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 Jake Yormak, Managing Partner at Story Ventures, who stopped by to talk about his journey from law to VC, lessons learned in his first year as a venture capitalist, and why the New York Mets will win the 2017 World Series.
If you are a NYC-based VC interested in participating in this series, please send us an email. We’d love to chat. If you are interested in sponsoring this series that showcases the leading minds in venture in NYC, we’d also love to chat. Send us a note.
Inside the Mind of a New York VC: Jake Yormak of Story Ventures
Bart Clareman, AlleyWatch: Tell us about your journey into the venture business and how you came to found Story Ventures?
Jake Yormak, Story Ventures: I started out at Penn for undergrad, and after a quick foray into California, I went back to the east coast to attend law school at NYU. From NYU I went to Cravath to practice “big law” but it was clear from the beginning that I wouldn’t find the work fulfilling.
While I was at Cravath I noticed a sea change, which I assume happened in the Bay Area years ago, during which many of my smartest and most talented friends moved from finance and consulting into startups. They were leaving the Goldman’s, JPMorgan’s, BCG’s, and McKinsey’s of the world and either starting their own businesses or joining startup companies.
So I thought about joining a startup, starting a business, getting involved on the venture side, and ultimately I had an opportunity at Gunderson Dettmer to practice law with all startup companies. It was through Gunderson that I had the opportunity to build out a broad set of relationships with entrepreneurs and angel investors. In particular, along with my brother Brian, who was a VC at Fontinalis Partners, we started to help people in our network evaluate venture investment opportunities. We would meet with the founding teams, research the market, and generally do whatever it took to develop a reputation.
The credibility built during those days was the key enabler for the first fund. That combined with the interesting deals I was seeing through Gunderson and our broader network allowed me to go out to colleagues, friends, family, and others to discuss a fund.
Did you give any thought to staying at Gunderson and becoming an angel investor on the side? More broadly, how did you think about angel investing versus VC?
I did, for sure. It’s very unusual for a lawyer – generally a very risk averse group of people – to do something so different.
As a lawyer, I felt from the very first day at Cravath that I was trapped inside a box. There were aspects of the job that I enjoyed but I like to think creatively, and in the legal profession it’s a little harder to do that.
I met with over 100 people over the three years I was practicing to figure out what I was going to do next. It wasn’t a spur of the moment decision. Ultimately, I think that to build something you have to take big risks. I had met with enough people in that nascent ecosystem I described to know that I could provide value, and to know that in the worst case scenario I could make money helping startups with the legal work. What I hoped was that the legal value proposition would be a hook to help me build a brand and a business.
Talk about your background as a lawyer and the extent to which that experience helps you in your work now in VC?
At Cravath I was doing multi-billion dollar mergers and debt facilities and IPOs, but being a lawyer at Gunderson is 100% relevant to the work I do now. I was working with companies on everything from formation to figuring out if a company should raise money via a convertible note or priced round to commercial IP agreements to bringing on advisors to managing the cap table. The way I describe it: everything you would go through if you started a business and needed legal or structural expertise, that’s what I did at Gunderson.
Lawyers are really expensive and one of the biggest cost centers for an early stage company, so the value pitch and the reason my colleagues at Gunderson are really happy to introduce me to startup companies is: I can be the sounding board for all the legal and structural issues. I’m not doing the legal work for the companies, but by this point I’ve had hundreds of conversations with founders who want to talk through raising via convertible or a price round, or founders who want to talk through cap table management or voting thresholds for financing agreements.
I talk the founders through these issues and say, “this is something you can do on your own with a form agreement your lawyer sent” or “this is something founders often mess up and you should engage your lawyers to do it but I’ll help you understand it so you can have a more productive conversation.”
A question on this topic via our mutual friend Sergei Revzin – for first-time entrepreneurs who are seeing term sheets for the first time, what advice do you have in terms of deal terms to pay particular attention to? On what terms can entrepreneurs push back and when is it appropriate to do so?
It’s very dependent on the stage of the company. The first big question that I get is raising money via convert debt versus a priced round. Some investors really want a priced round.
The general advice is, if you’re raising less than $1M, convertible notes make sense because they’re cost efficient and much easier and quicker to draft. You’re essentially punting on the valuation and there aren’t many meaningful terms other than the valuation cap. Using a cookie cutter note or SAFE from Y Combinator works. One thing I have seen though is that valuation caps that are too high can end up hurting companies. Some founders think the higher, the better, but in reality, high caps can make it difficult to raise a subsequent round.
For a priced round: think deeply about who you want to be on your board. The voting thresholds matter. This is more nuanced, but it impacts the way you run your business based on what approvals you need to get to take certain actions. It’s something people don’t think about as much but it’s one of the most important issues in a term sheet.
One other big point I’d say is, when you raise from institutional venture funds, the term sheet isn’t usually an issue because venture funds give pretty cookie cutter term sheets at an early stage.
Raising from angels and inexperienced venture investors is where things get hairy. I think it’s perfectly fair to push back to have that cookie cutter format, but your ability to do that just depends on leverage. If you have other investors lined up, then you can do that. If you don’t, you might have to swallow terms. I wish angels appreciated that cookie cutter is fine because it’s not about this round, it’s about building the business.
You’re still new to VC, still in the first year. What challenges does someone face as a “new” VC?
I think the single best way to learn is through volume. The earlier in the process you are, the fewer patterns you recognize. The more you see, the better you get.
When you’re building a brand, it’s very hard work to see top tier high quality deals off the bat. In my mind there’s two groups of first-time GPs: you’re more likely to find first-time GPs who see medium to medium-high caliber deals. You have to work your ass off and be good at building relationships to see the highest quality deals.
Do you feel that you’re seeing the top tier deals?
The deal flow we had from Gunderson enabled us to provide enough value in the marketplace to create the relationships to see the top tier deals. With that said, we definitely see consistently higher quality deals than we did a few months ago.
One of the most important things I’ve taken away from my experience thus far is, you need to know how to enable people to help you, to empower them to help you. In the beginning we had a more generalized thesis. As we honed our thesis we were able to tell people exactly what we were looking for. As we made the first few investments we were able to show people what we were looking for. The entrepreneurs in our portfolio knew what we were looking for. Consequently, the deals we see now are higher caliber and much more focused on what we want.
Tell us about your thesis and how it’s evolved since the beginning?
We focus on the combination of technology and the proliferation of data: that is, things that enable the proliferation of data, and things that are enabled by the proliferation of data.
Enablers include new tech sensors and software companies that collect information. At the middle level are infrastructure companies and software companies that aggregate or structure the data. At the tail are the artificial intelligence and machine learning companies that use this data to derive real world insights for businesses and people.
There was an IBM report that said that 90% of the world’s data has been created in the last year. AI and the idea of automation is entirely dependent on that data. We look for companies that can be hubs of that data or are enablers or are enabled by it.
Talk about the experience of raising your first fund. What were the highs and lows of that experience, and what’s in store for Fund 2 as far as timing, size, etc.?
The high was seeing that the credibility I had built up over a lifetime of hard work and building relationships helped to get people to believe in me to raise the fund. The little entrepreneurial things I’d done along the way enabled me to expand my network to touch enough to be able raise a fund. Colleagues of mine invested, friends of mine invested, family of mine invested, friends of those people invested – people believed in me enough without the background of having previously run a fund.
The low point is, it’s really, really fucking hard to do anything for the first time. I had no track record. To get people to believe is really hard. It required a lot of meetings and a lot of people saying “I love you, but no.” One of the biggest differentiators was, through Gunderson, I was already seeing deals before I had a fund. I could take those deals to angel investors and show the types of deals we would invest in and the quality of those deals. Without that I don’t I could have raised a fund.
Fundraising is very difficult. We do think about what we want to do as we finish investing this fund. It’s important to us that we continue to hone our thesis and that we’re able to tell a story with the investments we make. We work really, really hard to help our portfolio founders succeed. One, because our track record is being built on it, and two, because we’re building a reputation. I want that reputation to be one of really thoughtful investors who are hands on helping the operators build their businesses.
I’m sure that this part will get more and more challenging as we invest in more and more companies, but I can say definitively with our first seven investments that the founders would go to bat for us to say that we’ve been very helpful – outsized to our check size – and that they see us more as peers than they do arms length investors.
It can take 5-7 years before an investor in this asset class knows whether they’re any good. How do you do self-assessment, and how do you think you’re doing so far?
The single hardest thing about venture, to me, is the long feedback loop. We won’t definitively know one way or another for a minimum of a few years, although there will be a way to definitively asses how well we did in the long term.
We try to keep really good information around why we make decisions. We focus on the companies we invested in and the companies we almost invested in, rather than any vanity metrics. It’s all about collecting data to enable us to learn from our decisions, whether good or bad.
I was in San Francisco recently and on the way home I wrote up a whole thesis around the soft qualities of founders that we’re looking for. I think the first 6 months were spent focusing on where we see the world going, what kind of technology we want to invest in, and what our hard thesis is. Now I’m concentrating a little more on the learnings we’ve had about the soft qualities – it’s something I hope differentiates us.
We’re investing in technology companies but I understand humans way better than I understand technology. One of our bets is that our ability to understand humans at an early stage will enable us to succeed.
Tell us more about this “soft qualities” thesis – what are the hallmarks?
We’re looking for entrepreneurs with big visions and narrow focuses. Are there headwinds or tailwinds with what the entrepreneur is doing. We’re always looking for tailwinds.
We’re looking for founders who are very passionate about what they’re doing, not as much people who are just thinking to themselves, “what’s a company I could start?” There’s nothing wrong with that, and there are a lot of great companies built from that, but it’s so difficult to build a company from the ground up that we’re looking for founders motivated by much more than money or fame – they’re motivated by wanting to change the world.
We’re looking for founders who are very competitive and driven and, hopefully, where we can see resourcefulness in their background. I’m amazed by some people’s ability to juggle thousands of uncertain things and always move forward.
The last one is, founders that are very data driven. There’s a lot of information out there. The intuition is important, but looking at the data and figuring out how to build a business, which customers to approach, is important.
Almost a year into your life as a VC, how does the reality of the job compare with your notions of what it would be like?
I love the job. It’s very inspiring; I’m constantly in awe of the people I meet and how big their visions are for changing the world. I love meeting people, I love learning about new technologies, and I love thinking about macro trends.
It’s still (sort of) the New Year period – what trends are you watching closely in 2017?
Two trends we’re looking at are computer vision and voice as an interface. We’re still doing our thinking internally but we’re meeting with some really interesting companies. One computer vision company we invested in last year is called Nanit. We’re talking to a few voice companies now.
The trends we look at are mostly around the general trend of automation, and that artificial intelligence is going to have a tremendous impact on our day-to-day lives, quicker than people realize.
What advice would you give to the aspiring venture capitalist who is debating starting their own fund vs. joining an established one?
If you really want to start your own fund, the best thing is probably to start making angel investments and proving your track record over time. But to do it well is a full time job unless you’re already very well connected within that space. It’s really hard, but it’s about figuring out where you see the world going, and finding companies that fit that thesis.
I think I would have benefited for sure if I had gone to an established venture fund before starting my own, but there was an opportunity, we were seeing a lot of deals and I believe in seizing opportunities. We made sure to take it more slowly at first so that learning by volume would kick in.
What does the prototypical Story Ventures company look like?
We look for companies that are more technology-driven, where there’s a defensible moat in the technology in and of itself, or a defensible moat in the data the company is collecting – ideally both, but at least one of those. To the extent it’s the data, we look for companies with data network effects where they get better and better with the more data they collect.
We’re not vertical specific. We focus in New York and we want to have the majority of our investments here, but the more technical we get, the more we end up talking to companies in the Bay Area. We really are looking not just at the application layer, which is what a lot of New York companies are, but also at the infrastructure layer, which often takes us to the Bay Area.
Why are fewer New York companies focusing on the infrastructure layer?
Because most of the talent that’s bleeding into the startup ecosystem is from finance and media and fashion and other industries like that, and those people are starting companies in fintech and media and fashion – more consumer-oriented and brand-oriented. The deeper technology thinking is coming out of universities like Stanford, Carnegie Mellon, Harvard, Yale, MIT – I think it’s a focus thing.
Is there an argument then that X years down the line Story Ventures will be based in the Valley?
Realistically, we might have a presence out there but we’ll be New York-focused. The reason we were so eager to take advantage of the opportunity to start the fund is, I think there’s a sea change in New York where the smartest people are moving into startup companies and technology. The ecosystem here is nascent, and much more intimate, so there’s a real opportunity to build a brand here. The primary focus for the foreseeable future will be here.
A final question from another mutual friend, Andrew Yang: your brother did Venture for America in Detroit, how has that influenced your perspective?
I think that one thing we see is that talent can come from anywhere, but it’s very hard to nurture that talent in more barren ecosystems. We have no preconceptions about founders starting companies in New York or the Bay Area, we’re excited by founders coming from all over the place – and that’s a big part of Brian’s experience with Venture for America.
With that said, it’s really challenging to start companies in some of those places, because it’s hard to scale, there’s not as much money from consumers – less of a challenge, admittedly, in the digital age. It’s probably more of a talent thing. There just aren’t as many talented engineers in Cleveland, OH as there are in New York or the Bay Area. What Venture for America is doing is amazing. I hope it’s one of the great enablers for companies in developing cities.
Baseball’s Opening Day is coming up next week. We’re both Mets fans. Give me your prediction for the 2017 season?
I love this question because I’m so busy with work I haven’t thought much about the Mets, but there are few things I’d rather talk about.
Two years ago they went to the World Series, which I didn’t think, they were quite ready for. Last year they were derailed by injuries. If their pitching staff can stay even relatively healthy they should have no problem making the postseason, and their pitching staff is so good that they should be able to make a run.
No team I’ve rooted for has ever won a championship. I’m a Mets fan, a Jets fan, and a Knicks fan; I was born in ’87 and the Mets won in ’86. So I’m going to say that this is the year the Mets win the World Series – contingent on the health of their pitching. I’m very excited. Now I jinxed it, shit.