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 Hadley Harris, Founding General Partner at Eniac Ventures, a mobile first early stage firm with over 150 investments, now investing out of its third fund. Hadley sat down with AlleyWatch to talk about his journey from operator to investor, trends that Eniac is following in the market, differences between the west coast and NYC, and everything in between.
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Inside the Mind of a New York VC: Hadley Harris of Eniac Ventures
Bart Clareman, AlleyWatch: Tell us about your journey into the Venture business and how you came to found Eniac?
Hadley Harris, Eniac Ventures: I met my three partners when I was a freshman or sophomore in college, we were all engineering students at Penn and all graduated in 1999. We’ve known each other now for about 20 years. After graduating I spent a few years as a developer and then managed engineering teams for a couple of software firms.
I went back to school at Wharton, and then did some big company time at Microsoft and Samsung, but quickly realized the big company thing wasn’t for me and that I wanted to do something new.
Interestingly, I was living in Korea working for Samsung in 2006/2007 just around the time the iPhone was announced. Korea already had 4G networks and I saw the way that people were using their devices there. They were using these big dumb phones at the time, but they were spending a lot of time on their devices, which was a behavior we weren’t really seeing yet in the US. Through the combination of seeing what bandwidth could provide and then what these new platforms, especially iOS, could do, it was clear to me that mobile would be the next big evolution of computing.
I moved back to the US to work on that thesis. I linked up with Izhar Armony
at Charles River Ventures, they were interested in the thesis, so I helped them out with a couple of things and helped them with some opportunities and ended up jumping on to a company they had seeded called Vlingo.
Vlingo was a technology out of MIT, focused on voice recognition and artificial intelligence. I had the opportunity to play a bunch of roles there: leading business development, marketing, product marketing, even finance in the early days before we had a CFO. That was a great journey over four years, we were really fortunate to build a great team and we were acquired for $225M by Nuance.
Afterward I became CMO of another venture-backed company called Thumb, and we were acquired about a year later.
In parallel with those jobs I had started to work on Eniac with three good friends of mine: Vic [Singh], Tim [Young], and Nihal [Mehta]. We launched our first fund in 2010. It was a tiny fund, about $1.5M through our own money and friends and family, but we structured it like a real VC fund and made 32 investments – very small, $25-50K checks – and have continued to grow that throughout our history.
A couple years later we raised our second fund, which was a little under $13M, and then in 2014 we raised our third fund at $55M.
Does the increasing fund size suggest that a fourth fund someday will be still larger, or have you reached the point where $55M is about the right size fund for Eniac?
It’s not something I can publicly talk about, but what I will say is that we’re going to continue to focus on seed. I think what “seed” is has changed a lot – when we started a lot of the rounds we were investing in were $750K or $1M. These days we’re leading $2M or $2.5M rounds. Seed has really grown up and, for lack of a better word, institutionalized.
I think there’s an opportunity for larger seed funds, especially ones that lead who will invest about half the round, take board seats, act in a lot of ways how A funds did 10 years ago. I think there’s an opportunity for seed funds to be bigger but of course you don’t want them to be too big because you want to be able to work with other investors.
So the way we’ve thought about it is, we want to right size our fund so that we can invest a significant amount and continue to invest throughout the life cycle of the company, but also work with other great seed funds to co-invest when that opportunity arises.
I’m curious your thoughts on the expanding size of seed rounds – what is the driver of that and how does it change what you look for in a seed-stage company?
I think the root driver of that is actually the funds that traditionally invested in As and Bs have gotten much bigger and thus their check sizes have gotten much larger. That’s pulled them further down the road into companies that are more mature, and that’s opened up this sweet spot where folks like us and others have filled the void.
On AngelList you note that Eniac has invested in >150 mobile startups since it started. What’s different about your investment approach today with startup 151 vs. when you began with startup 1?
The short answer is: almost everything.
We’re different than a lot of investors in that we’re self-taught as VCs. We’ve learned a ton over time. When we first started out we were tech guys who knew the industry and could be really helpful; in a lot of ways I think we acted more like angel investors. Now we’ve built a lot of institutional knowledge as the four of us have worked together and made all these investments.
We’ve learned a ton over the almost seven years we’ve been doing this. We’ve built out more processes, more institutional knowledge, and we have this group of companies we invested in that now cover the whole range of the lifecycle from very early to growth stage companies to companies that have been acquired. Those companies and those founders are able to help each other, so we’ve built this network that adds a lot of value as well.
Your definition of mobile-first includes IoT – give me your State of IoT as we enter 2017, and what trends are you watching in the space?
There’s a bunch of smaller trends that I group into two areas.
One is a movement towards seamless computing, which features very natural interactions between humans and machines – by which I mean the internet. If you think about the path we’ve been on, first you had mainframes, then you had desktops, and then you had mobile, and each of those was more natural than the last, but we’re not anywhere near to where we’re going to get in terms of “natural interactions.” There are still some very unnatural interactions, like looking at your phone on the street – that’s not a natural interaction.
I think as AR progresses, as voice progresses, you’re going to get to a point where we’re able to have much more seamless and natural interactions with computing. That general trend is one that we’re interested in.
The other trend is automation – machines being able to do more things for humans and for society, and a lot of that is driven by artificial intelligence and the underlying technologies of artificial intelligence. We think of AI as being the brain of automation and the other aspect of automation is robotics, that being more the muscle, the physical manifestation.
As an investor or as an advisor to your portfolio companies working in automation, do you feel any obligation to address the societal changes automation will unleash?
It’s something I’ve thought a lot about and written about on my blog. In general, I think our job is to push technology forward. I don’t think it’s the job of our companies to think about societal changes on an everyday basis. Being an entrepreneur and growing a company is hard enough as it is.
But I do think as technologists it’s our job to inform society about what’s coming, so that society as a whole – be that the government or the population – can get ready for it, because I do think we’re headed more quickly than people realize towards a world where jobs will change as we know it, where machines will be able to do most tasks better than humans. The way that our political and economic structures are set up, they’re not ready for that.
It really worries me when you hear the political discourse and no one’s talking about that. We’re worried about really short-term problems around globalization and China taking jobs. But the real issue we’re going to run into is machines taking jobs, and it’s not something you can fight. We need to keep pushing forward, because someone’s going to do it. What we need to do is open up a conversation where society can get ready for that.
On your website a criterion you talk about is how Eniac “has to be convinced that the founders are in the business for the enduring process it takes to go from startup to hyper-growth, world-changing enterprise” – particularly with first-time founders, how do you suss that out?
It’s probably one of the hardest things that we do. It’s really trying to understand the motivations of the founders. Generally, short term and financial motivations are not the right ones. It’s more about founders who see a problem they want to solve, founders who want to have an impact on the world and really change the status quo.
You need to get to know an entrepreneur really well. It’s one of the reasons we always spend a lot of time in person with entrepreneurs, because you need to see the little ways that they answer a question. Often, the way co-founders interact, even just the little cues and nonverbal signs they send each other are really important to understanding where their heart really is. Because the reality is a lot of folks are in it for short-term financial gains and that’s not the type of entrepreneurs we want to invest in.
What one thing should someone reading this article know about Eniac?
We’re all entrepreneurs more than we’re investors. We’ve been in their shoes. I think that really helps us have more empathy for what they’re going through. It helps us be that co-pilot as they’re going through the process.
As we evolve over time we’ll continue to have that entrepreneur-first mentality, and have people on our team who have that background.
What one thing in particular would you say makes you guys unique?
I wouldn’t say it’s 100% unique, but one thing that maybe isn’t as obvious from our website or talking to us is we tend to focus on teams that are very technical engineering and product-driven organizations, and much less on organizations that are business-driven.
We tend to invest in teams that have a deep technology background, even with the CEO often being technical, and are taking a product approach with a product that solves a big problem versus companies that are more business model innovation driven.
What can an entrepreneur do to make themselves interesting to you or Eniac more broadly?
The stereotypical Eniac company when I look at what we’ve gravitated towards over time, it tends to be smaller teams that are very technical and product-oriented, the vast majority of the founding team and the team in general are builders, and are 100% focused on building a great product.
We like companies that have a product in market where we can use it and we can see some data. But in some cases we invest very early, almost more genesis round investors, but in that case it tends to be a team that has had significant success before, often has worked together before, which is something we tend to gravitate towards is entrepreneurs who have a deeper history beyond having met recently, and they’re going after a clear problem that they almost uniquely understand.
One thing that may be helpful, entrepreneurs will say “I think I’m a fit for you guys, what’s the best way to introduce myself?” The best way is to find someone we both know. I find that for good entrepreneurs that are at all plugged into the tech and startup ecosystem, that’s not a problem as long as they try. We always take a look at those companies.
How have your deal sourcing methods changed over time?
One thing that hasn’t changed is that almost every investment we make has come in through a warm introduction from our network, whether that be our individual networks that we had before we started Eniac, whether that be our >100 companies out there where they meet great entrepreneurs or if it comes from co-investors. We get a lot of opportunities from pre-seed funds and angels, the other seed funds we co-invest with, and also a lot of A funds that don’t do a lot of seed because it’s too early for them. So everything comes in through the network.
The volume of investments we look at has changed greatly. By last count we’re looking at 400-500 investments a month now. Back when we started I don’t know the numbers but it was a tiny fraction of that.
What are the classic mistakes that entrepreneurs make when pitching their businesses?
Probably a handful of things: one is just bullshitting, not admitting when they don’t know something or pretending or making things up on the fly. We want to invest in thoughtful entrepreneurs who have thought deeply about what they’re doing and the problem they’re solving. But the best entrepreneurs also admit when they don’t know the answer, and then talk you through the thought process of how they would get to that answer, rather than throwing out something that comes to mind.
It’s something I see that’s very different between first-time founders and experienced founders – founders that have done it before tend to be much more open about what they know and what they don’t and are happy to talk you through how they’re thinking about what they don’t know. A lot of time first-time founders want to pretend like they know everything when the reality is that’s never the case.
It’s still (sort of) the New Year period – what trends are you watching closely in 2017?
There are a bunch of trends we’re digging into pretty deeply. One is conversational interfaces – it could be voice-based, messaging based – we feel all computing interactions will move into a much more conversational form of communication. That’s what we do as humans, and the reason that hasn’t been done in the past has been a constraint of computing. So as the underlying AI, especially NLP [natural language processing] understanding increases, we think that interaction is going to look a lot more like the way that we communicate.
Another area where we’re a little earlier but we’re spending a good amount of time is AR/VR/mixed reality. At this point, because it is so early and the platforms are so nascent, we’re mostly looking at enabling technologies that allow others to create great applications – not so much consumer stuff.
When we start investing in a new platform we tend to take a similar path. If you look at AR and VR, I think we’ll follow a similar path to what we did with the smartphone ecosystems.
Early on we focused on those enabling technologies, what we call “picks and shovels,” and that’s what drove our investments in companies like Localytics and Vungal and TapCommerce, and then we got to a point where the platform started to mature and we started to invest in communication and consumer products, and then we got to a point where felt like consumers were willing and ready to start buying things on the platform and that’s when we started investing in things like Boxed. So I think we’ll follow a similar path where we’ll start more with the picks and shovels and move more towards the consumer investments as those platforms themselves mature.
What do you mean by “picks and shovels”?
During the gold rush, some people who did as well as anyone actually just sold picks and shovels to the gold miners. If you think about the smartphone ecosystem, these are the SDK businesses that instead of trying to build the next killer app, they sold tools to the app developers. When we look at AR and VR as well as conversational interfaces, a lot of the companies we’re really excited about are ones that are selling tools that help the developers create better offerings quicker, cheaper, easier.
There’s been a number of years that have been dubbed “the year of AR or VR.” From a consumer perspective, when will the year of VR actually arrive?
I think the big occurrence that will signal the arrival of AR & VR will be when you can get similar experiences to what you see with the desktop devices right now on mobile. If you look at the Vive and the Oculus and the Microsoft HoloLens, they’re really incredible experiences, but not many great apps have been built for them yet because they’re very nascent and they don’t have a lot of users. They’re super expensive, they’re tethered to some high-powered PC – those aren’t going to go mainstream with those constraints.
Then on the other end you have these other VR platforms that are relatively cheap, you can buy a Cardboard and attach it to a smartphone, but those experiences aren’t where they need to be. I think when we get to the point where everyone with a smartphone is able to have that full, rich AR or VR experience, that’s when we’re going to see it really go mainstream, and it will be similar to what we saw when iOS and Android ushered in the smartphone era as we know it.
You’ve had operating experience and now you’re a VC. You sometimes hear about operators-turned-VCs who miss the days of getting their hands dirty with the company-building process, is that anything you’ve experienced?
I don’t look back – mainly because Eniac is our startup, my partners and I started that from scratch. Most of my days are spent meeting with entrepreneurs, but I’m also involved in many operational aspects of Eniac as we grow.
We’re growing our team; we’ve increased the number of services we provide to our companies. In a lot of ways, I get my entrepreneurial juices going on that.
And the other aspect is I get to spend a lot of time with our companies. No one’s waking me up in the middle of the night when the servers go down – which is totally fine with me – but I do get involved in board meetings and casual conversations with our founders in really fun conversations around the future of the company and strategic decisions. So I get a little of it from running Eniac and I get a little bit from working with our founders.
In terms of working with your founders, how do you think about adding value as a board member?
Through Vlingo and Thumb I was in every board meeting, and as an operator it’s very different to be on a board because you’re involved in every little aspect of the business. That gives you a lot more context and a lot more knowledge.
But on the flip side, as someone who’s only involved on a weekly or monthly basis in conversations, or quarterly in board meetings, you’re better able to see how things change over time. I think that’s something we can provide and have more of an unbiased opinion to teams that, maybe because they are involved in all the minute details, it’s harder for them to see.
Eniac has offices in both New York and San Francisco – what are the most salient differences between the two ecosystems?
I would say, interestingly, they’ve definitely merged over time. When we first invested, New York teams tended to be a little less technical, less product-oriented, often were much more business folks that were trying to get into startups and tech. Whereas SF has always been much more product and engineering oriented.
I would say, New York over time has matured to be much more similar to SF than when we first started. When we think about what we see in New York vs. SF, right now you could see any kind of company in New York, whereas when we started it tended to be companies where there was a reason they were here – they were adtech or fintech or they were very industry focused, whereas now we see a little of everything here, and that’s good to see.
About half our investments are in the Bay Area, but New York is the clear second biggest market for us, whereas when we started New York as a whole was probably about the same size as Boston if not smaller, so fair to say New York has really grown at Boston’s expense.
What are the unique challenges and opportunities of entrepreneurship and investing in NYC?
Well, I’ll compare New York in some ways to San Francisco. I think the challenge of New York is to attract more really good engineering talent. I think most of our New York companies tend to be always in more need of that.
On the opportunity side, what I find interesting from going back and forth a lot is that in New York you’re living with little pockets of the whole world here, which I mean in terms of the types of people in terms of the industries, whereas in San Francisco everyone you talk to, everyone you meet is in technology. So in San Francisco I think you sometimes do get stuck in a bubble, that we don’t have in New York just because New York is so much more diverse from an industry and thinking perspective.
I expect New York to keep evolving. Whether it will be able to rival the Bay Area, I don’t think that’s going to happen in the foreseeable future, maybe in the very long term. But I think that it can maintain its place as clearly the number 2 market in the world, and I think that by drawing on a very intelligent, creative population it can continue to evolve in a really interesting way.
Tell us one thing we wouldn’t know about you from your LinkedIn.
I’m a massive Patriots fan – and not just because they’re so good, been a huge fan since I was a kid growing up in Boston.