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Inside the Mind of a New York VC: Vasu Kulkarni of Courtside Ventures Part 2

 

Vasu Kulkarni Header Part 2

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 the hot seat once again is Vasu Kulkarni, Partner at Courtside Ventures and CEO at Krossover, who joins us for Part 2 of our interview. You can get caught up on Part 1 here. In Part 2 of our interview, Vasu spoke with AlleyWatch about how he defines sports tech, the potential for esports, and why failure isnt all its cracked up to be.

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Vasu Kulkarni _Courtside Ventures 

Let’s talk more about Courtside and the sports tech field more broadly. For those who aren’t following the space actively, tell us the growth story and how advanced is this space relative to other parts of the consumer/enterprise tech landscape?

The first thing is, how do you really define sports tech? Different people will say different things. Is ticketing sports tech? Would you dump StubHub or SeatGeek into sports tech, or is ticketing its own vertical?

To me, sports tech today is defined by: wearables and any sort of sensors that are tracking any sort of athletic activity, and software that’s sold directly to teams, coaches or athletes. That to me is the core of sports tech, along with software that’s sold to teams not just for the sake of making the team better from an athletic standpoint, but also to help with fan engagement, social media, and anything else surrounding direct sports team activities and operations. Then there’s a third bucket, which are hardware devices, which are not necessarily wearables, but can in some ways enhance athletic performance. Those could be anything from new types of nano technology in apparel, to we’re looking at a company that’s created a knee brace that through thermo-electrics can go hot or cold instantly without the need for an ice pack – to me that’s the holy grail of recovery.

When you look at those buckets of what I consider to be sports tech, there aren’t a lot of players and there aren’t a lot of exits.

The only major exits you can point to are Bleacher Report, which was bought for $200M, and Replay Technologies, which Intel bought for $175M – in everything we consider to be sports tech and you throw media into the mix, those two might be the two biggest exits. You start to understand why VCs are getting a little worried, about investing in the space. Where are the exits, who are the buyers, who can afford to buy other companies in the space? There aren’t a lot of players. That’s the bad news.

I think the good news is that sports is always a little bit behind the mainstream. If porn is at the forefront and enterprise is in the middle, sports is always lagging behind. The expectation is that all the things you can now do with software in other industries, we’re assuming that sports is going to catch up, and they’re going to start to say it’s important to spend money on software because it’s going to make us better at everything we do. That is just starting to happen.

Today, youth sports software is still only considered a couple hundred million dollar industry, but in the next 5-7 years, people think that if it catches up to where other industries are, software in youth sports will be a $4-5B industry. That’s where I see the biggest opportunity. It’s not in selling to the 120 pro sports teams in America, because, there are 120 of them, they’re really cheap, they don’t expect to have to pay for anything, and even if you can convince them to pay you, there’s only 120 of them.

If you start to think about the youth market, you’ve got hundreds of thousands of teams, about 40M kids who play organized youth sports in the US, and their parents are all spending money on them participating in sports, which gives you an opportunity to now start to build software that you think they’ll start to spend money on over the next five years.

I notice you haven’t mentioned eSports – how are you thinking about the opportunity there?

eSports is on our radar as a fund for sure, but I don’t bucket it under sports tech. I think eSports has made enough of a splash to now deserve its own bucket. It’s not that big yet, it’s under $1B, but obviously it’s growing fast, it’s caught fire, it’s become a mainstream word now.

One year ago now, there’s a 0% chance that most of the more seasoned executives in sports knew what eSports was. But now every single one of them knows that it’s a word that matters. So I put it in its own bucket, we are focused very heavily on it at Courstide.

How big can be eSports be?

It’s a question that everyone has a different answer to today. The biggest question is, how much of an ironclad grasp will the publishers end up having, and how is that going to affect things?

In traditional sports, nobody owns the sport of basketball or football, whereas in esports there’s a company that owns the IP to the game League of Legends, they’re called Riot Games, they’re owned by Tencent, and they want to make money.

They have full control over who can play the game, they can determine who can use their IP in a league and who doesn’t, and right now, the problem with leagues in eSports is there is no guaranteed franchise. You can get relegated out and all the money you spent putting that team together is essentially gone in one season, versus in the NBA you know that even if you suck you still have a spot in the NBA next season, you don’t get relegated to the D-Leauge if you’re the Brooklyn Nets and you won 20 games this season.

There is talk that all the major leagues are going to start to franchise. The question is, how much are they going to charge for that franchise? We’ve heard everything from $5M to $25M is what some of these publishers are expecting team owners to pay for a guaranteed spot in their league. This is all without any guaranteed revenue share of media; right now, the number they’re giving to teams in terms of a stipend, which is really what it is, is very minimal. It basically covers the costs for these teams to bring their players to a city, put them up in a hotel and play in an event.

Until we start to see the publishers really willing to spend money on the leagues, we’re a little worried about how this thing is going to play out and whether a team you buy today for $10-15M can really appreciate to $50-100M in five years’ time.

I think the positives are, while most of the traditional sports leagues started in the 1940s/50s/60s and TV wasn’t even a thing back then and it took decades before TV rights caught up, esports is coming around at a time when the distribution of content is a guarantee. It doesn’t cost anything to stream an esports event online today, other than bandwidth costs, and the audience is already there. There’s a global audience they’re all watching this stuff. So it almost all comes down to, are these publishers willing to take the leagues seriously?

You have to remember: today, the leagues they’re running are simply a marketing expense for these publishers. They make all their money off of the 100M kids sitting at home playing the game in their mom’s basement, buying in app purchases, buying swords and stickers within the game, that’s how they make their billions. The actual esports side of this business doesn’t really generate that much revenue for the publishers today compared to how much the games are generating for them from the players themselves, the basic consumer.

For the NBA, their core business is running a league, they don’t have some other source of revenue that’s not the league, so they take it very seriously. I don’t necessarily know that the publishers have gotten to that point yet, but they’re thinking hard about it.

With Overwatch League, which they announced a few months ago, Activision-Blizzard is the first one taking it seriously. Who did they call? I was in the room: they brought in every major NBA and NFL team owner to a meeting in Anaheim to pitch them on the fact that they’re starting a league and they want professional team owners to buy in to an Overwatch team. The price range we’ve heard is somewhere between $10-25M for a spot.

Is the ideal arrangement then one where the publisher would license the IP to a third party who would construct and run a league around that game or franchise?

There are companies that do hold events and leagues. ESL is the biggest company that does this; they run events and tournaments for certain publishers. Overwatch is one of the games they were getting ready to start a league under, but then Blizzard came in and said, “we’re running out own league now.”

There’s the problem: the amount of control a publisher has. If you’re planning to start a company to run a league for a particular title, all of a sudden if the publisher comes out and says thanks but no thanks, your entire business is gone.

Then there’s a second problem, which is shelf life: these titles don’t last that long. Ten years isn’t that long. If basketball was a sport that was only relevant for 10 years, the NBA would be in serious trouble. That’s the other problem with esports. You’re under the assumption that your team is only going to be able to play this particular title professionally for a 5-10 year span, something will come next and you’ll either die or you have to adapt and have a team ready to go after whatever the next big title is.

Do you have an investment thesis?

We invest in passion. For me, it comes back to everything I learned at Krossover. If I hadn’t been as passionate about the game of basketball as I am, with all the trials and tribulations we went through, having $1.87 in the bank account, I don’t know if perhaps I would have given up along the way. The third time you don’t have money to make payroll, maybe you say to yourself, “maybe it’s time to quit.” But for me, the passion I have for the game said, “this is the best job you’ll ever have in your life, you better find a way to make it work.”

I like to see entrepreneurs who are trying to solve a problem, ideally something personal to them where they’ve felt a pain point and they’ve set out to solve the problem. That’s the first thing I look for – that passion and that personal story behind the company they decided to start.

From there, it’s got to be some sort of novel technology. It doesn’t have to be a patentable piece of IP, but it has to be some sort of a novel take on an industry or product or technology that we can look at and say, this isn’t just another one of those, there’s enough differentiation here.

Like any other VC we have to believe in the market size. For us, we’re a $35M fund, we want to think every company we invest in, if all the stars align, there is a chance it will return the fund. If we’re going to put $3M in over the life of a company, that $3M has a chance to turn into $30-35M at exit. If we don’t believe that, then it’s really hard for us to make an investment.

In that case I tell the entrepreneur, “maybe we’re wrong, but you might want to think about bootstrapping this or just taking a couple million bucks in and build a very nice lifestyle business, and put money in your pocket” as opposed to taking the easy way out, which is raising venture.

I feel like for many entrepreneurs, being told by a VC that they have a nice lifestyle business on their hands is about the last message they would ever want to receive.

Yeah – I call it keeping it real. Every panel I talk on, people come out shocked by the things I say. I almost feel I’m advocating against ourselves as a venture capitalist in telling people not to take money from us, but I think it’s the right thing to do.

I always tell people, I am an entrepreneur first and a VC second. I am always, always, always thinking from the standpoint of what’s going to be best for the entrepreneur. More than any other fund, I feel like we advocate very often for an entrepreneur to not take venture capital and simply try to find a way to start generating revenue and get to profitability.

I think there’s a massive problem in the tech ecosystem. Everybody thinks getting TechCrunch to write about their next big funding round is a sign of success, and I tell people, “getting congratulated for raising a round of funding is like getting congratulated for taking a mortgage out on your house.” If somebody were to congratulate you because Citibank gave you a mortgage, you’d look at them like they were an idiot.

That is truly what taking venture capital is. You are diluting yourself, you are shortening the amount of time you have to try and build a very nice business for yourself, you are responsible for money now, even if you’re not liable legally, it is your obligation at the very least to return capital to your investors.

I tell people all the time, “the richest people in America, most of the millionaires in America are people who run small businesses; who instead of having one large payday for $10M or $20M, every year they’re putting $1M in their pocket.” Those are the people that make up the majority of millionaires in America, but those are the stories nobody tells. Nobody wants to hear about the farmer that is growing fruit and corn in his backyard and is selling that at the local produce market and putting $500K in their pocket after taxes.

Those are the stories of people that I really believe should be told. I understand from a media standpoint it’s all about clickbait, and who is going to click on the story of the farmer that makes that $500K versus the story about Uber now raising another $2B on a $70B valuation and still burning $3B every year. That’s a story I’ll click on every single time. It’s somewhat hypocritical of me to say that someone needs to figure this out, because I’m the one clicking on that article just as much as anyone else.

But having been on both sides of the table, I can tell you I wish someone had said these things to me five years ago when I was getting started, because I may have taken my own advice. I may have moved out of New York City, raised less capital, and owned more of my own company as opposed to having given up the vast majority of it to investors and probably still ending up with the same outcome that I’ll end up with, just with less money going in my pocket at the end of the day.

I do believe there is a cultural problem and that people do not value lifestyle businesses as much as they should, and this is almost entirely driven by the tech industry and the venture capital industry.

Vasu Kulkarni Quote 2.001

On top of your other activities you also blog periodically. Last year you wrote a blog post in which you said “somehow it became just as cool to fail too.” Your main point was that mindset of entrepreneurs needed to shift from failure “being ‘okay’ to ‘not an option.’” How are we doing on that front?

I don’t think much has changed. I think it’s important for people to understand that your life doesn’t end when your company ends. For all the positive that the venture community and Silicon Valley places on embracing failure and saying it’s OK, I salute them, and I’m happy we do not ostracize people for being failures.

At the same time, I see too many people start shitty companies with terrible ideas because they think it’s fine to fail. And the ecosystem abets it. Take Y Combinator, which now takes 120 companies per batch – there used to be six or 10, so you knew the companies coming out were really good. If they’re taking in 120-150 companies, there are probably a lot of those that are not going to make it past Demo Day, and I’m saying, “what is the point? Why are you doing this?” It’s because you’re just fine with taking three months off, throwing something against the wall and seeing if it sticks – and in the process you’re taking investment capital from someone.

It’s one thing if you’re out on your own completely bootstrapped and you try something out on your dime, but if you’re going to take investor capital you need to really believe this will work, and you need to be willing to sacrifice multiple years of your life to trying to make it work. You can’t give up after 6-12 months.

In my estimation, it takes four years to get to the point where anyone knows who the hell you are. Even an Uber, when you think about it, they started in 2009. I am the biggest tech junkie and I don’t think I took my first Uber ride until 2012; since then I’ve probably taken 2,000 rides, but it took three years for Uber to break into the mainstream. If you’re just a normal entrepreneur with a normal idea, I believe it takes four years. If you are not willing to put four years of your life down, and you’re willing to say, “hey, if I fail after one year I’m ready to roll on and go get a banking job,” I think that’s a problem and I don’t think that you should be an entrepreneur.

What trends are you watching closely in 2017?

eSports for sure, that’s at the top of our list.

We’ve spent a lot of time on VR and AR. I am bearish on VR in some ways, and I’m very bullish on VR and AR being on a collision course to becoming what is essentially AR. Wearing a giant headset on your face is not cool, but being able to hold up your phone or wearing a pair of normal-looking glasses at a sporting event and being able to look at Steph Curry and have all of his stats instantaneously overlaid on his head is the coolest thing in the world.

In one of the conversations I had with FIFA a year ago, they taked about their 2022 World Cup, and they basically said that their goal is, if this is happening in Qatar, in America you’ll be able to go to Red Bull Stadium, sit in a seat, and be able to watch the field and there will be hologram-like people playing the match in front of you. That is cool. That’s the sort of stuff that’s out there but it’s not outside the realm of possibility at this point.

As always, we’re excited about analytics and data. Data is driving the world. Anything that can help teams, leagues, sponsors, or brand dollars being spent across sports get a better ROI through data, at the end of the day there’s always a market for that.

We’ve been very excited about drones. We’ve done two drone deals: one, the Drone Racing League, which is killing it, and we also did an autonomous drone company. Every week I hear about a new startup sports league, I’ll hear about a new alternative basketball league. That doesn’t interest me. What interests me is these niche sports that have no competition. There’s nothing else like Drone Racing League on TV, and that’s why I think they’re doing well.

Whereas, if you look at yet another alternative basketball league, they’re trying to compete for eyeballs against the NBA and the NCAA, which, as the biggest basketball fan in the world who watches probably 2,500 games per year, I don’t have the time to watch another basketball league at this point.

I’m really intrigued by alternative leagues that are holding new types of competition with new types of sports that don’t compete with one of the four mainstream American sports.

What would your founders say about you as an investor?

I hope they’d say that we are helpful. I know our partner Deepen, more so than I, is the one who is significantly more helpful on a day-to-day basis. One, because of my time commitments between Krossover and Courtside, but more importantly he’s spent time to build a very good venture network for us when we first started. He went on a road trip, met with all the major VCs and told them we were starting this fund. He put in the back of their minds that we’re the sports guys and they should call us.

There’s been a couple of instances now where a company came to us and we decided to lead the round, and on behalf of the company, we made 5-10 phone calls to other investors and said, “we’re leading this round, if you want to come in we’d love to have you.” It’s almost like we put together the whole round for them. The entrepreneurs had to do their pitch and take the meeting, but for the most part we brought those rounds together. From that standpoint, I like to think we’re very helpful in putting together a round.

Secondly, and I had this happen to me multiple times at Krossover where we just didn’t have enough money to get to that next hurdle that we needed to go raise a Series A or B, so we needed a little more money. We may be on our second or third company where we’ve come back in to put money in between the Seed and the A or A and B, to bridge the company to make sure they have the 3-6 additional months they need to be able to raise that next round at a higher valuation. We like to be very good partners from that standpoint. There are a lot of VCs who don’t like to be the bridge guys, but we like to be the bridge guys if we really like the team and believe in what they’re doing.

Finally, just opening doors. Between my network, Dan Gilbert’s network, and the WPP network, for a number of our companies we’ve been able to get them in to places where it may have taken them 3-4 months to finagle a meeting. Our network has been very good to us. If one of us picks up the phone, generally the person on the other end will take the call. Let’s be honest: If Dan Gilbert sends an email to anyone in the world they’re going to answer. If George Pyne, our Executive Chairman and the former President of IMG, calls anyone in the sports or media world, they will take his phone call in half a second.

Another two guys on our team: Brian Bedol started Classic Sports and sold that to CBS and sold another business to ESPN, he’s a media genius. These are all guys that have been in the industry so long, if they make a phone call, it’s unbelievable how quickly people answer.

That’s the value we bring. Outside of our check, we want you to not have to waste six months trying to get a meeting with someone at the NBA or ESPN. We can get that meeting for you next week.

What does the division of your time look like between Krossover and Courtside? And do you think more VCs should maintain a side hustle in a business so they maintain their operational abilities?

It works for me because it’s one big job at this point. Krossover has gotten to the point where it has 100 employees and a beefed up management team, I brought in a COO two years ago, a lot of the things two years ago I had to be responsible for, I’m no longer responsible for day-to-day. That’s freed up a ton of my time to focus more on BD and being the face of the company out there – with that comes meeting other entrepreneurs and VCs, and eventually it all dovetails into Courtside.

At this point, it truly is one job for me and there’s no bifurcation between Courtside and Krossover. Almost every entrepreneur I meet with is in some way relevant to Krossover, if it’s a sports-related company there’s something I can help them with at Krossover, whether it’s a co-marketing deal or us being a reseller for them or some sort of simple agreement to help each other – there’s always something we can do to help a startup at Krossover. And if we end also up investing via Courtside it’s a double whammy and that’s great for everyone, but we turn down 99% of deals we look at, but a whole host of them get sent over to Krossover to do a deal on that side.

I’m an evangelist for the sports and venture capital worlds, and that’s my job along with evaluating whether we think we should do a deal or not.

You said once that your dream was to own an NBA franchise. Is there any world where you end up buying the Knicks? Please say yes.

I feel like I’m going to end up owning an esports team before I end up owning a basketball team. I would love to buy the Knicks, I’m probably going to be a New Yorker the rest of my life and I would like to not have to fly to every home game if I can afford to just take the subway 10 minutes. I would love to buy the Knicks, I don’t know if I would ever be able to afford the Knicks, and I don’t know if I will ever be able to put Knicks fans out of their misery of having James Dolan as the owner of their team.

What’s your basketball movie Hall of Fame?

Glory Road, it’s the story of Texas Western University in 1950 something. It was the first all-black team that was put together at a time when many universities were not allowing blacks to play at all.

This white guy named Don Haskins puts together a team of five black players and they end up in the National Title game against Kentucky, whose coach was famous for never recruiting or playing any black players, and his star player at the time, interestingly enough, was Pat Riley.

So it’s Pat Riley and Kentucky against five black players, and in order to make a statement, Don Haskins tells his players, “this game, we’re not going to play any white players.” Their team was a 12-man roster, their starting five were five black guys, and then they had seven white players. He refused to play anyone other than his starting five that entire game.

Imagine playing a National Title game with only five players, and they beat Kentucky. It is the greatest college basketball story of all time.

Quick Hits:

Favorite book and why?

I have a lot but I would highlight two in particular: Paul Kalanithi’s book, When Breath Becomes Air, along with Chasing Daylight: How My Forthcoming Death Transformed My Life from Eugene O’Kelly, the former CEO of KPMG. Both of these books are incredibly sobering books from people who were dying. Every year I give a book to everyone at the company for the holidays – this year I gave Shoe Dog by Phil Knight – but those two books I gave out to remind them of what’s most important in life.

Most under-hyped of the tech landscape today?

Running a company that has EBITDA.

In the year 2027: what’s your one iconoclastic hot take about how we’ll live 10 years from now?

I think we will be flying places as easily as we today hail an Uber. Whether that’s flying cars or private jet memberships like JetSmarter or things like Hyperloop, I think that traveling far distances will no longer be as painful an ordeal as they are today, and United will not be able to throw people off of their aircrafts.

About the author: Bart Clareman

Bart Clareman is Senior Manager of Hardware Outreach at Indiegogo and the Founder of Clareman & Co. LLC,  a management consulting firm offering sales and marketing, business development, product management, and fundraising services to startups and other companies in the media, hardware/IoT, retail, and e-commerce spaces. He previously was Cofounder and COO of Tiggly where he was responsible for consumer retail sales and marketing from 2013-2016. He has an MBA from Harvard Business School and a BA, cum laude, from Williams College. He volunteers for Venture for America.

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