How much of transportation has changed? How much of healthcare has changed? How much of finance and banking has changed?’ There are a variety of these global scale industries that have barely been touched by the latest and greatest of new technology. So, although we may see these valuations spikes in these small pockets of technology, 99 percent of the world has yet to be drastically improved by these new technologies by virtue of these huge industries still being very nascent.
VN: What do you think about valuations these days? What's a typical seed pre-money valuation and what do teams need to get that Series A?
AJ: Valuations are more expensive now than they used to be a handful of years ago, that’s for sure. There’s a part of me that wouldn’t mind more of a correction in the market because if there’s one thing you learn as a pubic investor it's, when markets sell off all that means is stocks are on sale. I think Warren Buffet had that quote in 2007 or 2008 of, ‘Stocks are on sale, 40 percent off.’ That provides a good opportunity to make good investments in great teams and great products in great markets, just at a lower price.
Nonetheless, valuations are fairly high, especially for the competitive deals. One of the ways I think about it is, let’s say there’s a Series A check that’s at a $30 or $40 million post-money valuation versus a $60 million post-money valuation, but that company goes on to be worth $1 to $2 billion someday. It would be an incredibly bad decision for me, as a venture investor, to pass on a fast growing and potentially wildly successful company because it’s priced 20 or 30 percent higher than I would prefer at the seed or Series A level. In the long run, venture is all about home runs, and, if it becomes worth $1 or $2 billion dollars, that’s actually the only thing that matters. It’s different for later stage investors because, understandably, they’re more sensitive to the valuations because the multiples that they can potentially earn are less. For me, if anything, sometimes I get even a little more excited, or it will cause me to do even more diligence, if another great investor has decided to price a round quite highly. That’s not to say that I would follow them blindly just because another great investor jacked up the price, but, generally speaking, that’s not going to turn me off. This is something that I learned from one of my mentors, Andy Rachleff, who’s a co-founder of Benchmark Capital. He said that this is a lesson that he and his partners learned a very long time, which is: don’t lose an incredible early stage deal just because of valuation. If it’s great, it’s great.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
AJ: A huge part of it is the Get Ahead Platform that I described, because that is a very unusual model. It’s an incredibly rare model in the world of venture and that’s the bet that we’re placing. In the long run, we can become the preeminent early stage venture capital firm, because we become the best at helping early stage companies establish liftoff. That’s a huge, huge part of our pitch to our LPs and it’s compelling enough to where when John Vrionis and Jyoti Bansal were starting the first fund, they ended up turning down a significant amount of money. We could have raised five or 10 times as much as we actually did, but opted not to because of focus. In venture today, because there’s some much money, it’s compelling to raise larger and larger and larger funds, and, suddenly, it becomes an assets under management game, not a returns game. Meaning, if I’m charging two percent and managing $2 to $3 billion in assets, the income that that spits off is enough to pay me millions of dollars per year as a partner. A lot of these larger funds are being pulled into that game because of the attractiveness of the fees that are generated off of a very large asset base. We want to focus on remaining a smaller fund and being better at doing early company building and creating wealth through the generation of amazing returns, not just off of large salaries.
VN: How do you differentiate your fund to entrepreneurs?
AJ: That’s the cool part. When I started to explore venture a handful of years ago, some of the best and well known investors told me the same thing: ‘One of the hardest parts is being able to answer the question of, ‘Why me and why us?’ Meaning, if there’s a great entrepreneur with a promising company, they might be able to receive money from any venture capital firm of their choice. It ultimately comes down to that entrepreneur picking a specific partner or a specific firm, and that’s where you need to be able to answer the ‘Why me?’ question.
What I’ve found is, before I became a venture capitalist, I had been approached by a lot of great companies and entrepreneurs to either advise them or invest in them through my own personal checkbook because of my operating experience. It turns out that if you’re building a consumer company, you want to be great at building great products, and you want to be great at knowing how to grow and scale their adoption. I’ve built my entire career around those two things. I’ve been a Head of Product for a category defining, leading consumer finance company and I’ve worked on growth at Facebook, Twitter, Quora and Wealthfront, and a variety of other companies that I’ve advised. So, I’ve been in the fortunate position that, in many cases, the pitch is sort of flipped on its head, where I may go to them and say, ‘I’m very, very interested,’ and their response to me is, ‘I would love for you to be an investor because I’m looking for somebody that can help us build great products and grow the business.’ It’s my operating experience that lends credibility to that. So, I’m certainly in that fortunate position where the ‘Why me? Why us?’ is much easier to answer and, in many cases, the entrepreneur answers for me.
VN: What are some lessons you’ve learned as a VC?
AJ: There’s a few things that stand out to me, and I’m not going to act as if I’m an experienced pro yet, so I’ll try to speak candidly about two things that have stood out. The first is, at the end of the day, my ultimate job is for entrepreneurs to want to work with me. My job isn’t to convince the rest of the venture industry that I’m an amazing investor, my job isn’t necessarily to convince other venture capitalists that I’m the exact person that they would want to work with. I hope I have those relationships but, at the end of the day, it just comes down to the entrepreneur. It’s their company, and if they really want me involved, because they believe I can help, then that’s what matters most. That’s been informative in how I spend the majority of my time. The other is it’s significantly competitive, there’s no way around that. I don’t have to go too deeply into that, because I’m sure you’ll hear that from every investor.
The third is that it just pays to be be genuine. I don’t show up to a meeting with an entrepreneur trying to wow them with all the experience I have, or to talk about all these other companies I’ve seen. I show up and I meet with them almost as if I’m interviewing to be a co-founder. I don’t try to put on a different personality other than who I am. In many cases, it’s actually a much more laid back version, that doesn’t feel like they’re meeting with a venture capitalist. So, I’ve learned just to be authentic and if I’m really passionate about what they’re doing and what they’re building, I’m going to use the product, I’m going to play around with it a bunch, and then I’m going to be able to talk shop with them about their product and their industry, as if I were interviewing to be a co-founder or a Head of Product. I take that approach; it’s as if I’m still an operator and that’s how I engage with the entrepreneurs. They deserve to have an investor that thinks what they’re doing is outrageously awesome and who truly believe in it.
Ultimately, the gut check that I do before I make the decision as to whether or not it’s go or a no go is I ask myself, ‘If I weren’t an investor, would I want to work here?’ That’s really a judgment-based decision that comes from a constellation of factors. Once you spend enough time with a founder you either feel that or you don’t. That’s how I approach my conversations. I really don’t view myself as Andy the venture capitalist.
VN: What excites you the most about your position as VC?
AJ: Here's what I like the most, and I have empathy around this from my prior experience: building a startup is brutal, it’s really tough. It can take a physical toll on you, it can take an emotional toll on you, it can do both and it can also do that to your friends and family. It is so challenging to do what these entrepreneurs are doing because, when you think about it, it’s kind of a crazy proposition to begin with. Here’s the premise: we’re going to take couple of random people, we’re going to give them millions of dollars, we’re going to ask them to build a multi-billion company in 10 years or less by creating something that’s never existed before and assembling a team of people that’s never worked together before. And to do so in the headwind of extreme competition, either from other startups or from large companies that 10 or 100 or 1,000 times larger. That’s the core premise, and that’s a bit crazy. That’s what these people sign up for, and that’s what I signed up for as an operator at these companies. That is an immense challenge that takes a toll on you, no matter who you are.
One of the most rewarding things that I’ve experienced as a venture capitalist and, prior to that, as an adviser or angel investor, is when I can take my 15 years of collected wisdom and, in a one hour meeting or a simple conversation, help an entrepreneur work through something I know has been keeping them up at night for weeks and months on end. That might be the make or break aspect of whether or not their business goes on to survive and reaches the next round of fundraising or not, and, in those moments, you get that nugget of wisdom and you guide them in the right direction, you can physically see that anxiety released, where you know that you just took a huge weight off their back because they’re feeling a tremendous amount of that. For me, that’s the most rewarding part and it comes with the added benefit that if you do that for the right people, within the right products and industries, you can generate a significant amount of wealth for everyone along the way.
So, the practical answer is the job of a venture capitalist is to make money, but the reward, from my perspective, is in those moments where you take the weight of the world off the founder and you set them up to succeed.
VN: What is the size of your current fund and how many investments do you typically make in a year?
AJ: The fund is $160 million. Given than we’re early stage and we want to be very hands on with helping with company building, on the consumer side I’ll probably do two or three checks a year, a significant investment where I’m trying to get 20 percent and take a board seat. I’ll do another four to six investments where I’ll be more of a supporting investor as opposed to a leading investor, and trying to get eight to 10 percent ownership, and offer help and advice but not as much as being on the board. So, in a given year, on the consumer side, I may do eight to 12 investments, same on the the enterprise side.
We also have what we call the Academy, a program to which companies can apply that we open up once or twice a year. What they get with the Academy is basically a knowledge platform, where, each week, they’re put through a couple hours seminar or a lecture, taught by somebody who’s the best in the world at whatever they do. For example, one of the sessions in our Academy is taught by Andy Rachleff and he does a session all on fundraising. Having been a 20 year, highly decorated venture capitalist himself, and having also been the founding CEO of a successful private startup, he knows an awful lot about fundraising. It’s through that Academy that we also source another five or 10 companies in which we’re putting in smaller checks in the range of $250,000 to $1 million. So, we may do another 10 or 20 investments a year coming out of the Academy, in addition to those other investments I talked about. But, to be clear not, we are not doing this spray and pray strategy, where we’re putting $100,000 checks into hundreds of startups. That’s just not our thing.
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