The Games Fund is a Moscow-based $50 million early stage fund that launched last weekRead more...
Interlace Ventures invests in commerce companies at the seed and pre-seed stages
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.
Vincent Diallo is a managing partner at Interlace Ventures
Prior to Interlace, Diallo co-founded Bleu Capital, the venture arm of a family office.
A seasoned finance executive, he was the CFO of Sinodis, the largest distributor of Western Food in China and took it from $30 million to $200 million in the space of a few years. Diallo is an ex-Deloitte auditor, he is passionate about Chinese cultures, mind-body alchemy and practices Vipassana. He is also an active member of BlckVC.
Based in San Francisco, Diallo is fluent in French, English and Mandarin.
VatorNews: What is your investment philosophy or methodology?
Vincent Diallo: In terms of philosophy and methodology, at Interlace Ventures we have a very clear focus, which is commerce technology. So, we’ve established ourselves as an early stage firm that is specifically focused on helping to build the transformative commerce technology companies of tomorrow. We get the chance to fund a certain consistency and certain verticalization of our practice because we are backed by larger family and executives investors, but also by companies such as Bain Capital Ventures, and that creates, again, a certain consistency in the smartness of our money. Our LPs are connected to the commerce world, and we only practice on this vertical. We decided to invest in the pre-seed and seed stage, and we want to basically identify the next big company as the pre-seed stage, that's the whole logic.
In terms of market perception, or the way we proceed where we see there is an opportunity, we use kind of a dual lens. First, we understand that there are some huge consumer dynamics in place, including the growing influence of Gen Z. Knowing that they're going to be the largest consumer base sometime soon, that brings us to focus on one or two key elements in terms of consumer dynamics, the first one being diversity awareness, and the second one being global consciousness.
In terms of diversity awareness, what I mean is that Gen Z is definitely, by numbers, the most diverse generation in the history of the US, and we believe that in order to cater to this consumer base of this generation, the founders that will manage to address this generation will probably come from young and underrepresented communities. So, that's the first dimension. The second one, the global consciousness, what we see is that this is the generation that really wants to change their buying behavior versus their parents; they really care about sustainability and the message and the mission of the brands they represent. Of course, COVID accelerated that kind of global consciousness sentiment, but these are two big markers of the growing Gen Z that is impacting also older generations, the Millennials and Gen X. So, that’s the consumer dynamic. At the same time, we observed that with commerce now, maybe there's a universal way to monetize traffic, to see a business model that is purely based on advertising. This is being challenged by all the content around data privacy and you see more and more social media companies that are completing the funnel and starting to convert their viewers into shoppers. So, the rise of social commerce and, in the same logic, you see a blending between commerce, media and entertainment. These different dynamics, one at the consumer level, the other one at that market structure level, are creating a huge opportunity in this space.
On top of understanding these dynamics, which lead our investment practice, we want to bring additional value to our founders and portfolio companies. And so, we created what we call the commerce platform, which is a way of saying that we connect them to a community of executives and leading brands retailers. We try to bring them their first enterprise client, their first partnership, which gives us the opportunity to share, maybe, some elements of trends and market insights to some of our strategic partners. So, this is why we actually call the firm Interlace, because it’s bringing value to the portfolio, thanks to the LP and extended community and, in the same way, bringing value to the LP and extended community thanks to the granularity of our practice and the fact that we see the beginning of companies having vision or concepts in the commerce world. These are the emerging trends of tomorrow.
VN: Are you going after companies that are targeting Gen Z's specifically?
VD: Not specifically, but we definitely take these market dynamics into account and try to propose the new form of commerce experience that will be suitable for the Gen Zs. It’s not a focus but it definitely impacts the way we see innovation and the product because we believe that the consumers tomorrow will be mainly Gen Zs, so it has to be compatible but it doesn't have to be only for Gen Zs. We are also interested in other other market innovations but Gen Zs come with some specific attributes that have to be taken into account to be a winning product tomorrow.
VN: Are there specific verticals within commerce that you are looking at want to invest in? What is it about those verticals that you find exciting right now?
VD: I put the deals we observe in three categories: we have tech solutions, meaning software that’s enabled the incumbents, but also the growing brands and retailers, to adjust to new retail. It's more like a B2B proposal on software. So, that's probably 70 percent of our deal flow. Then we have a second big category which is around new consumer experiences, new shopping destinations. They can be digital or in-person and might be B2B2C models that could also include communities and native brands that have managed to really, somehow, innovate in the way the consumer is shopping for the category.
Having said that, there are many, many trends that I'm interested in. We invest all along the commerce value chain, from the moment the good is manufactured to them it is consumed by the consumer, and even beyond that. So, we’re interested in the full life cycle of the product. Definitely we can invest in supplies and in logistics, in merchandising, in recycling or ecommerce solutions, so there's a lot. In terms of the places where I see there is some innovation to come, first we see a full reconsideration of the supply chain dynamics so that the supply chain is now more, and should be more, used as a demand chain. That’s one that I'm pretty interested in, changing the logic of the supplier. The second trend that I’m considering, maybe we could talk about the fact that there is definitely some needed optimization of the last mile to grow the accessibility and new ways to consume it. I’m also interested in anything that is around experiential commerce. Of course, there's some challenge around in-person experiences these days with COVID but I think this will come back even stronger after the pandemic because there’s going to be a certain pent up demand. And so, anything that is an in-person, physical experience, and how we measure the importance of this, is something that I'm really interested in.
VN: What is the size of your current fund and how many investments do you typically make in a year?
VD: I can’t say much about the size of the fund because we’re still fundraising. It’s the first fund of an emerging manager, a first time manager, so we’re not raising $100 million. In terms of pace of investments, and how many we’re going to do, am indication is that we already have 11 companies in the portfolio, and we are looking at investing probably 15 to 20 companies over the next 20 months with an initial check around $200,000 to $250,000. We invest up to the A round, maybe the B round.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
VD: We don’t have the same analysis for seed and pre-seed companies; they’re two different stages. Let's talk about pre-seed first, and I think that's the most interesting one because it’s not about numbers at all. Maybe the only number that is important, that really matters, at this level is the size of the market they’re after. They are probably pre-revenue and pre-product, and so what we really try to identify is the capacity of the team to deliver their vision, and that goes through a couple of criteria characteristics that we try to identify among the team. Of course, we'd love to have the possibility of talking with maybe the first user or the first customer to try to measure the love and the potential stickiness of the products. But, again, nothing quantitative; it's much more qualitative.
At seed stage, it’s a little bit different, of course; we're going to look at the growth rates. That's what we definitely focus on in terms of acquisition of customers. We look at revenue though, generally, that's not the moment to accelerate but we're going to look at the matrix and check the veracity of this matrix on top of the criteria that I just mentioned, which is, of course, the chemistry of the team to deliver the big vision and actually to have a big vision. But not overt numbers, except, again, the size of the market and growth.
VN: What do you want to see from the team to make you want to invest?
VD: I usually use a set of five criteria that are fundamental for me. The first characteristic that is important for us is founder-market fit, and I would even add the product, so there’s a founder, product and market fit. The founder has to understand the market and to have a background that shows that he’s been exposed to that market, that he has access to that market, that he understands the challenges of this market. I prefer somebody that experienced it directly than somebody who read a couple of reports and came to some conclusions based on that. So, somebody who has touched this market, in a way or another.
Another aspect that is really important for me is I have to feel their hungriness. This should be just for the sake of solving the problem; even if it’s a good motivation, I don't want to see too much greed in their logic, in the approach, in the dynamic. I want to see hungriness for solving the problem instead of being super rich. Also super important for me is being visionary. I love when I have somebody that brings something very contrarian. I love to be surprised by new concepts, new trends, new elements that I never considered and markets that I never heard of. That’s something that definitely catches my interest.
For the fourth criteria, I believe that people with a sound mind, a certain emotional intelligence, have a better chance to be successful. I mean, it's a roller coaster. The zero to one, and the one to 10, it’s really, really tough, emotionally speaking, and so you have to be able deal with these really extreme situations. I believe that somebody that is able to navigate these moments well is somebody that is able to show a certain level of calm.
The last point thing that I like to measure is what I would call a certain magnetism. This is that capacity to be a well surrounded. That goes from, of course, the co-founder and the founding leader to their first pool of employees, their advisors, their first clients. Who are these people able to attract?
When it comes to criteria of hungriness and contrarian thinkers, we have a chance here to over-index underrepresented founders in our evaluation. When you come in from an underrepresented minority, maybe with a different access to wealth, that's a reason to be more hungry, at least I’ve observed that. I want to consider this in our deliberation. Coming from an underrepresented community is a plus, at least when it comes to hungriness, and they’ll also bring some new ideas, some new market segments that maybe have not been tested in the past. So, with these five criteria we’re definitely in position to over-index underrepresentation and, as a matter of fact, that's what we do: in our 11 companies, we have seven that can definitely check the box of underrepresentation. I believe that's above average. We don't have a specific objective there, but it’s definitely something that comes naturally to these evaluation methods and the criteria we care about.
The short version is I invest in good people and cool people. But my point here is that, even though you can have objective criteria, there's a lot of intuition in this work. One of my big questions from day one has been, ‘How do I grow my intuition?’ Knowing that I have to find a way to hack the process because I don't have the 20 years of experience that will enable me to have a very sharp intuition, how do I grow my intuition? That is so important. I found a couple of answers, and that’s another discussion, but my point is that there's a lot of really intuitive work here. It's good to have a framework and criteria so that you know where to look but at the end of the day, again, there's a lot of intuition.
VN: What do you think about valuations these days? How have they been affected by COVID?
VD: What I'm observing in the segment of the market that I'm focusing on, and the specific deals I’ve been working on, there’s been an increase in the valuation that precedes seed, and even Series A. The reason is that the risk is higher in the pandemic context; uncertainty has gone through the roof and visibility is completely limited, so the risk has increased. There's a concentration of funding, so there are fewer rounds, with more money injected in the company and, therefore, higher valuation in order to make it work for the founder. That’s a dynamic that, of course, I've read in the Pitchbook and Crunchbase reports, but I also saw it directly in my deal flow this past year.
I don't know exactly what the market dynamics behind it are but last year was actually a record year for fundraising for VC funds, it was at an all time high. And, again, we see a certain concentration because a lot of that amount has been raised by, I would say, traditional firms that became bigger; they were already big but they’re becoming bigger. Of course, at the same time, we see a growing number of micro VC funds, but, generally speaking, venture is getting more and more democratized and yet there's a lot of resources available, funding that is available, for venture companies and venture in general.
I'm not surprised that valuations increased and, hopefully, it won’t impact the performance too much. If there is more money flowing into this asset class, and the company valuations are increasing, based on basic supply and demand, we can expect a reduction of performance here. But, at the same time, we see some on the right side of the pipe. It's hard to have a clear market overview here but I disagree with the valuation increases that I saw. That pushes companies, and venture firms, to be a little bit more early and take even earlier bets since there's so much competition laid in the pipe, and so much liquidity.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
VD: First, it’s rare to see pre-seed and seed stage funds that are industry focused. And, for this reason, we have a clear message, and generally the VCs we're talking to have a sensibility for that. They see the diversification and we translate it by saying, ‘We're building this commerce platform and so we offer this access to the leading brands and retailers and we're going to bring this reciprocity.’ That means the benefits go two ways: for portfolio companies, thanks to their access to this commerce world, they're going to bring value to the portfolio and vice versa. Our portfolio is going to bring value to their existing business. Being able to leverage our commerce platform is really one of the very strong elements of differentiation.
On top of that, we come with certain expertise because from an investment approach we've been doing that for five years already and before that we were former operators in this space. Not only that, we were coming from Europe, we spent extensive time in China, and now we are in the US, so it's also rare to have this blend and this exposure to markets that are really different in terms of maturity and structure and efficiency. What we've seen in Europe and in China can inspire some of our investments in North America because we only invest in North America.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
VD: Our two-sided benefit platform is also directed to founders and addresses the needs of founders to, again, land their first enterprise or smaller customers.
At this stage, the founder normally has many options to get funded today, and he is going to choose the one that's going to bring the muscle on top of their money. We know the space very well and in just the first few minutes of discussion, founder can perceive that we know what we're talking about, because we’ve already seen the challenges with other teams. So, in our discussions we can go a layer deeper than in a discussion with an investor that doesn't know the space. We go to an expert level very quickly with the founder and it confirms to them that we have some value add. It's a real comfort for them. And also maybe it’s the French accent effect, I don’t know.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
VD: It’s difficult because I love all of them. If I have to choose, I’ll highlight a few that are really inspiring.
One is Alloy Automation. Basically they are automizing the ecommerce web store and all the ecommerce players that are dealing with 10 to 15 apps, giving them a full monitoring of their activities. What was interesting about Alloy, not only their vision, but they had a team of really knowledgeable developers and engineers who are very well connected to the community of their future customers. They knew how to enter their future customers because they were coming from this world. It also resonated with what I said before about underrepresentation, because the CEO and co-founder of Alloy is a 22 year old woman. We were convinced by her grit and determination to make it happen. So, we found them very compelling.
Another example on the other side of the spectrum, in terms of your representation, is Olive, which we invested in at the end of last year. Olive consolidates deliveries from different purchases to reduce packaging and actually recollect the tool they used to deliver your product. So, it's a solution to all the cars and trucks that are generated by Amazon, as we can see on garbage collection day, everywhere in the streets. On top of the sustainable angle, they also address this notion of global consciousness that we talked about at the beginning. It is a massive and huge ambition and it takes a lot to make a difference; we need to have somebody that has enterprise access and this was able to scale quickly because it's a game of magnification and densification. Olive has been founded by one of the co-founders of Jet.com, who definitely has this ambition and this capacity. It was a perfect founder-market-product fit.
We invested in a company called Ravacan, which has a founder named Anne-Sophie who has an incredible, inspiring story. She the domain expertise of the product she wants to develop, which is a CRM for suppliers; they enable you to connect with your direct supplier when you're manufacturing and building a product. They’re a little bit earlier in the value chain, and it has the potential to create a B2B marketplace. But, going back to going back to the founder, because that was the main criteria here, Anne-Sophie is a former purchaser and she's been working in different industries and different companies, understanding the dynamics and the logic and always bringing innovative solutions to the problem she met. So, she decided to go to learn how to code and she became a developer after two years of training in order to be skilled enough to deliver the vision she had she had in mind. She’s now leading the company with the domain expertise and a deep understanding of the product and that, for me, demonstrates the greater variance I encounter after a massive problem that has not been solved yet and has a significant impact on the performance of a brand because it allows for control of their margin. It’s a significant impact for their clients, and their first clients really express their love for their product to the point where it made it very compelling.
VN: What are some lessons you learned?
VD: One is probably that I don't know what I don't know. Another element, and I realize that the dynamic that comes after it is just marvelous, is that we should not be shy to be bold or contrarian. That comes from a French person that maybe discovered the flavor of the American dream about five years ago.
VC is really a job for insiders and so you have to be able to build this network. And, of course, our job is the long term consideration, especially when you invest at a super early stage. So, my point is, what I’ve seen in the last five years, and especially with the pandemic experience, it’s necessary to anchor down and not to react to the short market movements, not to react to FOMO. It's more about how you grow, so it’s really important not to react. I know it’s super hard sometimes but the consistency is really important.
VN: What excites you the most about your position as VC?
VD: I get to interact with these beautiful, inspiring people that are our founders, peers and LPs. Venture is an ecosystem with incredibly skilled and talented people who want to always push it further, and so they’re always in the process of elevation. I think that's the true human nature, to elevate and allow others to progress. I have the ability to maybe be a better human, or a true human, when I put myself in this dynamic by interacting with these people.
VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?
VD: Maybe because we talked so much about my point of view, I want to highlight the fact that Interlace is a team, and I want to highlight the work of my partner Joe, who has been fundamental in achieving this vision of Interlace. Nothing could have been done without him. And, very recently, we had two venture partners that joined the team; the first is Vibhu Norby, the CEO and co-founder of b8ta. He's an incredible human, very inspirational, with a real connection in terms of values. He is a visionary thinker. The other is Sydney Werber, the former CFO at ShopShops. Sydney has also an incredible understanding of social commerce and video commerce from her position at ShopShops.
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