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Distributed Ventures funds startups in the fintech, healthtech, and insurtech industries
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.
Shawn Ellis is the Managing Partner of Distributed Ventures.
Ellis is a seasoned venture capitalist and managing partner of Distributed Ventures, an early-stage venture capital fund specializing in the fintech, healthtech and insurtech industries. With nearly two decades of experience spanning early-stage venture investing, operations, corporate strategy and investment banking, he helps accelerate his portfolio companies' revenue and growth in the initial stages of their life cycles.
VatorNews: Give me the big picture about the firm about what you're all about. Where do you fit into the venture ecosystem?
Shawn Ellis: Distributed Ventures is distinguished within the VC community in that we're a very builder-centric, strategically oriented fund. So, our DNA is in venture backed operating experience and deep expertise within the insurance and fintech sphere. I spent about four years in an operating context myself, and had been in an incubated concept that I'd built out with a firm prior to Distributed Ventures, so that gives you a sense of my DNA; I've been in the trenches firsthand myself. That's the DNA that's representative of our partnership. Adam Blumencranz, another partner, has a third generation insurance agency background, grew up in insurance, knows the industry inside and out. So, we've really got that rooted expert perspective in the verticals where we play.
The other distinguishing dimension is our LP base, and how we work with our LP base, which is a constellation of insurance brokerage, distribution, RIAs in the space, retirement entities that are in the space, and insurance carriers. So, we're playing in verticals where we also have expertise that we can tap into from an LP dimension. And then we can also leverage them to help accelerate the momentum of the early stage companies we’re working with, hence the name Distributed Ventures.
VN: You said you invest in insurtech and fintech, so those are your two main areas of focus?
SE: Yeah, insurtech and fintech, and I know that can bleed into one category for some investors, bu we think of those as two distinct verticals. We also look at things in healthtech or distributable benefits vertical.
VN: What's exciting about insurtech and fintech? What's happening in those spaces? Why do you want to invest in those in particular?
SE: You're dealing with slightly different dynamics in those different verticals: within the insurtech space, what you're seeing is an efficiency in the placement and understanding of risk in the experience around insurance products that really is a new day for insurance. It's exciting for all the constituents in the value chain, from the insurance broker to the carrier thinking about the right risk and the most efficient placement of that risk. I know some of the time when folks think about insurance, it may not be the most glamorous but, at its core, these are products that help people live their lives, or run their businesses, with additional security. We've looked at everything from underwriting efficiency to placement of risk, submission of risk to carriers, how ongoing risk is managed. The full value chain is up for grabs, and you're seeing really interesting innovation across that value chain.
Within the fintech sphere, you're seeing a consumerization that's really, really interesting. We've made investments in companies like Harness Wealth, which is really democratizing the type of wealth advisory and access to guidance that individuals can have, really trying to bring what, historically, has only been accessible to ultra high or high net worth individuals and make that more accessible to a broader swath of the population. So, some similar themes are there, like bringing financial security to the masses in a way that they, historically, haven't been able to access. And then we've got MoneyLion, which has really been focused on bringing financial security and greater access to products to folks that are on the lower end of the income spectrum, with digital access and banking for folks that maybe have never had it, or haven't had it in the form for quality that MoneyLion has brought.
VN: What about healthtech? Obviously, there's a lot that's been happening in that space over the last couple of years because of COVID. How has that affected your investing and what do you see happening there?
SE: We're big believers in virtual centers of excellence. That is the acceleration that we've seen in the digital health sphere. We've made investments in companies Vivante Health, which is focused on digestive health as a chronic condition and helping folks live better lives when they're struggling with those types of conditions. That's really a virtual care platform that can help folks with everything from understanding their digestive health conditions, to avoiding triggers, and accessing care when and how appropriate. We also recently invested in a company called Posterity Health, which is focused on male fertility. The irony there being a focus on male fertility is really a bet on more equal access to fertility care for the entire household. Historically, there's been more of an emphasis on the female side of the equation and, a lot of times, women are made to feel as though something's wrong if a couple is having trouble conceiving. So, Posterity is really leaning in and considering the male side of the equation with a virtual center of excellence focused on male fertility therapy or treatment, so that there's actually a care and support pathway for men that are struggling with fertility.
VN: Insurtech is often seen as a space that is lagging behind in terms of technology, that they're still using pen and paper and spreadsheets and things like that. So, there's a lot of innovation that hasn't happened in that space, but it seems to be happening now. Is that how you see it, they're catching up at this point?
SE: That's a super fair assessment. I mean, part of that is just legacy systems and systems that have dealt with pretty significant sums of money, and so a lot of carriers have been hesitant to disrupt those systems and processes. But, beyond that legacy tack and some concern about modernizing, a lot of carriers are starting to appreciate that they have a particular sweet spot for types of risks that they have a unique perspective on, and so I'm starting to see a little bit less concern about commoditization of coverages than there was when there was the initial onslaught, or the initial push, for API connectivity and more free exchange of data and quoting and binding. Carriers are starting to realize that's coming, like it or not, and they can pick their shots and how they want to play in risk markets. And so, there's a little bit more of a collaborative constructive tone than maybe we saw two or three years ago in this market.
VN: What are the trends you’re seeing in the market that you’re betting on?
SE: If you're open to it, I'm happy to speak to trends that I'm seeing in the funding market and curves that are prevailing. I know that's less industry vertical-centric, but it's been a really interesting environment for the last six months. Founders are finding terms that are not quite as rosy as they were a year ago, which may be a slight understatement, but in the long term that ends up being a really healthy development for the evolution of companies. They don't have such burdensome valuations to grow into and they're growing in much more of a measured, disciplined way. So, there is a return to fundamentals there that is healthy for the ecosystem. We had a bit of a disconnect from fundamentals for a few years and so it's certainly been a shot in the arm and, and a painful one at that, in the last couple of months but, when you look at companies of this vintage three, four or five years down the line, you're going to have a lot of winners that were seated and funded in this period.
VN: It's probably good for the companies that are coming in now, the ones that want to raise that funding; not so great, maybe, for the ones that already raised that funding and now have to raise a Series A or Series B at a lower valuation. They took that big valuation, so they might not take it down round going forward. What about those companies? What happens to them?
SE: That's a really interesting question, and I don't know that there's an elegant answer because I do think, historically, workout has not been a core muscle of venture. And so, it will be really interesting to see, do you have a subset of ventures with a little bit of a deeper pockets that is more comfortable stepping in, perhaps, to backstop some of these companies and get them on the right trajectory? I talked to a lot of funds, even larger, later stage funds that say, “hey, turnarounds are not what we do.” And there is a little bit of a vacuum there, which could end up being an opportunity for folks. Does that become a buyout play? I'm not sure that growth equity checks have historically played here because you may have to have a little bit more control to transition some of these companies to a healthier state and get them back on the right path, where capital is going to be a little bit more willing to come in.
VN: Let's talk about your fund. What's the size of your fund? How many investments do you make per year?
SE: We're investing out of our new fund. We're still in our fundraise, so we've got about $120 million committed currently. We do three to five investments a year and we're looking for more lead checks than not. Just because of the strategic perspective we have as an investment team, and the support that we can bring through our LP network, we can be more actively involved from a governance vantage point, and be in the room and able to help out.
VN: What stage are you generally coming in at? And what does that look like in dollar amounts, meaning initial check and then over the life of the company?
SE: Typically, we're coming in at late seed or Series A. We're looking for products that have been built, we're looking for some demonstration, albeit often very early, of revenue. Check sizes for us are typically in the low to mid figure seven range, typically, when we initially attach, and then we're reserving for follow on to be on the ride for the duration.
VN: So, it sounds like you want the companies to have at least some numbers, like ARR or some amount of customers. Do you have a minimum that you want to see from those companies at that point? Or does it depend on the type of company and other factors?
SE: There's no set minimum, it's more having a preliminary definition of how they want to go to market, how they want to price, how they want to bundle their solutions. What we've found is that it's easier for us to come to the table when the founders already have a view there and we can help them accelerate or refine it. But, if we're starting from scratch, that's where we're just not as effective.
VN: You don't invest pre-product, so how do you vet that product? What's the due diligence there?
SE: It's pretty deeply market driven. So, we’ll initially evaluate it strictly as an investment team, and then, typically, what we're doing is also tagging in our LP base and the subject matter experts that are in the front lines in the respective area where a company is selling, or the market they're addressing. We’ll plug in those subject matter experts, those champions, have the company sell to them as a true audience and see what the response is, see if it feels usable, see if the workflows make sense. How does it integrate into a broader technology ecosystem that that buyer might be leveraging today? So, it's super grounded in a market view and taking the perspective of actual decision makers and users of these types of software every day.
VN: I should have asked you this earlier, actually: are you investing in B2B or B2C or B2B2C? Where do you generally play?
SE: Typically, B2B or B2B2C. We’re open to companies that have had success in a B2C context and are interested in entering those other go to market channels. In fact, we use that as a fact pattern, because those companies have been able to get some power users that are really using the product heavily and they can iterate quickly. So, by the time it's getting to an enterprise context, this is something that's been refined and has already been out in the wild with users for a while. It's a rarity that we would be looking at something that's true B2C without the aspiration to enter those other go to market channels.
VN: Why is that? Why is B2C not an area of focus for you?
SE: It's just not a core competency that our investment team has today, that our partnership has today; we've really grown up in B2B and B2B2C contexts. We know those channels, know the dynamics, they’re more representative of the perspectives we have in our LP base. So, we're sticking to our knitting and what we know today.
VN: How do you vet the team? What are you looking for from that founder or that entrepreneur to make you want to invest in them?
SE: Typically folks that have been on the ride before, because it's a unique set of resource constraints and circumstances that you're operating in as a founder. So, that's key off the top. The other bit is looking for a founding team that's got complementary skill sets. Are there superpowers additive when combined or are they redundant? So, that's really key. Getting to know them; this sounds old fashioned and folksy but really spending time and getting to know them over a period of time is also super helpful. This is a marriage, it's a long journey , when we're attaching at the stage that we do; this is a five, seven year journey, you're going to be spending a lot of time in that partnership. So, from our vantage point, we want to make sure it's a good fit for all. And now just another thing, I guess, building on the notion of folks that have been in, in startup context before and ideally started their own companies before we're not, we're not exclusively looking for founders that have had super amazing accidents? It's always interesting to get into the conversation and really appreciate it. What did they learn in the journey before? what would they do differently the next time around? How would they build teams differently? How do they think about market conditions differently, and timing and risk as well? It's just really helpful to see someone who's been through the process before, been through the highs and the lows, because it's definitely a roller coaster ride, and they’re certain that that's the ride they want to be on.
VN: Do you ever invest in first time founders? Or is that not something you ever do?
SE: We definitely do. Everybody’s got to do it for the first time once and so we backed a number of first time founders when we were under the NFP Ventures umbrella, and even now in Distributed. It's always interesting when you're working with first time founders because you've got to really help them calibrate stylistically your approach and, just generally, what does it mean to work with an institutional investor? That's a different program. Even the notion of interfacing with the board, the governance dimension, it's all just very different from other contexts that folks have often been in. So, it's easier to know the shorthand if folks have been founders previously.
VN: So, do you want to have somebody on that team that's done this before? Is that something that's important to you? Even if it’s not the CEO, but at least somebody who has some experience in this and knows the drill and can walk them through it.
SE: Absolutely and, in reality, it's not so black and white, it's shades of gray, because you’ll have folks that have been at the table, who were the first 10 employees, or even have seen a company scale from 20 to 200 employees, and those are really important and junctures. But, yeah, you want to consider the team as a whole there. It's not as though we're just looking for the named co-founders and looking at their backgrounds.
VN: Let's talk about your LPs, which you mentioned a couple of times. Are they different from the LPS a lot of other funds go after? Are you targeting different LPs? And what's your pitch to them?
SE: We think of LPs in two categories: one are those that have a strong perspective based on their business and, typically, those are corporate or large insurance carriers, entities of that ilk. A lot of times what we find with those LPs is that they're looking for returns first, obviously, but they're also looking for an exchange of strategic and innovation ideas. What are we seeing as the bleeding edge in the market from our vantage point? What they are seeing as something that can be actualized at scale from theirs? And so, when we're thinking about that strategic LP class, it's somebody that's looking for anything from semiannual to quarterly to even monthly forum, where we're working through investment themes, we're engaging in specific diligence on companies, or, after we're invested in a company, we're working together to determine how we can best accelerate those companies and bring their value prop and the benefit of that into their organizations.
Beyond that strategic LP class, we are courting more traditional institutions, endowments, private family offices, folks of that nature that may just be looking for an exceptional return and exposure to different industry verticals in the venture class. So, we definitely have both of those categories in our LP base, but work with them differently.
VN: I would imagine from the strategic LP point of view, part of what they probably want is to partner with the companies that you're investing in, is that something that you've often encountered?
SE: That's another one where we see this intuitive, interesting opportunity to be at the intersection of interest there, between early stage companies and more established strategics, where we can structure things that benefit the early stage competence and benefit the strategies. We’ll have things like performance based warrants, so it's, “hey, we'll put in x amount of capital today, and we’ll unlock the right to invest more if we can demonstrate value to you, the startup founder, and everyone on your cap table benefits if we do.” And the reverse: the strategic LPs are benefiting from new compelling innovation that's coming into their organizations and getting some prioritization in terms of the partnership queue there.
VN: That's definitely one of the benefits for your entrepreneurs, that connection to those strategic LPs. What are some of the other things that you offer them? What are the ways that you differentiate yourself from other VC firms?
SE: It's that close partnership, when you've got an LP. Obviously the value prop, the pricing, everything has to make sense for the customer, the LP, but it's a very helpful, more friendly conversation than if they're coming into a large organization and pitching them cold, having to deal with legal procurement, all those things. So, this is a very applied model where folks can have a more friendly environment to build these muscle groups and appreciate what large partners are going to be looking for.
VN: Talk about a few of your companies and take a deep dive into maybe two or three of them. Talk about those companies: when they first pitched you, when you first met them, what was it about those companies that made you want to invest?
SE: The first company that we invested in out of Distributed Ventures, our new fund, was a company called Ascend, an end to end payments automation and process support play within the insurtech sphere and, specifically, within the property and casualty sphere. We were super excited about Ascend because it touched so much in the value chain that has friction within that PNC sphere. So, everything from payments automation, in whatever form is desirable for the insurer, the broker, the carrier. We're also integrating premium finance as part of that flow, so that's a significant value prop, and then commission and liability settlement between the carrier and the broker. So, that was an end to end solution, and it was super compelling. Andrew and Praveen, the two co-founders of Ascend, they had co-founded a business previously and had done so together, so they were experienced folks in the venture sphere, and had a really strong application for our largest strategic LP, NFP, which is an insurance brokerage.
Another is called Armadillo, which is a new home warranty offering. This came from a theme that we had related to the health of the home; obviously, with COVID, everyone's living at home, working from home, and the reality is you've got more wear and tear on the home as a result. Because folks are spending more time there, when there is an issue at home, it's staring you in the face all the time. At the same time, we've looked at a lot of legacy home warranty products and there were a lot of exclusions, typically very low attachment rate, and you're having to use the service network that's prescribed by the home warranty player. Armadillo had a fresh take on all of those dimensions. So, we've been working with Matan Slagter and the team there, and we’re super excited about that. Matan is a first time founder, but we were really impressed by his background and his co-founder’s background. Matan came from a carrier pedigree, had been involved in innovation very recently there, and had an underwriting background, so he knew these policies inside and out and how to construct a better form of coverage here.
VN: Tell me about yourself and your background. Tell me about your career and how you got into venture. Why did you choose this career?
SE: There’s two segments to my career: there's the pre-venture and after venture. The pre-venture, early years was a lot of professional services work; I started in investment banking coming out of college, did that for a couple of years, did some corporate venture and M&A work at McDonald's. I got my MBA, came out and was in consulting for a couple of years, again, doing a lot of M&A and strategic advisory.
I got to a point where I wanted to focus on growth and building things instead of thinking about cutting costs or how incumbents can respond to dynamics that they're seeing. I had the chance to connect with Glenn Tullman and Lee Shapiro in the early days, just as they were launching 7wire Ventures, and join them on the investment side. I was with them there through a number of deals, the best known of those was Livingo Health, as we put the seed check into what would become Livongo. Then I jumped onto the operating side, incubating a concept with another venture fund, and built that out from a whiteboard to a team of about 40, a handful of partnerships with major medical carriers, and selling through the employer benefits channel. So, I found myself in a very different state in 18 months from being at PCG, working in a very well resourced environment, with a lot of really smart people, and not a heck of a lot of constraints, to thinking about, “we're moving offices, we need office furniture, who's going to buy the office furniture? Oh, yeah, that's going to be me.” It's a very different reality 18 months later, but I learned more than I ever had in my career being in that operating role and working with some great folks, like Glenn and Lee. That's what really colors my perspective now that I'm back on the investing side of the table again, having been in those really early stages, and knowing all the things that you can hit your head against, and being able to see around some of those corners, so that you can help founders find traction and avoid some of the pitfalls, having been there yourself, that's really helpful.
VN: What are some of the lessons that you've learned over your career that you can now impart on those entrepreneurs when you invest in them?
SE: Certainly for the stage we play in, focus is incredibly important. Think about what you're trying to achieve at every stage of the business, almost in a hypothesis driven way. What are the handful of things that you need to establish or prove to advance to the next round and graduate to a broader product offering or market that you can affect? That's really key, thinking about that evolution in a really disciplined way, operationally.
The other thing is the Peter Drucker quote: “culture eats strategy for breakfast.” It's an incredibly hard run when you're founding something, especially in the early innings, when you're building it, it can feel like the deck is stacked against you. And so, recruiting a great team, building the right culture so that folks have resilience and grit and the fuel to keep going, that's incredibly important. It's been super interesting, the attention that's been given to founder health, executive team mental health, in early stage startups over the last few years. We've gone into a more challenging environment over the last few months, so that's where culture really matters, having a sense of what your culture is, how you're motivating your team, getting the right talent there, keeping them there, that's something that is really important to spend time on. I've seen some of the best built companies in that regard. So, certainly if you compare me to my investment banking days, it's night and day in terms of the appreciation and just realization of the importance of culture in companies.
VN: What is the part of being a VC that you like the most? What really motivates you to do this job?
SE: You're getting to see things created that never existed. You're changing folks' lives in ways that are incredibly profound, and that's just super exciting. That, for me, is what feels a privilege. Most days, I'm saying to my wife or my friends, “I can't believe I get paid to do this.” I could give examples for every company we're investing in, but to be able to choose your own adventure in that regard, and determine who you work with, and get to share in the problems they're solving, and support their success., that's a totally awesome privilege.
VN: Is there anything else about you, about your firm, the spaces you invest in, anything you want people to know?
SE: We are here to support folks in the realization of their dreams. These are their babies, so we're always interested in trying to determine how we can be helpful for folks, even if we're not investing. I know we're still a relatively new fund on the scene but I look forward to working with more folks and finding ways to bring more really compelling innovation to market.
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