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 this time is Jonathan Struhl, Cofounder & General Partner at Indicator Ventures, an early stage venture firm focused on emerging frontier technologies including VR/AR and machine learning, as well as enterprise SaaS, media & entertainment and marketplaces. Jonathan stopped in to talk about Indicator’s quest for digital efficiencies, give his take on whether VR is overhyped, play the word-association game about the entrepreneurial ecosystems in NYC, SF, Boston and LA, and much, much more.
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Jonathan Struhl of Indicator Ventures
Bart Clareman, AlleyWatch: Tell us about your journey into the venture business and how you came to co-found Indicator Ventures?
Jonathan Struhl, Indicator Ventures: After a short stint in the music business, I spent the first part of my career in marketing. I ran marketing for a CPG company where I ended up being around in the early days of social, and studying how brands and influencers were trying to navigate the space.
I saw an opportunity to start a pure play social media agency that would help large, complex brands in social. This was when brands were starting to hire dedicated social media agencies rather than using a traditional PR agency or a digital agency to run their social efforts.
We ended up having an interesting product offering for our brand clients, which was helping them identify startups. It was me, my current partner Ben Luntz and another partner with whom we founded the agency. Our large brand clients would come to us and essentially say, “you guys are young, you’re in the digital space, you’re involved with startups – help us identify what we should be looking at. What are the latest platforms we should use to help reach our audience that we don’t know about?”
That gave us exposure to a lot of things from the future of content to emerging tech to marketing tech to different consumer apps where their potential customers were but they weren’t reaching them. After doing that for a little while, we realized we were seeing a lot of interesting companies out there.
We had been looking at them from a brand perspective, not from an investor perspective, but soon enough we started to angel invest. We would have these late night ad hoc investment committee meetings, me and my two current partners Ben Luntz and Geoff Bernstein. We turned around one day and realized we had a bunch of really good investments, and a couple of strong early wins as angels. We were spending more time with our startup angel investments than we were with our brand clients – it’s what we loved and we realized we were good at it.
So the natural transition was into figuring out how to build an institution to invest in startups at scale. We wound down the agency and started down the path of what is now Indicator Ventures.
It reminds me of our previous interview with your friend David [Goldberg] at Corigin Ventures, who was doing private wealth management but found he enjoyed spending time with his clients – startup founders, mostly – talking about their businesses rather than their portfolio construction or what have you.
It’s important to have that natural progression into venture; you can’t really force it. We were coming at it from the brand and marketing and storytelling and productizing side, we had been helping founders really articulate the complex problems they were solving, which isn’t always the easiest thing to do. Coming from the branding and storytelling world put us in a really advantageous position.
I also worked at a brand incubator for a number of years, called 100 Mile Group which helped launched Zico Coconut Water, Marquee Jet was founded out of there, and a couple of other interesting companies. I’d had a lot of storytelling experience, which I think is a really important part of startups, especially early on. That’s one of the many things we like to help our companies with.
You’re a fifth generation entrepreneur – you don’t meet many of those. Walk us through the generations that preceded you, and how does that family history influence your work at Indicator Ventures?
My great great grandfather started a business importing goods. His son, my great grandfather took it over. My grandfather started his own business selling coffee into office buildings. As I was raised it was all about entrepreneurship. It was all about ideas around the dinner table. My father and my uncle are partners in what they do, they’re serial entrepreneurs and they also invest here and there, but essentially they’re founders and operators.
I’ve seen hundreds of businesses at various points, some just at the idea phase, that didn’t take off, and I’ve seen many companies that actually did take off and found success. I’ve seen every aspect of businesses from a very young age. We’d be sitting around the dinner table talking business – not the high level, but really detailed as far as what went right, what went wrong. In all of it I was trying to understand what makes not only a good idea but also what makes a good business. I’m a big believer in pattern recognition so you can say I honed my skills at a very young age. That fueled my passion for startups and for creating things that there’s a need for, solving real problems.
Tell us about your investment thesis – what sorts of opportunities are you looking for?
I believe it’s important for a firm to have a reason why they exist. Ours is pretty simple: we want to make the world more efficient using innovative technology. We call it “digital efficiencies.” That’s mostly in the enterprise although we do do some consumer; typically though we want to make business life more efficient.
We measure efficiency two ways: saving time and saving money. And not just marginally; we’re not talking about saving companies a little bit of time or money versus what they’re doing currently, but 10-20x over the current solution.
We believe that if you find great people who are providing digital efficiencies, it can be a successful business. Very simple. Intentionally broad.
As we look at emerging technologies, which I spend most of my time in, it’s tough to find startups that have a real sustainable business model in this space. One of the other things we look for is an immediate path to revenue. We’re not looking for companies that need three years to start charging customers or companies that need to scale to 1M users or 10M users or 100M users before they can start to monetize. We’re looking for businesses that can scale right away.
If we match digital efficiencies thesis with real and immediate business models at the early stage, that’s our sweet spot. That’s where we play.
How do you decide for yourselves the companies that have the potential for aggressive growth? Is your assessment more metrics-driven or qualitative?
It’s very different with every single company. Some of it is potential market size, average contract value, sales cycles, distribution channels, innovation, the team’s unfair advantage, but mostly it’s staying true to digital efficiencies.
Given our thesis, figuring out how much time and money the company’s solution does save, getting as close to that 10-20x over what currently as exists as possible, is important to us. If you can do that and it really does add significant value to the end user, then users will pay, and if the markets are big enough it will be a valuable business that should grow at an aggressive rate. Then you have to prove that you will continue to outplay the competition through your product roadmap, ability to attract talent, build a scalable and competent sales force, and then sprinkle on a ton of luck.
But again, a lot of it has to do with – and you hear this thousands of times, I’m sure –but a lot of it has to do with the entrepreneur. We spend a lot of time thinking about the people behind these companies. We study the psychology around them, the grit and the founder-market fit. To be honest, because we are investing so early, most companies are completely different by the time they start to hockey stick.
I have the idea that establishing founder-market fit can come relatively quickly. The other two bits though, founder psychology and grit, how do you assess that and decide on founders who have what it takes?
I tend to like young founders. Obviously experience is really great, but someone that is young enough where they can live off of ramen noodles or cereal, and really struggle – because that’s what a startup is, nothing’s as good as it seems until you break out. I like founders that can really take the struggle of being a startup founder. That is really, really important. Everything is going to go wrong, but the key is focusing on what is going right. If you can roll with the punches and continue to be scrappy while staying true to your mission and yourself, that is very important. The ability to story tell is another must have trait which will help attract talent, sell your vision and ultimately your product. If you mix it with the other things I said, that’s what I look for.
What I like to do, because I’m a young VC – I’m 28 years old, I was and I am that scrappy person I like to look for – I invest in peers. I invest in people that I would want to associate with, that I would want to work for, hang out and grab a beer with because after all, we are investing in people.
I’m not looking down on companies. I’m looking eye level and I like that to be the way when we assess founders – they’re peers. I think we’ve been able to get into certain deals and invest in certain businesses because we’re more millennial-focused, and we’re on the same wavelength as some of these founders, whereas for some of the older VCs it’s a harder relationship because of the age gap or experience gap or whatever it is.
I’ve been in board meetings where a founder will come to me and confide in me about something where they won’t talk to the other board members or someone else on their team because they look at me and my partners as people they can really vent and relate to. And that’s how it should be, because what’s my job at the end of the day? It’s being a sounding board for entrepreneurs, and I think the psychology around investing in younger people, it helps and enables that closer connection.
You write on the website that “actions > words” and that most important on that topic is that you have “significant skin in the game, creating a true alignment with all parties.” In Venture Deals, Brad Feld and Jason Mendelsohn wrote that 1-5% of a fund’s size typically came from the GP. Given what you say about having significant skin in the game, how does that percentage look at Indicator, and what is the argument for VCs occupying larger parts of their funds?
All I can tell you is that our GP commitment is larger than 5% of the fund. I think it’s very important for first-time fund managers, which I was, and my partners were, to have significant skin in the game, for a number of reasons.
One is, it’s sort of an extension of us as angels. It’s our investments, it’s our money that we’re putting to use. If we just have someone else’s money that we’re investing, you may start to think differently and take different risks, but because we’re a significant part of the committed capital of the fund, it’s our money that we’re investing, so we tend to look at things a little differently. Which I think is an important thing, especially for first-time fund managers where you’re still trying to prove that you know what you’re doing. It’s important for limited partners to see that you have skin in the game. And secondarily, it’s important for the entrepreneurs as well. If we lose money on a deal, it’s not just our limited partners who lose money, it’s ourselves that lose money in a significant way. It leads to aligned incentives with all parties.
How does VC investing differ from angel investing in your experience? Is it just the ability to write larger checks and having LPs, or something more?
Angel investing for some folks is more of a hobby than anything else. Angel checks have been over the last number of years known, for the most part, as “dumb money.” I think that’s been both hurting and helping the industry, though mostly hurting it, because companies that shouldn’t get funded are getting funded by angel investors that just don’t get it. They don’t have time to study the spaces, they don’t have enough data around competition, they don’t have time to spend with companies in order to help them as much as possible.
There’s been a lot of dumb money in the system for the last number of years. When angel investors end up coming into an investment, typically they come in before we do. They typically come in the pre-seed or friends and family round.
They’ve done a couple things by that point. Many angels don’t understand how to negotiate terms the right way, so you constantly have to go back to the drawing board because thing weren’t set up the right way, or think about valuations or caps the right way. That being said, angel investors are a very important part of the ecosystem as they typically take the most risk in deals that are just too early for typical venture funds.
With angel investing you’re writing smaller checks, typically, and entrepreneurs tend to take you less seriously, because you’re one of the many people on their cap table.
Investing as a VC is a lot more impactful. VCs have scalable practices. We know our bread and butter is taking a company from their seed round to a really great Series A from a position of strength. Now, that’s not the goal, but if we can get a company from Seed to a great Series A through our program, which we’ve done that a bunch of times already, we set them up on the right path for success. You can’t really do that as an angel investor because you don’t have a scalable practice and process.
We also have a pretty large team around us. We have venture partners and advisors who are experts in specific industries. They help our portfolio companies. As angels you don’t have that dedicated practice and that institutional model of helping companies.
We have 23 companies in Indicator Ventures’ Fund 1. We have built a practice; this is what we do full time, whereas with angels, it’s not typically what they’re doing full time. Your life has to be venture if you’re a venture investor, everything you do needs to be about it, around it, speaking to potential customers for your companies, helping them fundraise, helping them story-tell, productize – if we’re not full time, we’re really just a check and most angels tend to fall into that.
I’m not saying it’s bad to raise from angels, it’s just they don’t have that scalable model that they can help you through to lead you in the right direction.
Thinking about the angel who can participate at the pre-Seed level but cannot participate meaningfully later on, I wonder what future funds may hold for Indicator. You’re Seed-focused currently. With later funds would you aim to lead later stage deals?
We are Seed-focused. We do participate in Series As and Bs for our companies, but we have started to establish ourselves as a firm that invests in your seed round and helps you get to that next level, both from a product and a customer perspective, and also from a funding perspective. We want entrepreneurs to look at us and say if we go through the right processes and time and take a check from Indicator, the odds of me raising a great Series A and ultimately success are higher.
We’ll occasionally do Series A in certain deals but those are outliers. Our real bread and butter is taking companies from Seed to Series A. I believe we have 65-70% of our companies that went from Seed to successful Series A or acquisition.
Our future funds will be the exact same model. We like to stick with what we know and what we are good at.
The website notes somewhat coyly, “it’s not always the revolutionary technology that represents the largest opportunity.” What’s an example of a non-revolutionary technology that produced a “largest opportunity” so to speak, and what are the implications for the sorts of companies and founders you look for?
I’ll give an example from our portfolio. One of our companies is a company called Lob. What Lob does is, they created a suite of APIs to enable printing and mailing at scale. The idea is, you should be able to send direct mail as easily as you send email. That’s an innovative technology, but that’s not recreating the wheel. Incredible business, they’re rocking, they are enabling massive digital efficiencies. They save a ton of time and a ton of money for businesses. If I can send direct mail one at a time, automate it and make it cheaper than the traditional way, it’s a huge opportunity.
It’s not the most game-changing technology. I love APIs they have incredible margins and a network of amazing printers, but the team, the execution and the industry were really important, versus the technology.
Again, it goes back to that efficiency multiplier. It adds 10-20x to the current solution. It doesn’t matter if it’s the most innovative technology, what matters is, does it solve its problem by a lot, and will it continue to solve it as technology evolves?
Take us inside the inner workings of a VC. Indicator has three co-founders and General Partners – how did the three of you come together and how do you split out the responsibilities?
It’s me and two partners at Indicator: Ben Luntz and Geoffrey Bernstein. Geoff is based in Boston; he runs our Boston office. He is our numbers guy, the backbone of our fund and he also helps with a lot of legal work as well. Anything to do with numbers, models, digging into the financials of a business, helping a company think through burn – anything to do with numbers, Geoff is our guru. He acts as outsourced CFO for some of our companies as well. He also spends a lot of time on heavy enterprise SaaS deals.
My partner Ben is with me in New York, although he travels around Boston, LA, San Francisco. He focuses more on media, entertainment, consumer and marketing tech type deals. He works with a lot of our portfolio companies on a day-to-day basis and also helps think through our internal process and systems.
I focus most of my energy on new deals, and a lot of frontier emerging technology, specifically in enterprise. A lot of tools for the future of content and workflows, whether it’s VR or AR, a lot of machine intelligence, machine learning type stuff. I like to think about where the world is going to be in 5-10 years, and do deep dives. I’m spending a lot of time on voice as an interface right now and looking at a lot of deals in that space.
I use venture as a tool to learn. I’m young, but I’ve spent a lot of time meeting with people a lot smarter than me and just absorbing. Talking through industries trying to develop my own thesis of where things are going to be, I use venture and I use the firm to gobble up as much information and data as humanly possible. That’s what I’ve been doing the last four or so years –learning. Investing, but learning. I think the best VCs are constantly asking questions and learning, and saying in meetings, “teach me.” I think entrepreneurs appreciate that, too.
You have 23 investments across the US, almost half in New York and four apiece in the Bay Area and LA. Compare the three ecosystems by way of word/phrase association – what one word or phrase comes to mind for New York, the Bay Area, and LA?
New York: pragmatic.
Bay Area: small world. What I mean is, everyone knows each other, everyone protects their closed networks. I think there’s a lot of FOMO, there’s a lot of inner fighting on rounds and deals. But if you have an entrepreneur from San Francisco that knows people in San Francisco and has a great story, they’ll get funded very easily, without real metrics.
Boston: brilliant – because you have some of the best schools on the planet there, the trick is keeping the talent there. It’s getting easier. I think because the Boston ecosystem and some of the angel investors and corporates there have realized they have to keep talent there. I’m looking forward to doing a lot more deals in Boston.
What would your founders say about you as an investor?
We’re always available just to riff. I think that’s very important. Entrepreneurs can trust us, do trust us, and can talk to us like they wouldn’t some of their other investors.
We try to be as approachable and available as possible. We try not to judge; we know things will go wrong at all time, so it’s about focusing on what’s going right, and being more of a resident psychologist. I think that’s what a lot of folks would tell you. Being an entrepreneur is lonely so having an investor that you can bounce things off of is really valuable.
I’ve been asked to be on boards because we’ve been that sounding board for entrepreneurs, where they’ve come out and said, “I need you to be the voice of reason, a friend in the boardroom.” I think that’s what our entrepreneurs would say.
How do you walk the line between being that friend in the boardroom and also dishing out tough love?
The key to early stage venture is building trust with your entrepreneurs. Trust is not just laughing and hanging out and talking about good things – trust is also telling it like it is.
If someone you trust challenges you you’re going to take that as constructive criticism, versus if there’s no trust, that feedback won’t be listened to as loudly. I think building close relationships with founders enables you to give candid and honest feedback, versus when you don’t have that close of a relationship with someone. There’s definitely a fine line, but honesty and open conversations are integral.
What trends are you watching closely in 2017?
I’m spending a lot of time thinking about the future of voice. How do we interact with the world around us? More on the enterprise side of things.
I spend a lot of time thinking about enterprise AR and VR. How can those technologies help solve some major problems in the business world?
I’m also thinking about machine learning and machine intelligence. A lot of this software that exists in enterprises should be getting smarter the more you use them, but they’re not. How do we make those systems smarter, to be able to adapt and customize themselves based on how folks use them?
The other thing with machine learning right now is, the knowledge worker and the machine learning process are very far apart right now. The delta between the knowledge worker who’s non-technical and the machine learning process is way too far apart. How do you bring the two together and cut out biases in the data? Right now only the most technical people can be involved in the process and there’s a lot bias that goes on. I just funded a company that closes this gap, but I believe there is still a lot of opportunity here.
You’ve made investments in VR – how do you respond to people who say VR is overhyped?
I’ve spent the last three years looking at the VR space from an investment perspective; we’ve made two investments, both enterprise. I think there’s way too much hype around VR; some of the numbers of when it will reach the masses or X number of headsets will be sold by this time or that time, virtual reality will never live up to that.
I’m focused more on enterprise. One of my companies is called IrisVR. One of the reasons we invested in them is because, in order for an architect, an engineer, designer or construction firm to use virtual reality, you don’t need the masses. You don’t need tens of millions of people to use VR for an architecture firm to get value out of VR – Iris is enabling that. To be able to do a walkthrough of a building before it’s built has obvious and immediate value.
I like emerging technologies that are not waiting on mass consumer scale. I think some of the companies we’re investing in, including 360 video, are taking into account that VR adoption will be a lot slower than we think.
I see a lot of VR companies with very rough and in some cases unsustainable business models. When I think about VR, I think about what are the business models, what are the digital efficiencies they can add to antiquated industries?
It doesn’t matter if they’re using VR, AR or any other technologies, so long as they’re saving time and saving money by a lot over what currently exists and have a strong product roadmap, we’ll invest in those spaces.
On a personal note: you donated stem cells to save the life of a woman suffering from leukemia. How did you get involved with Gift of Life, and for anyone who might want to become a donor but feel skittish about doing so, what can you say about the procedure to assuage concerns any potential donors might have?
Long story short is I had signed up for a bone marrow registry. Years later, in about 2012-13, I got a call that I was a match for a woman in her 40s who had leukemia.
They called me and I said, “great, what do I have to do?” I was a bit nervous because I thought it would be a very intense and invasive process. It turns out a majority of bone marrow donations are peripheral blood stem cells; what that means is it’s not an invasive surgery. What they do is, they give you a shot every day for seven days before the donation, and the shot increases your blood cells, so that when you’re ready to donate you’re heavily condensed with blood cells to pass along to the recipient.
On the seventh day you go to the hospital, it’s about a seven or so hour procedure where they take blood from one arm, rotate it through a machine and put it back into your body. They cycle through most of the blood in your body.
After that, the finished product is a bag of your blood cells, extra condensed, that they then go and run as fast as they can to wherever the other person is and hook them into an IV and the process is started.
The Gift of Life is one of the largest bone marrow registries in the world. They’ve saved thousands and thousands of lives. I then ended up meeting the woman I donated to, she’s a mother of four, lives in Florida. We are very close, she’s healthy now, she’s loving life and able to do whatever she wants.
Favorite book and why?
Living with a Seal by Jesse Itzler. Jesse is a guy I used to work closely with; he was the founder of Marquee Jet, he helped found Zico Coconut Water, he was a rapper in the early ‘90s, and today he’s a part owner of the Atlanta Hawks. He’s a successful entrepreneur, but he’s also a nut. He ran a hundred miles in 22 hours straight. I’m obsessed with endurance and passion, I think if you have endurance for all aspects of life, and you have passion, you can accomplish anything.
For Jesse, his whole thing is, get out of your comfort zone. He’s successful, he has everything he needs, but he likes to be pushed out of his comfort zone. He had a Navy Seal live with him and his family for 30 days, and basically had the Seal beat the shit out of him for 30 days. It’s a short book, it’s impactful, it’s fun and it really gets you thinking of getting out of your comfort zone. It’s really important especially for entrepreneurs to be able to shake things up and do things differently, when startup life doesn’t go your way sometimes, you have to be able to roll with the punches and be ok with not being comfortable.
Most underhyped part of tech?
Well, it’s still hyped but I think more people need to spend time on it: the future of food. The world’s population is going to double in the next 50-100 years, and we’re not going to have enough food to sustain that.
What are we doing right now to account for that? There’s companies like Soylent that are trying to make food more cost effective or a more efficient form of food. Synthetic food is very interesting as well, but I’d like to see a lot more of that especially at the early stages. It’s such a big fundamental problem that will catch up to us, so I do think we can use more and more people focused on that industry.
In the year 2027: one crazy prediction about how we’ll live 10 years from now?
I’m a long distance runner and I spend a lot of time thinking about biohacking. How do we optimize everything we do, whether it’s living longer, feeling better or living better I think we’ll be able to quantify every part of our lives – what we should eat, how we should work out, how we should sleep, how many calories should we be consuming, what types of workouts should we be doing – everyone has a different bio makeup.
The very first step was Fitbit-type technology counting yours steps. It’s very simple, but if you can apply that to every aspect of your life, if you’re able to quantify and optimize your life with data, I think that will be a very important aspect of how we live and will help push the boundaries of extending life.