Venture Investing My WayStuart J. Ellman Jan 15, 2011 Back to blog
“I invest in weird sh*t in big markets”
That is how I found myself answering some Limited Partners (the investors in venture capital funds like RRE) when they asked me in which sectors was I a specialist. This is an easy question for many of my partners, but not for me. Generally if RRE sees a storage business it goes to a partner with expertise and experience investing in that area. Same with adtech, financial services, location based services, consumer internet, etc…. But what about me? It really set me to thinking.
I have a non-traditional background for a venture capitalist. I wasn’t a computer science or engineering major. I studied Economics at Wesleyan and took some classical literature, religion, philosophy, and government. I didn’t work at a large tech company or a startup after college. I spent some time at McKinsey in Australia and then went to work at a small, highly regarded investment bank named Dillon Read where I specialized in LBO’s and restructuring. I went to Harvard Business School but could not get a summer job in venture capital so I went to work on a trading floor at Morgan Stanley. Failing again to get a full time job in venture capital, I was the junior guy of three founders (the grunt) in trying to start up a private equity firm. Two years after that I started a venture firm with Jim Robinson IV. Why? Because I didn’t know what I didn’t know. But I did it anyway. I did not and don’t think of myself as a technologist but as a business person that utilizes technology to build great businesses.
In sixteen years of investing, I have always tried to invest in great businesses in large markets with the best entrepreneurs. And one thing I’ve learned is that the great deals come where they come. Several of my partners create thematic maps and look at all the companies in various spaces. That’s a good way to invest and they do well identifying promising companies by trying to think forward along trend lines, but it’s just not how my brain works. My deals come in through bike rides, golf outings, non-profit boards, former entrepreneurs, former students at Columbia (where I teach), venture capital friends, just plain friends, and people that I randomly meet. One thing is in common with all of them: I need to either trust or learn to trust them. My brain processes what sectors are interesting, which are tired, and which are to come. Then I look at the sectors I have invested in over the past sixteen years, and they are numerous. To try to take a cut at them let’s say: enterprise software, enterprise hardware, SAAS, mobile, safety, location-based, payments, B to B exchanges, B to C companies, content, consumer green, publishing, database tools, storage, backup, SMB, middleware, enterprise application integration, group buying, anti-spam, authentication, identification, security, zigbee chips, smart meters, active security, enterprise marketing, and many more that I cannot even remember (or perhaps try to forget like furniture.com).
When the LP asked the question of my specialty, I immediately thought of three companies that I am actively involved in: Recyclebank, Payfone, and Betaworks. I made each of these investments for essentially the same reason: great entrepreneurs and huge markets. Let’s take a quick look at each.
Recyclebank came in through Ron Gonen, the co-founder and a former student of mine at Columbia Business School. Ron had figured out a way to pay people for recycling their garbage. It was barely a technology company - it seemed more like a garbage deal. Today, Recyclebank is the largest green incentives program in the country and is killing it with an amazing new CEO, Jonathan Hsu. But, it came in as a garbage deal from a former student. Not exactly thematic.
Payfone is another example. RRE had invested in Rodger Desai as the founder of Rave Wireless and I thought he was a huge talent. When he was ready to move to the next big thing I paired him with another former student, Michael Brody, and told them to stay in my conference room until they and I agreed we had a deal to fund. After six months of intense collaboration, Rodger and Mike had come up with a revolutionary way for people to pay for things using their mobile phone’s account. Today, Payfone is a tremendous company. Again, great entrepreneurs working with me to find the right space. Is this a thematic investment? It certainly fit a mobile payments theme at RRE, but that was really more by accident than anything else.
Last, let’s look at Betaworks. The two founders, John Borthwick and Andy Weissman, have been friends of mine since college. They are brilliant and awesome. But their business plan was full of BUTS. But, is this a holding company? But is this an incubator or an accelerator? But how do you make money here? Here is what I know. They are experienced, smart guys early in the real-time social media space. They had some core intuition around ideating and creating web services and were building an important brand and an important piece of New York City’s emergent tech ecosystem. And yes, they have killed it.
In all three cases I am extremely excited about my investments. I don’t necessarily work the same way a lot of my peers in the VC industry work. Many of them are steeped in the tech media and try to tease out what’s likely to be hot next. That is just not me.
Over the past two weeks my firm had an offsite where we looked at the themes we would pursue over the next year. I asked my partners if I needed to become a more thematic investor. They gave me some sage advice. In sixteen years, my track record stands for itself. It works for me. My mind assembles an investment thesis, turns down others, and pursues what will be profitable. It just does it in a different way than specialization or thematic maps. My firm invests thematically along a variety of fronts, but I tend to go after contrarian or even oddball ideas..
I would like to quote Michael Kaplan, now a successful founder and CEO of a great retail chain called Fashion to Figure. When Michael was 24, he worked for RRE as an analyst and said, “I am too old to work on my weaknesses, I need to build on my strengths.” Michael, I agree completely. My strengths are finding great people, learning to trust them, and working with them to come up with really differentiated ideas that can take the market by surprise. And by storm.