A Master Class In Venture Capital with Drive Capital's Chris Olsen

hi everyone i'm chris olsen and i'm the founder of a venture capital firm in columbus called drive capital thank you for having me today please take what i teach you today with a grain of salt these are my own interpretations um based on what i've learned in my experience as a venture capitalist so please forgive anything that you might hear from me today that might contradict anything you hear from other people that should be something that you should expect in this industry and we'll talk about that in a little bit i want to take the time to say thank you to sandy and christine kemper for putting together the yep kansas city program and i also want to thank jesus garcia fuentes for running the program and inviting me here today it's i think programs like these are incredibly valuable i'm thrilled that you all have the opportunity to take classes like these today and i really want to thank sandy and christine and jesus for for really making this happen okay now let's plunge in so what is venture capital i actually didn't know what that term meant when i was a kid that was like something that i would read about and i would see it in newspapers but i didn't actually know what it is so let's take a step back and talk about what it is venture capitalists are people who invest in entrepreneurs now there are a lot of different types of entrepreneurs venture capitalists usually invest in the riskiest kinds of entrepreneurs the reason for that is there are other forms of investment and other forms of capital that most entrepreneurs are going to use to build their business so let's start with a very simple example something that you think about a main street business let's say it's a it's a fashion store so an entrepreneur has an idea and she wants to open a store on main street what she's going to need to do is to go out and she needs to fill her store with stuff for customers to buy products for customers to buy well there are a lot of people who have a good understanding of what that store might look like because there are a lot of these stores already and banks oftentimes for example you can go to the bank and you can say hi mr banker i'm trying to open a store and i need a loan because i need to go buy inventory that i'm going to sell to customers the banks will say what kind of inventory they will typically say it's jeans or t-shirts or whatever and the bank will say i know what that is and they will give her a loan to start her company so now she can use that money to go out and sign a lease she can use it to start paying employees she can use it to acquire her inventory and she can get her business up and running and she can start getting customers okay that works in a business that's that's very well understood however there are a lot of companies that have never existed before so you go out and you can't get money from a bank you've got to try other sources well you can try going to friends and family well the problem with that is that these are your friends and these are your family and if they're not professional investors and so one of the problems is if you lose your mom and dad's money that's mom and dad's money and there's a lot of things that are problematic with that so what has emerged is this class of investors who are out there that are called venture capitalists and venture capitalists like me are set up to basically invest in businesses that have never existed before and my business my venture capital firm is built in a way where i can afford to lose money on investments not all of my investments have to work out which enables me to take more risk on investing in things than other people would typically be able to invest in why is that really important well let's talk about these startup ideas a lot of you probably are entrepreneurs a lot of you probably do have great ideas and a lot of them are probably very investable the reality is when you do the math and you look at startup companies the ones that are backed by venture capitalists professional investors like me on average 75 of businesses of venture-backed businesses fail i mean they go to zero now these companies are raising lots of money you know not hundreds of thousands sometimes millions and millions of dollars and it's gonna go to zero this is why asking mom and dad to invest in your business is not a good idea if mom or dad were to put a million dollars into your company and it were to fail probably a tough conversation at thanksgiving whereas a venture capitalist can be set up to absorb those losses and i'm set up to absorb those losses because not while the 25 are going to be successful not only are they going to be successful they have the chance if i do my job right to be incredibly successful i mean beyond your dreams successful nobody thought that amazon microsoft google would all be worth a trillion dollars that is a remarkable amount of money this has never happened before in the history of humanity and the fact that now that's a possibility means that if i invest in just a couple of those winners it more than affords me the 75 that will fail now the reality is i have to come up with money in some way shape or form before i can invest in these startup ideas so where do i get the capital the only way venture capitalists can be successful is if i can build an investment product that is competitive with other places that big institutions think about like the biggest pools of money on earth think about um you know the pension funds think about the the gates foundation think about these enormous foundations and things think about they can invest in just about anything if i can build an investment product that can create a return for them that is better than other places they can invest it then they will take their money and they will trust it to me to invest and create that return for them so what that means is that i'm in a lot of competition right now and i'm not just in competition with other other venture capitalists i'm in competition with every other thing that a big pool of capital a big investor could put that money into and they can invest in anything let's take an example let's let's use the the gates foundation it's a wonderful example this is a multi-billion dollar foundation if you're if you're running the gates foundation and you're going to invest that money into an asset you're going to evaluate everything and you might look at treasury bills and say that's a great way if i'm investing a billion dollars i can make a guaranteed return from the u.s government that will be fairly modest but it's i'm not going to lose money on that like that's a very very safe investment for me to make i can also invest into other things i can invest in real estate i could also invest into the stock market the public markets and stock the public stock market is historically been a very very attractive place to invest so me as a venture capitalist now i have to recognize when i go in and i pitch a foundation that i'm competing against all these other places that the foundation could invest its capital now i have to give them a return that's better than all of those places and i just told you that 75 of the money that i'm going to invest is going to go to zero so let's talk about how that math actually works and how do i create a return that works for the investors in my funds let's assume as a venture capitalist i'm going to raise my fund let's use an example of a 300 million dollar fund now on the surface 300 million dollars is an awful lot of money however remember i've got to create a return that's better on that 300 million than all of those other places and there's going to be some cost to that 300 million dollars the first cost is i have to pay my team people don't work at drive for free i would love them to do that but they're just not willing to do that and in fact i need to get a really good team and that team is really expensive so to afford that team i have to charge a fee on that 300 million dollars of investor money so the way that works is i charge a management fee every year of 2 i tell lps i'm going to be around for 10 years so simply assume i'm going to charge 2 percent for 10 years that's 20 so right away of that 300 million dollars 60 million of that is going to go to the expenses of running the fund now that means i've got 240 million dollars that i can actually invest okay well now there's another cost while 75 percent of uh startup companies venture-backed startup companies fail historically if you're a good venture capitalist you can do a little bit better than that let's assume about 50 but still half of the money that i invest is going to fail now i can only invest 240 million dollars so half of that 240 million dollars is going to be worth nothing now take that 240 subtract half that's 120 now i'm down to 120 million dollars that's actually going to be available to generate the return let's talk about what does that 120 million dollars have to be worth okay well the venture capital firm the venture capital fund that we committed to limited partners those are investors in a venture capital firm are expecting this return to compete with whatever they could put in the public markets and they're not going to pay a fee on whatever they could put in those public markets so let's take that 300 million dollars and let's invest it in something like the public markets and let's run it forward for 10 years if you do the math on that that 300 million dollars by the end of that 10 years which is a really long time that 300 million dollars should be worth about 1.5 billion dollars if i've done a good job of investing into public markets and not had to pay any fees right so that's my competition i have to generate a 1.5 billion dollar return to those limited partners but remember i have to generate that return on 120 million dollars that's 11 times the money that is actually invested to generate that kind of return and if i can't do that then the institutions in the world they're just not going to invest in venture capitalists they're not going to invest in me they'll invest in those other alternative investments that they have access to which gives you a sense as to like the kinds of investment opportunities that i need to look for as a venture capitalist if somebody an entrepreneur shows up and they say to me this is a really good way to make two times your money doesn't work i can't get my return from that if they say this is a great way for you to make 10 times your money almost there but that still doesn't quite get me there like i need these investments to produce returns that are at least 11 or 12 times that investment that's a really hard thing to do on any one company on any one investment anywhere like most people just that doesn't happen in life very very often as a venture capitalist though i have to go out and find a portfolio a collection of those businesses that are going to create that kind of return and that's a really really hard thing to do but if you look at this historically what you'll find is that the venture capital industry has been able to produce returns that are better than those of the public markets even with the fees even with the losses so how does that happen okay well the first thing that you need to understand is that i need to set my firm up to be able to go out and identify where those opportunities are so let's start with where they've occurred for the last 20 years i'm going to invest for the next 10 years let's look at the last 10 or 20 years and understand where have those returns come from historically technology has been a wonderful disrupter of traditional industries so think about the brands that we talked about if you think about what google has been able to do a lot of the money that google generates in revenue today from advertisements previously went to the newspapers but google came out with a technology product that basically instead of giving people information through a piece of paper that they would go and pick up every single day they said i'm going to take that information and give it to people on a screen and i'm going to give them that information and i'm going to sell ads against it they were using technology to disrupt a traditional industry and usually that happens at the advent of some remarkable technology now these things did you probably seem like they're they're this is what you expect like you you kind of you cut you you guys all have smartphones in your pocket to me i'm like oh my gosh the amount of technology that is in that smartphone and the amount of multi-billion dollar companies that were created prior to that smartphone is astounding think about the inventions that had to happen you had to have the invention of semiconductors you had to have the invention of the computer which happened in like this happened in like 1936 that's a long time ago 1936 was the first computer that was an enormous shift and that created a company like ibm that is worth hundreds of billions of dollars after that you had the advent of the personal computer so this is a computer that people could actually have in their homes which to you you're like well i've got them in my pocket this was a big big deal and in 1983 what you saw was the advent of personal computers and the advent of microsoft which was the software that ran on those personal computers then in 1984 you had the advent of the laptop an apple computer really came into its own and produced a computer that could fit on your lap well then those computers all got connected and you had the advent of the network well that was a local network and then there was a wide network and then there came the internet where every computer was connected to every single thing like the every time these happen you had the advent of uh of cisco in the case of networking in the ad in the advent of the internet you had the advent of browsers and multi-billion dollar companies like netscape and then google and then in 2007 another tectonic shift was in the form of smartphones where you could take a what would previously have required a building and multi-multi-million dollars you could give people for a thousand dollars a supercomputer that fit in their pocket has access to all of the world's information and everything on that every time these things happen they are highly highly disruptive and the reality is while everyone sees these disruptions it's hard for bigger companies to take advantage of these things the reason that they struggle to do this the reason that the new york times or the newspaper companies didn't invent google was they had no incentive to do it in the early 2000s if you were to go to a newspaper company they wouldn't think that their business was broken they would tell you that we're more profitable than we've ever been why would we invest some of our profits into this risky thing that is the internet to organize information like what if people don't adopt the internet there's just it's just really hard for big companies to move quickly to take advantage of these trends which creates the opportunity for startup companies to go into these trends and if you look through history now what you can see is this is played out again and again and again and in particular technology has this knack for reinventing itself and then it reinvents these platforms and then it fundamentally changes the way that people do things think about you know uber i mean technology has changed fundamentally changed the way that we have we that transportation occurs that we move around the world amazon has changed the way that we that we shop so what you can see here is this is this is a remarkable shift and it happens in incredible short periods of time when that happens there's the opportunity to create enormous amounts of value in fact if you add up all the value of all the technology companies in the world technology is the most valuable invention in humankind it's more valuable than oil it's more valuable than automobiles it's more valuable than airplanes it's more valuable than the entire banking system it is the most valuable invention that we have ever run across so as a venture capitalist that's attractive to me because i have the opportunity now to go invest in startup companies that are going to take advantage of this and they're going to move faster than the big companies and if i get it right then they're worth an enormous amount of money let's talk about what these things look like almost every time somebody comes in to drive and i ask them they've never worked in venture capital before and i ask i'm gonna train them to be a venture capitalist i ask them what do you think a startup company looks like and they always give me the same answer and they give me some fancy company with some fancy logo and what they end up missing is that those companies don't start like that in the beginning these companies start out very very humbly most of the founders of the most successful companies were college dropouts who never had formal training had never run a business before they were first-time entrepreneurs they were first-time founders and frankly they weren't starting a company in the beginning they were super passionate about solving a problem that was so important to them they would do it if there was no money like this was they were just doing this because it was what kept them awake at night so as a venture capitalist that's what i'm looking for you know you think back to what larry and sergey looked like like they didn't look like this big mega campus they looked like two guys who had this very simple concept that was they wanted to organize the world's information their first product this is something you you guys probably think about i could draw that in powerpoint and you know what you could you definitely could these first products they're very very simple this is the first product that google ever shipped it's super super simple steven steve here in this picture this was a club at stanford there was a club at stanford that said hey we're interested in computers and we want to try and build a computer on our own at home and steve and steve got together and they built their first computer in their garage and it looked like this if you were to look at this first product you would probably not ever expect that this will be a trillion dollar company the way that they got from here to the trillion dollar company is they were pursuing their passions they didn't know anything about revenue or profits they didn't care they cared about the ability to take technology and to package it in a way that other people could access it these two guys started a company that said we're going to build a bank that is for e-commerce merchants to accept payment online and it was super clunky it was it was like the worst product experience you'd ever seen but you iterate that forward and today paypal is one of the most important digital payments companies this guy started a company that was very very simple he was frustrated that he couldn't recruit people it was frustrating to him that he would try and hire people for his business and the only people that would apply to his business to to work for his company were people who were looking for jobs who were these are people that were not the top performers so he wanted to build a passive way for people to be recruited and he built this product you might not even know this product yet because you're too young and you probably don't have a linkedin profile but when you start using linkedin you compare it to this today it's pretty remarkable to think about what this thing looks for this guy had a very simple concept his concept was i want to sell books on the internet it wasn't global domination it wasn't i want to deliver everything to everyone it was i just want to be able to buy a book online on the internet i mean which is kind of interesting because you would think probably well why wouldn't you just buy a digital book online but they didn't exist there was no such thing as a digital book if you wanted a book you had to go walk down the street into a bookstore and you had to pay for whatever book they had in the store what jeff did was he came out and said i'm going to change all that i'm going to have the world's biggest bookstore because i'm going to ship everything from one giant bookstore to everyone's house and obviously today you know that company as amazon this is their first product which is pretty comical you know i know you know amazon so look at this website this is an example of what these very first products look like and this is what we're looking for this team started with the idea that they could rent out their couch for one night and somebody would come and sleep on your couch a stranger you would invite a stranger into your house and they would sleep on your couch and you would meet them and you would give them an experience and this would be a fun thing for you to the venture capitalists almost all the venture capitalists in silicon valley this was this was stupid well today airbnb is renting out more hotel rooms than any other hotel company combined i mean it's kind of amazing to think about this these early these zany ideas though sometimes they need to be you need to believe in the entrepreneurs and you need to see that they've got the capability to pursue their passions in a way that they will they will build something the world has never ever seen before if you invest in these companies what you need to understand is that you're signing up for a lot of failure too along the way each of these products that you see here are you don't know them today because they look very different today because they were the first versions of their products they were the first crummy product that they were going to shift it was think about it this way an entrepreneur whatever their first product is it's the worst product that they're ever going to ship and the ones who understand that the ones who understand that i'm going to ship this and then i'm going to i'm going to iterate through the next and the next the next and the next the next they're constantly looking at the future and they're constantly capable of uh of improving these things so how the heck do you find the next entrepreneur well turns out as a venture capitalist who has raised a big fund let's go back to that 300 million dollar example a lot of people come and find you in fact a drive just to give you an example every year we get about 3 500 inbound requests from entrepreneurs asking us to invest in their businesses it would be very easy to assume that the best thing for us to do is to just filter all these business plans and we'll just read them and we'll look for the good ones in there if you asked me to do that i couldn't read a business plan and tell you that this is this is the right company to invest in one of the reasons for that is those inbound investments that come in they're totally random and if i was to go through them all i would or take meetings with them all my day would be filled with just total randomness i would meet with a social networking company and then i would meet with a cyber security company then i would meet with an artificial intelligence company i would have no idea if this is a good company or a bad company but every entrepreneur would give me the great pitch about why their company is going to be so valuable and why their hockey stick graph is up and to the right and why that is going to be the way for them to build the next huge company and that i should be an investor in that and that's a recipe in my opinion for disaster contrary to that what we do instead is we try and understand something about these industries so what we do at drive is instead of reacting to all of those inbound investment opportunities what we do at drive is we proactively go out into the market into areas where we have a high degree of conviction that this industry is ripe for disruption because we spotted some other change one example that we can give you here at drive capital was in 2013 we looked out at unstructured databases unstructured databases were a new technology for the way that you could meld information together and we said hey this is really valuable if somebody could use these databases to better price risk then they would build a very valuable company and one of the places we saw that opportunity was in the insurance industry because traditional insurance carriers the big ones that you all know whether it's geico or nationwide or whomever they weren't using this technology to price risk they were using all of their old models their old their legacy way of doing things we went out into the market we talked to every single insurance startup company that we could possibly talk to proactively i picked up the phone i cold-called entrepreneurs i cold emailed i called message people on linkedin i'm hounding these people and telling them hey i want to talk to you about your business i want to learn more i want to learn more i want more by the time you talk to a hundred of these startups patterns start to emerge and you start to understand that all of the companies that are building things a certain way they look very similar and there's a an average thing that's in there well don't don't invest in average that's not going to work what will also emerge from that pattern is there are one or two companies that are growing exceptionally more or they might have a product that is just so new but it's such a great idea it's so different than what everyone else is doing but as a venture capitalist you've got to invest in that you have to give the on you have to trust that the entrepreneur is right and you need to make sure that when she gives you that pitch that she knows more about this market than you do if you do that then you're going to have the ability to invest in things that nobody else is investing in and that gives you the opportunity to build something that is special that is different from the rest of the market but this effort is very it's very unglamorous most of the time i talk to companies that are not going to be investable a venture capitalist will invest in maybe let's say two companies a year max maybe four so think about how many conversations do i need to have with other entrepreneurs to identify those four we're talking about in the thousands of conversations so a big chunk of your day as a venture capitalist is going to be spent going out and proactively mixing it up with entrepreneurs and hearing their story mixing it up with researchers and hearing their story mixing it up with big companies because they're in this mix too and you've got to be able to identify what's going on in the market but when you do that those patterns that i was describing emerge and now you start to identify the company that matters and there's a reason for that over time what will end up happening is the market defining company will garner the vast majority of the value and the number two in that market they might get some but nowhere near as much as number number one and then there'll be a whole bunch of other folks well as a venture capitalist the problem is people don't acquire the number three or number four in the market you know they they're a lot of times gonna muddle along and that company's certainly not gonna go public so i can never exit that investment i'll never be able to sell it however if i'm a shareholder in the market defining company then i have the opportunity for that company to be a public business where i can get liquid or for that business to be acquired by another company who looks at it and says this is an area that we need to develop new products in they might acquire that business so to go back to our unstructured data example we scoured the world for insurance companies and frankly we couldn't find one they it didn't exist we saw this technology and we were dying to find a company that was was taking advantage of it and it didn't exist but we did meet a founder and a guy called alex tim showed up at our offices and told us about how he thought this was a great idea and there was no business plan there was no company nothing existed but we invested a little bit of money and we gave him an office space and we let him get to his first product that first product is now a telematics based insurance company called root insurance it's valued at several billion dollars and we wouldn't have been able to do that though had we just invested in number two in the space there was there were companies that were out there don't get me wrong there were there were competitors there was a company in san francisco called metro mile that we we could have theoretically could have invested in that company but we looked at it we said that we just wasn't different enough it was it was too much of the same whereas when we met alex and we saw what his vision was we said that's something different and that's something that nobody else was doing and so that led us to invest into that company hopefully that gives you a sense for what we're looking for and where to find these investments while there are patterns in here every situation is a little bit unique and you need to be incredibly creative as a venture capitalist around making those investments work so sometimes you do all this work kind of give you the example of unstructured data the the right investment opportunity was a startup company well sometimes it's not it was sometimes it's a company that already exists but you call that company and they say you know what i i don't need any money my business is already working well if you tell me that as a venture capitalist now i'm really interested in your company because it's obviously going really really well and as a venture capitalist a big chunk of your time needs to be creating investment opportunities into businesses that may not necessarily need an investor that don't necessarily need the money and that's a really challenging thing to do but you can do it but you need to offer something that's a little bit different than money or a lot different than money in a drive what we really look to do is offer our ability to be a business partner with the founder not only somebody who's got cash but somebody who's like-minded somebody who has made a ton of mistakes in the past and we've made a ton of mistakes and we can use those mistakes to educate entrepreneurs about how we've messed things up in the past and hopefully enable him or her to not make those same mistakes again we also have the ability to help you hire people so we have a program here at drive our talent program where we are tooling ourselves to show up to a entrepreneur and say that next vp of engineering or that next engineer i can help you get that next engineer i can help you get that next head of sales and we've got an infrastructure that can do all that stuff oh and by the way i can teach you how to interview you've never remember we're back to anybody who's never done this before how do you know what a great head of sales looks like how do you know what a great vp of engineering looks like well we can introduce you to great ones and you can now having met a bunch of them we can teach you how to interview them we can also introduce you to a lot of people so we have a big rolodex here at drive and not just the company that we're investors in but we make it our job to be able to get entrepreneurs and audience with anybody in the world and we say that everybody in the world is one to two emails away and we can use that to set the entrepreneur up to get that audience and then also by the way not just get the audience let's strategize about this meeting you're about to go meet big person x who you want to be a customer or you want them to be a board member you want them to be an investor in your company before you go to that meeting let's talk about that let me train you as to how to make that meeting go really really well so when we start to call these entrepreneurs and we start to offer these other services to them for which we charge nothing by the way we are offering those services in exchange for the ability to be an investor a shareholder in their company that will oftentimes create a dialogue that an entrepreneur will say you know what i like you chris and i you've been very helpful to my business and a lot of time i have to do favors for people before i'm ever an investor in their company in exchange for that down the road i will have the opportunity to become a business partner with that founder and the medium for that exchange is our our opportunity to invest in that company so you've got this conundrum as a venture capitalist that you need to solve for which is that oftentimes the most valuable companies are the ones who don't need the money and you need to be creative around how do you listen to that entrepreneur and how do you hear what she needs and then how do you set yourself up to be able to offer the solution to whatever that problem is and you need to do it not just when the company's teeny tiny but you need to do it when the company is big right you need to be able you need to be relevant to these entrepreneurs for 10 years so you need to build a reputation and so it's really important as a venture capitalist that you kind of need to be a good person and that doesn't mean you tell everybody what they want to hear all the time but you need to be very straightforward with people you need to be very truthful with people and you need to do very simple things like just do what you're going to say you'll be you'd be surprised at how many people as you start in business show up and they promise you that they're going to do something and then they just don't do it so you need to be in the differentiate yourself from all these other people that are in the world and if you do that then you will have the opportunity over time to invest in the very best companies we've been able to talk about what we're looking for we've talked about where it might live we've talked about how you might be able to invest in those things now let's talk about what does it actually take to build these companies and what's your role in this as a venture capitalist well let me tell you what your role is not your role is not to run the company at all if you're running the company if you're making operating decisions as an investor in these companies that's a really bad situation you see a lot of venture capitalists who they might be on the board and they think that they have to make the operating decisions and it goes horribly wrong and as a venture capitalist one of the things going back to what i said earlier is you need to trust that the founder is going to make the ceo is going to make the decisions how to run the company your role is as an advisor your role is to give the the ceo the information that they need to give them any tools that they need but ultimately you also need to know at the end of the day it's her choice as to what they're going to do how she's going to run her company and you need to you need to understand that your role is is to support that and not to to be that so it's super super crucial the other thing you need to know is that along the way there it's not going to go to plan i promise you remember 75 of these businesses fail and it's not because we don't try and do everything right in the beginning we try and do absolutely everything we know how to do everything to plan everything and and to make sure that it goes the way that that we want it to go but the challenge is that you know as much as you build a plan and you write it all down and you communicate it and you ask everybody to do all these different things at the company the reality they don't always do that you know companies don't startup companies in particular don't look like everyone is rowing in the same direction most startup companies look a little bit crazier there's no straight lines here because you're hiring people to a startup company well you'd be surprised how hard it is to hire somebody into a startup company but you're asking people to say no to that job that they could get at big company x that's never going to go out of business that their parents think is a great company and you're asking them to show up at your company well they need to take a risk and a lot of times the people who are excited to take risks they don't necessarily always want to follow orders and so you need to be okay with that you need to be okay with enabling entrepreneurs to have these cultures where there's a little bit of chaos there's a little bit of these things and the result of that means that oftentimes companies they they struggle to hit their product timelines and the the team doesn't always get along and sometimes they ship products that the market doesn't want and the result is as a venture capitalist now your role in this is you need to continue to support the company as much as you can doesn't mean that you just write a check every single time they ask for it but it means that when the first bump in the road comes you're not running for the door and saying i'm out this is too scary it didn't go how i thought it was going to go i'd rather go back to a safe safe haven it means that when the bumps come that now is when you really dig in and you you help that entrepreneur iterate through this problem and if you can do that if you can help an entrepreneur go through their problems then you're helping the company grow through its problems and hopefully the company can develop a muscle like a what you would at a gym of problem solving and if they're able to do that then whatever the next problem is we're running out of money the customers won't buy the product we can't hire any engineers we you know whatever covet 19 happens whatever that problem is this team has now developed a problem-solving muscle that they're they're capable of doing and they know that they can do that because their expectation is not that oh my gosh if we get this wrong the board's going to fire us all like that that cannot be the expectation is going to be we have a very supportive board who's going to help us and they're going to do whatever they can to solve whatever this crisis is that only works if you as a venture capitalist are able to keep a steady hand in all of these times of crisis okay another thing you need to be prepared for is that the products that you're going to invest in are not going to be the products that are going to create the return that you need to be a successful investor and let me give you some examples this is an example of uh of this app called bourbon how many of you ever heard of bourbon not the drink the talking about the app almost none of you right well what happened was this team took this app and they shipped it into the market um and they put it out there and basically the world said no thanks so what did the team do did they you know did they shut the company down did they go to the market and say you're wrong you need to do this no what they did was they took the feedback from the market and they came back and they said the market doesn't want this product let's take it but we have a really good engineering team let's take our engineering team and try and pivot the company into a new product and so one of the things that they were excited by were filters on phones so smartphones today take great pictures the very first ones did not take great pictures and they developed a series of filters so that a mere mortal could take a picture and it looked like it was done by a professional photographer well the market loved that and so they built more filters and more filters and more filters today that company is called instagram how about the point have you ever heard of the point i'm guessing not because the point is a failed marketplace for people to go and get products that were that they could fundraise for products that hadn't ever shipped yet so this you know i started with a lot of nonprofits the world didn't want it until all of a sudden somebody listed a pair of pink fuzzy slippers on the website and the market took off for it there were these pink fuzzy slippers and they were selling them at a discount but only if enough people showed up to get them well the team saw that and then they pivoted from this fundraising website to hey maybe we should offer discounts for these kinds of services or for other slippers or other things that are out there and they started this thing called groupon where you could get a group of people who would show up to a business and if you've got the group then the the uh the merchant would be willing to sell the product at a discount this is now a multi-billion dollar company um audio odio was a podcasting app not a bad idea a lot of podcasts like why wouldn't people want podcasts but they put this product into the market what they discovered very quickly was it just didn't the market wasn't ready the technology wasn't there yet the content creators weren't there yet the bandwidth wasn't there yet and so they pivoted they pivoted to a product that was very very low resolution there was 140 characters that was this crazy idea but they got that idea because they saw that the market was rejecting the rich media and they were they were saying they wanted a really light touch form of communication and they launched twitter which is obviously now a multi-billion dollar company the lesson from this is products at startup companies iterate they change very very quickly and if you're going to be a venture capitalist you need to be okay with that you need to understand that the only constant is change and that every day is going to be uncomfortable like you have to be comfortable being uncomfortable otherwise you're just not going to be successful in this role the good news is if you can make it through all this stuff it's worth it in fact some of the most successful people in the world are venture capitalists at the firms that are these household names firms like sequoia or andreessen or benchmark or excel these firms are very very successful and they're able to put together these programs of investing that consistently outperforms other investment products that you could ever receive in the world some of the best venture capital funds they don't return a you know that go back to our example of 300 million being worth 1.5 billion some of the very best venture capital firms return multiples that are like 20 times your money so think about that i'm not talking about 300 million dollars being worth 1.5 billion dollars i'm talking about turning that 300 million dollars into 6 billion and they're able to do that because they execute against all the things that we've talked about here and the run is worth the race because when these companies are successful they're way beyond our expectation even at sequoia capital where i worked for a long time where we had been the original investor in apple in google in so many other uh electronic arts go down the list almost you know so many very valuable companies there was no memo floating around sequoia that said linkedin would be worth 26 billion dollars that was just beyond our expectations like it it wouldn't fit in the spreadsheet if you built the spreadsheet and you guessed how valuable linkedin would be and you looked at how the revenue growth went you wouldn't guess that it would go like this and then all of a sudden it would exponentially grow it just was beyond the realm of thinking that through and it's important to understand that it's important to understand as a venture capitalist that when these things work they will absolutely defy your expectations everyone's expectations frankly for how valuable of a business they they can become you've seen this repetition of this really occur in silicon valley and historically what everyone has said is you got to go to silicon valley to do this well you're not in silicon valley you guys are in kansas city i have some good news for you those are the old days today you don't need to go to silicon valley and in fact that's why i'm here is because the best investment opportunity for venture capitalists today is actually outside of silicon valley it's in other places where there's never been any venture capitalists before which in the venture capital community is kind of crazy to them in silicon valley this is the only place that was when we started drive capital that's what people said and they said that because really if you're going to build a technology company you're going to invest in technology companies you need access to engineers and it used to be said that you could only find great engineers in large quantities in silicon valley well the advent of the internet has changed this whole thing in particular the advent of cloud computing has changed this whole thing where now the specialized engineers that used to build the infrastructure for technology companies have been completely commoditized and you no longer need these specialized engineers that only did exist in silicon valley now with an internet connection and a credit card you can rent all of that infrastructure and now you as an engineer or you as a founder you can build your company where the customer lives well the customers don't live in silicon valley silicon valley is great there's a lot that goes on there but if you look at who are the biggest industries and where are they based do you think about banking financial services you think about health care you think about transportation you think about aviation you think about all the biggest industries insurance the biggest industries are not headquartered in silicon valley the biggest industries are headquartered outside of silicon valley and that's the opportunity for us at drive capital and that's your opportunity today if you're going to be a venture capitalist or you're going to be a founder of a company that you can do it anywhere and now you're starting to see that the most powerful the most successful companies or an entrepreneur who has an enormous amount of domain knowledge go back to alex tim he knew a ton about the insurance space he'd never done a startup before but he knew a lot about the insurance space he had that domain knowledge he's an actuary he actually understood how to do these things if you could pair that domain knowledge with technology that you could access then you could build products that the world had never seen before and now you're able to build these multi-billion dollar companies in cities like kansas city you guys know sandy sandy's building a wonderful company at c2fo c2fo is a technology company it would not have been possible to build c2fo in kansas city in the early 2000s it just would have been too hard like the engineering challenges didn't exist there today it would be crazy to put that company in silicon valley because there's more understanding of banking and financial services in kansas city than there is in silicon valley so this is now on repeat and the most exciting part about this is as you all are starting out your careers you can go anywhere in the world and you can also do it here in kansas city where you have access to your network of people around you you have access to wonderful engineering talent you have access to tons of domain knowledge and now you have access to venture capitalists who are excited to invest in the next great entrepreneur in a city like kansas city what i'm describing to you is incredibly exciting but it's kind of hard to see it does occur though in other places and let me give you one example here this is a picture of shanghai in 1987. it doesn't look like much no tall buildings there's very little infrastructure around it there's been an enormous amount of technology investment and development in shanghai shanghai is is probably the tech capital of china well shanghai today looks like this this is a remarkable amount of change and you can observe it in this place now you might not see that in one city like kansas city but i promise you it's happening and you'll see it in other ways and you've got the opportunity now to go out and take advantage of that so good luck in everything that you're doing thank you for listening to me today and please let me know if you have any questions you

Channel: Drive Capital

Views: 24,594

Rating: 4.9631147 out of 5

Keywords: drive capital, vc, venture capital, midwest, columbus, ohio, startups, entrepreneurship, founder, master class, Chris Olsen, how to become a venture capitalist, best practices, venture investing

Id: oULoamyhycA

Length: 45min 57sec (2757 seconds)

Published: Thu Jul 23 2020