Welcome back to Inside the Mind of an NYC VC, a new series at AlleyWatch in which we speak with New York City-based Venture Capitalists. In this hot seat this time is Frank Rimalovski, Managing Director of the NYU Innovation Venture Fund, and Executive Director of the NYU Entrepreneurial Institute. Frank sat down with AlleyWatch to talk about his journey from corporate VC to NYU, the perfect bourbon for a cold winter’s night, and everything in between.
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Inside the Mind of a New York VC: Frank Rimalovski Of NYU Innovation Venture Fund
Bart Clareman, AlleyWatch: You’ve been in the venture business for almost 20 years. How did you get into it initially?
Frank Rimalovski, NYU Innovation Venture Fund: I got into VC a little bit by accident. I was living in Northern California working for Sun Microsystems in 1998, and my wife and I had decided, a year after our daughter was born, that we should move back East where we were both from, where our family was.
So I began looking into opportunities, and it was an interesting time particularly given how the startup scene in New York had begun to evolve. When I graduated from business school in ’93, there was next to nothing going on in New York – there were a couple of CD-ROM companies and that was it.
But by ’98 there was the beginning of a mini startup boom. I was looking at VP of Marketing jobs at a lot of startups and I started networking with VCs not thinking of going into VC but just as a way to get to more startups.
Along the way, a friend connected me with a friend who had just moved to New Jersey and was working then in a group at Lucent Technologies, in something called the New Ventures Group, which was tasked with creating new startups based on new technologies coming out of Bell Labs, the R&D arm of Lucent Technologies.
When I learned they were looking for a director, I threw my hat in the ring, and two interviews later I had a job offer and a relocation package and I took the job.
What did the role in the New Ventures Group consist of?
The job had two parts to it – part entrepreneur in residence, part VC. Having been a product manager, working with the technologists to help them come up with a go-to-market plan for their research was a good fit, and I had prior experience on Wall St. so I thought I knew a little bit about how venture capital works.
I think many people conflate Wall St. finance and venture capital finance, and they have about 3% in common.
What are the main differences between Wall Street finance and VC finance?
A lot of people think venture capital is about finance, but venture capital isn’t about finance – that’s part of it, but really it’s about business models. Like most VCs, I spend very little of my time in spreadsheets. VCs spend more of their time in meetings with companies.
You have to understand the company’s technology, you have to understand the development process, the marketing and sales, the manufacturing and distribution and operations and governance and all that. That’s not Wall St. finance. The financial part of it, it’s not easy, but it’s not the hard part of VC.
One aspect of the VCs job is to raise money from LPs – was that not part of your job description in the New Ventures Group given the connection with Bell Labs?
Initially, that’s correct. We ultimately did have to do that because, in 2001, my partners and I – well, back up.
Lucent’s demise began before the telecom market really crashed. When the telecom market and the Internet market crashed, Lucent was in very dire straits.
We took the hint that we weren’t going to be able to sustain our activities given the cash situation the company was in. So, to make a long story short, in 2001, seven of my other partners and I went out and raised a fund to essentially buy our portfolio from Lucent. We were able to write Lucent a nice 9-figure check and bank some money for the fund going forward.
We had a portfolio of about 25 companies at the time, all of which were early stage Series A and Series B investments that all needed more care and feeding, and we needed capital to help continue to grow them and participate in the syndicates.
The buyout of Lucent is when you went from the New Ventures Group to New Venture Partners, is that right?
That’s correct. We went from being the New Ventures Group to New Venture Partners. We hired a multimillion-dollar branding group to come up with that (laughs).
Life after Lucent as an independent operation now – how did things change for you?
It was different in a couple ways. The majority of the first year was about setting up our business and triaging and tending to the portfolio companies we had.
Within a year we turned our attention to the future, to sourcing new deal flow. Our hypothesis going into it was not just that we wanted to save our existing portfolio, but that there was also a lot of potential to work with other large established companies to help them turn their leftover technologies into new ventures.
Say more about that – why does that need to exist?
If you’re spending hundreds of millions of dollars on R&D each year, there’s a natural byproduct of that research work that results in inventions and discoveries that really don’t have a proper path to market through the business’s traditional business channels.
That might be because the new technology involves a different revenue model or different customer segment, or maybe because there’s a competing technology inside the firm or the new technology didn’t have the right internal champion – whatever the reason, normally those inventions and discoveries would just sit on the shelf and collect dust.
Sometimes, those inventions would walk out the door in some way and the company wouldn’t get to participate in that value creation. That was a lesson that AT&T, Lucent’s predecessor, really learned the hard way. They really didn’t profit off of some of their most significant inventions and technology contributions.
Most large technology companies have this problem. Before things got dicey at Lucent, there were a number of companies that had come and sought us out to learn more about our model, which was being held up as a new model for tapping corporate innovations.
These companies would come and benchmark what we were doing. We were pretty open source about it, and these meetings would often end with, this is great, can you guys help us do it at our own company? As part of Lucent the answer was no, but that gave us a signal that there was potential to work with other companies as an independent firm.
At New Venture Partners you didn’t have that constraint?
That’s right. So it’s now the end of 2002 and we had started discussions with a bunch of companies, and by early 2003 we had struck our first partnership with British Telecom, which had a very large and substantial research lab and had started to get into the venturing business themselves, and ended up partnering with us to take that forward. A year later we did a similar partnership with Phillips.
Those were the only big formal partnerships we had, but we had informal partnerships with a variety of other companies as well, including IBM, Intel, Avago, and Freescale, and and others to help them spin off new businesses. By 2009, we had raised multiple funds and had invested in another 20 companies, all spinouts.
Does it de-risk the investment for the VC or for the LPs to invest in spinouts versus startups?
The portfolio level risk is the same. In some ways you might have better IP or more substantive technology, and maybe even more market input early on because it was affiliated with a corporation where there was some notion of high level market needs that should at least drive the research agenda.
However, there was a challenge in some cases trying to turn some of these corporate researchers into entrepreneurs. Arguably the person who takes a package to be a researcher to go work at Bell Labs or IBM Research or even Google today, is a very different profile from someone who wants to be an entrepreneur. They may be beyond brilliant, but their entrepreneurial drive and risk tolerance may be different.
In that sense, we were looking to find needles in the haystack in terms of trying to find a great team with a great tech and with great market potential.
Bring us to the present – what brought you to the NYU Entrepreneurial Institute & Innovation Venture Fund?
I came here in 2010. Paul Horn, our senior vice provost of research, had recently retired from IBM, and he was trying to reinvigorate the research enterprise across NYU.
Having come from a corporate research environment, he understood the importance and value of basic blue-sky research, but also knew you had to bring (some of) it to market. To put it another way: you can discover the cure for cancer but if you don’t bring it to market, who cares? You’re not really curing cancer.
Paul had conceived of the fund as a way to try to catalyze that level of commercialization activity. While there had been some great spin out successes out of NYU, I think it’s fair to say commercialization was not a core part of the culture or DNA of the university at the time. The fund was conceived as a way to make seed investments and help get more of these ventures started.
What made it the right opportunity for you?
I agreed to join for a variety of reasons. Between the New Ventures Group at Lucent and New Venture Partners, I had been doing essentially the same thing for a dozen years with the same group. So the chance to build something new, to have a real impact on the university, and to try to put NYU in the center of the startup ecosystem in New York City at a time when it was just beginning to explode, in a good way, was too tempting to pass up.
The fund started the day I joined, in May 2010. In that first year, those first months at NYU, there were a lot of people looking for money, but few investable businesses. There were a lot of solutions in search of problems, a lot of technologies in search of teams, a lot of if you build it they will comes, or all of the above.
Given the model of the fund was to co-invest with other early stage angels and VCs, that meant we invested in early stage businesses – not ideas, not just inventions or IP.
I quickly realized there was a need not just to invest, but to help create the deal flow so to speak, so I started to invest more and more of my time into creating programs and events and resources to raise the profile of entrepreneurship at the university.
By 2011, when we started making our first investments, you could see the green shoots of entrepreneurship and startups starting to happen around the university. You saw growing interest and appetite, our events were very well attended, there was a higher quantity and quality of teams looking for money, and so on.
In 2012 we formalized all of those extracurricular activities and created the Entrepreneurial Institute to house those programs plus the Fund. All those other programs help feed the Fund. Today, I think of the Fund as one more program or resource at the very narrow end of the funnel where we invest in the most promising startups coming out of the university.
How large is the fund?
We’re approaching $4M raised. We’ve made 15 investments, and invested almost half of that $4M. Interestingly, on top of what we’ve invested, our companies have raised over $80M altogether, and that number’s about to get bigger. They collectively employ 171 people. Last year as a group they did about $30M in revenue.
How do the pitches you receive via the NYU Innovation Venture Fund differ from those you received in other VC roles you’ve had?
In some ways the pitches are similar, in the sense that very rarely does someone walk in the door where they’re ready for investment.
In all cases they need some level of help and support, which is different from most VCs… if you walk into most venture funds, and the company isn’t ready for investment you say “thanks’ but you’re too early, come back later.”
Whereas I never tell anyone “no.” I say “not yet,” but here’s how we can help you, and that’s what the rest of the Institute and the Leslie eLab is all about.
Are there classic mistakes the entrepreneurs make when they pitch you?
Yes. Like trying to be all things to all people. Or, this “if you build it they will come” approach. Or not thinking how they will acquire customers or make money – that it is just about their product.
I think there’s also a common misconception that you raise venture capital much earlier than most think. In this day and age, particularly in the tech sector, and especially if you’re a first time entrepreneur, even angel investors are looking for some form of market validation or traction. It’s funny because the lessons are all around us that this is how investors work; yet this lesson does not seem to have permeated.
I’ll give you three examples. In The Social Network, Mark Zuckerberg didn’t raise money from an angel until he had launched in many colleges and had in the thousands and thousands of engaged users – the majority of which were using Facebook daily!
In Silicon Valley, the TV show, they raised money after they had launched their product and had users.
If you watch Shark Tank even, and you really pay attention, things get real when someone has revenues or a partnership or customers.
So, the biggest mistake is there’s this mythology: I have an idea, step 1, raise venture capital. But actually, Step 1 is to validate that someone gives a shit if you’ll pardon my French. And that’s really where our emphasis is – in my book, Talking to Humans, we wrote that “success starts with understanding your customers” on the cover.
Speaking of business books – apart from Talking Humans, are there any you would recommend for the aspiring entrepreneur?
Hackers and Painters (I haven’t read all of it truthfully) has a lot of Paul Graham’s greatest hits in it.
It’s still (sort of) the New Year period – what trends are you watching closely in 2017? Both globally and here in New York?
I’m not particularly worried or focused on specific sector trends as we need to be pretty opportunistic given our focus on investing in startups at NYU.
That said, I am watching to see what, if anything, happens as a result of anything the new Trump administration does or doesn’t do; and like others, I’m also curious to see what happens in the IPO market with Snap. While it shouldn’t have an impact on the seed stage market I’m in (given there is a 5-8 year period between companies getting seed funding and going public), a positive outcome and other successful IPOs in its wake would likely lead to increasing valuations and deal activity.
What are the unique challenges and opportunities of entrepreneurship and investing in NYC?
I think the best opportunity is that there is so much given the scale, and so diverse an array of industry in NYC that a startup is literally surrounded by their customers and partners. That makes is a very rich environment to build a business in. There is also a very dense and active ecosystem of investors, lawyers, incubators, accelerators, etc., all of which makes it one of the best spots on the planet to start a startup.
In terms of the challenges, while perhaps not the biggest, the one that comes to mind is the amount of inexperienced capital in NYC.
First time entrepreneurs really need experienced investors by their side who have been there and done that. Because there is so much money in NYC, I find a lot of entrepreneurs get offers from investors who don’t really know startups, but get excited about the prospect of investing in one or in what sounds like a great idea and I’ve seen this do more harm than good too many times.
I’ve seen investors offer off market (way too high or way too low) valuations/caps, unsavory terms (redemption provisions, multiple liquidation preferences), inappropriate control provisions, excessively complicated deal documents, etc. that often come back to haunt the entrepreneur in ways they don’t anticipate.
A question from your friend Ash Kaluarachchi: What is 1) the current role and 2) the ideal role of universities in fostering entrepreneurship? What can we do to close the delta between those roles?
Current: certain universities, particularly Stanford, MIT, Berkeley, maybe a few others, have been key contributors of startup technology and talent in the geographies they operate in for years. In both of those cases, they grew up hand in hand, and it’s really hard to separate Stanford from Silicon Valley or MIT from Boston or Kendall Square, they’re very tightly interwoven. We’re trying to serve the same role here.
Now at a Stanford or MIT you have VCs roaming the halls. I saw a presentation the other day where they actually had some email with with the Google team where they were thinking of licensing their technology, and who was pushing them to create a startup? It wasn’t the tech transfer office at Stanford. It was this guy named, Vinod – Vinod Khosla, who was either an angel then or at Kleiner Perkins, but it was someone on the outside encouraging them to think about that.
So we can both play that encouraging role here but also be that facilitating bridge with the external community as well.
We have three core philosophies here at the Entrepreneurial Institute.
One is, we try to be inherently multi disciplinary in everything we do.
Two is, we try to make everything experiential. We don’t just lecture about startups, we teach people how to do it, and make them do it as part of the process.
And three is, we try to make everything in and of the city. That means bringing the entrepreneurs, the investors, the lawyers into what we do and pushing entrepreneurs out to understand their customers needs.
I understand you like bourbon. It’s a cold winter’s night and you and your significant other want to cozy up with a nice bottle of booze. What do you recommend?
If resources were unlimited I’d say Pappy Van Winkle (laughs). On the other end of that spectrum, I like Four Roses, which is a great value for the dollar.
I like to make Manhattans a lot. There I would argue the bourbon is important but the vermouth is much more important. The two vermouths that I would strongly recommend are Carpano Antica and Vermouth Del Professore. Don’t use Martini & Rossi, whatever you do.
So if I’m at the bar trying to sound sophisticated and the mixologist asks if I prefer bourbon or rye, what do I say?
I prefer rye. Both can make a good Manhattan; it somewhat depends on the vermouth. Some work better with bourbons, some work better with ryes.
Oh, and I’d say the bitters matter, too. And the dark black, brandied cherries.
One thing we wouldn’t know about you from your LinkedIn: I’m a dog servant. People who have dogs are under the delusion they’re the dog’s master. We are in service of our dogs.