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 are not one but two prominent VCs in New York, David Arcara and Jeffrey Silverman, Partners at Laconia Capital Group, a late seed stage B2B venture focused on investments in the Northeast. Jeffrey and David were kind enough to provide an entertaining view of their partnership dynamic, building a firm that captures the best elements of both angel and venture investing, how the Laconia thesis leverages its LP base for entrepreneurs, and much more.
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.
David Arcara and Jeffrey Silverman, Laconia Capital Group
Tell us about your backgrounds and how you came to found Laconia Capital Group?
David Arcara, Laconia: My background is primarily as an entrepreneur. After HBS [Harvard Business School], I went to work for the Lifetime cable network and started to see that there was an opportunity during the recession of 1991 to buy radio stations at low cost relative to historical comparables. I raised some money, debt and equity, and bought my first station in the Albany, NY area, and over the following six years, I built a small station group, which I sold to Clear Channel in 1998.
Afterward, I came back down to New York City, where I’m from, and some friends and I started a new company called UGO Networks, which was one of the early ad networks. UGO was targeted to 18-34 year old males; essentially it aggregated web publishers and resold their ad inventory. That company did survive the [dotcom] downturn, and was eventually purchased by Hearst.
In the interim, in 2001, I started a company called Alliance Custom Communications doing custom newsletters, magazines, DVDs, etc., for national marketers. Eventually that business was absorbed into Random House, where we started the Random House Custom Media Division. I was there for a year and a half.
I left there to help run a web publishing company called Imaginova. Their core business was selling telescopes online under the Orion brand. But they also were a web publisher – Space.com was their flagship property, which was the busiess that I lead. I left Imaginova to try to do another startup, that was ‘08/’09, and obviously it was a difficult time to raise money. So I said, “you know what? Maybe it’s time to move to the capital side of the startup ecosystem.”
So I joined New York Angels, and that’s where I met Jeff.
Jeffrey Silverman, Laconia: For the last 30 years I’ve been in media and technology, and actually have a very similar background to David.
I worked at companies like CBS and then headed up sales & marketing for an in-school advertising company, which got sold. During that time as I was deciding what to do next – this was in ‘96 – many people I respected in the industry said to me, “you should look at the internet, it’s going to be like getting into television when it was black & white.”
So I got a job at DoubleClick, where I was one of the early employees. I spent five years there and had multiple senior-level positions. I ended my career there running the media division. We sold it, and then I took over an early stage software company. I evolved from a media person to a broader tech management person, DoubleClick exposed me to technology and to developers and product managers – it was a great experience.
My next company, Integrated Color Solutions, developed software for the publishing industry. I ran that company for about six years, after which I stepped down and joined the New York Angels because I had made a number of angel investments over the years and I wanted to surround myself with other angels to see more of what I didn’t know – which was a lot.
At one of the first New York Angel meetings, I sat next to David. One of the great things about the New York Angels is the people, and the membership. Through my time in that organization I met some fascinating and amazing people – David being one of them.
The vehicle I had created to do some investments was Laconia Ventures. Soon after I had started to do some angel investing, I found that a number of friends and former colleagues would say, “If you see anything really interesting, let me know.”
At the time, I did not want to start a venture fund, so once a month, I’d have dinner at my office with a group of 8-10 people. We’d talk about the two or three deals I’d seen because they’d come directly to me or through New York Angels or through different channels that we had.
David at one point said he’d love to join those dinners. Long story short, we did that for about two years and invested in 25 companies, and our friends and former colleagues came to me and said, “OK, are you going to go back and start a business, or are you going to do this?”
I said, “I don’t want to do it alone. I really enjoy collaboration and having a community.” And that’s when David raised his hand. About three years ago now, we met at a diner on the Upper East Side in August, and he said, “Let’s you and me build something together.”
We didn’t want to just do a traditional venture firm – there’s a lot of them out there, and they’re great, but we tried to put our entrepreneurship hats on, and say, “What’s our personality, what works for us, what’s the best of angel investing, what’s the best of a venture firm, and how can we combine all those pieces to give it our personality and our fingerprint?”
DA: What we liked about the angel world was the collegiality and the transparency of the entire deal process. And we also liked the discipline and the rigor of a thesis-driven venture firm.
The questions we asked ourselves were whether we could combine the two and create a strong sense of community and alignment between investors and the GP, while maintaining maximum transparency and being high-touch even towards our entrepreneurs.
Having been on the other side of the table raising money from VCs, I know sometimes there is a tension between the two sides. Jeff and I wanted to eliminate that tension and break that barrier down. We see getting involved both with investors and with the entrepreneurs as a group activity in order to build great companies. We’re all on the same side, and that’s where this high-touch model that we have comes from. The model we have fosters great relationships and we’re building some great companies.
JS: We called it Laconia Capital Group. We are a late-seed B2B fund that’s focused in the Northeast. Our thesis was that companies could not raise enough money at the seed stage to hit the necessary milestones to secure an A, where the bar keeps rising.
For us, the seed stage investing that we’d done as angels was a little too high risk. We were very sales & marketing and operational-focused. The necessary data and KPIs we would need to see from a company in order to make an informed decision – we wouldn’t find at the early seed stage. We like to see companies that are doing $25-75k in MRR. We want companies that are in Northeast, because we want to develop relationships with them. We want to be able to jump in a car or train and be up to Boston in a few hours or just on the subway and be able to meet with our companies for drinks after work if they’ve had a bad day.
We wanted to use crowdsourcing with our LPs. Our belief was that LPs should, besides their money, have other resources to bring to the table. We wanted to build that community. We speak to our LPs, which consist of family offices and high net worth individuals, a couple of times a month. If we see a deal we like, we let them know about the company and ask if they have any experience or context in that industry. We encourage them to feed us their contacts whom we can turn to during our due diligence.
DA: We bring our LPs into the due diligence process fairly early on. They’re not conducting the actual due diligence; we are still fiduciaries of the fund. But they do see, I think, an extraordinary amount of the sausage-making, if you will, leading up to the eventual closing of a deal. We believe that that transparency is very helpful. It gives the LPs confidence in our process. It also makes us even more accountable to the process. When we do close on a deal, everyone understands the reasons why and the deal has been fully vetted across the LPs, and of course amongst ourselves through our own infrastructure.
JS: We’ll draft an 18-25 page investment memo that we distribute to our LPs prior to us issuing a term sheet or participating in a term sheet. These are bright people, and to not get their insights would be our loss.
They don’t get a vote, however, – David and I are the only investment decision-makers – but they’ve come back with some great questions or insights in situations that maybe we’ve gotten too close to. A fresh set of eyes can offer a really good opinion. We’ve only seen upside from it; it has not slowed down the process. We can complete due diligence in 4-6 weeks.
For the entrepreneur, we build that same type of community. Twice a year, we have our entrepreneurs come together and we host a portfolio roundtable where we bring in a speaker on a certain topic, whether it’s HR, public relations, or whatever else. It allows our entrepreneurs to sit around a table with one another and get to know each other better and ask questions on a topic that might be troubling them. That night, we have a dinner with our LPs and portfolio companies, and they have to meet each other. Our most recent portfolio companies will do a pitch, or the ones who have just completed a raise will give an update on where they are.
To be in a room with 40-50 people and allow them to engage and talk and share ideas really has fostered this strong partnership community that the LPs love to be a part of, and the portfolio companies really enjoy being part of.
When you’re looking for cofounders as an entrepreneur, the guidance is to look for someone whose skills are complementary to yours – someone who brings something meaningfully different from what you do. Does the process of finding a partner for a venture firm operate similarly or is it quite different?
JS: I gotta tell you something: Laconia would not be Laconia without David.
DA: Well, and Laconia would not be Laconia without Jeff. Our wives are very jealous.
JS: We both love rolling up our sleeves and working with the entrepreneurs. David has a knack for the details, the back office, the how do you deal with the lawyers and the fund documents and drafting our PPM and modeling out everything and dealing with the back operations end stuff that would drive me crazy. It allows me to be out meeting people and networking.
It’s a great yin and yang partnership. We’ve been together three years and there hasn’t been one disagreement. If we get a deal that one of us likes and the other’s not sure about, we will literally not talk about it for 72 hours and then we’ll come back and grab breakfast three days later and say to one another, “What do you think now?”
DA: For me, when I’m not initially agreeing with a point of view that Jeff has, my instinct is, I need to understand why he’s believing that because his instincts are really good, and I’m probably missing something. That’s my approach rather than putting forth arguments as to why he’s wrong – I try to search for the argument as to why is he right? And he often is right. When his instincts kick in, there’s a there there.
JS: I have so much respect for solo founders. I think it’s probably the hardest job in the world. To have a partner who has these skills that I somewhat have but don’t necessarily want to develop is so valuable. And better yet, there’s no ego here. If he brings a deal to the table, the response is, “oh my god, great.” It’s not, “oh my god, I have to carry my weight.” There’s a lot of Jewish guilt going back and forth here.
DA: Italian-Jewish guilt.
JS: All kidding aside, it’s really been great. It’s been an absolute perfect match.
On your website you note that you invest in startups “solving immediate efficiency problems in markets and workflows.” Tell us the backstory there – how did that come to be the focus for Laconia?
JS: We are a late seed investor. We know the risk that comes with that. We don’t have the $200M fund to enable us to go to the A-B-C-D [rounds]. We do the late seed and we’ll participate in the A. We know we need to develop a really strong relationship with the entrepreneurs and help them solidify their companies.
Why we like the late seed is it fits our skillset of being operational within marketing and sales. When we go through the due diligence on a company, it’s remarkable to see David look at the financial model and ensure — in most cases it doesn’t — that the financial model matches up to their sales pipeline, their marketing plan, their hiring, and their technology roadmap.
DA: And their capital plan. We see a lot of misalignment between operating plans and capital strategy. We don’t see a lot of entrepreneurs who think about capital in strategic terms – they see it purely as funding, but they’re not tying it into questions like, how does the business execute and what is the efficient role of capital in that process? What are the milestones that need to be reached in that execution? And what are the milestones you need to hit that will trigger subsequent rounds of financing, and how does that impact the way you execute and the way you segment your market?
JS: What we don’t want to hear an entrepreneur say is, “I’m raising $2.5M that’s going to last 24 months.” That doesn’t tell us anything; it could last 12 months if you hit the right milestones. We’re more focused on, what are the milestones you need to secure the next round of financing? Our jobs are to go out and confirm those are the right milestones by working with later stage VCs, because once you’re secure around that, then you’re building a plan around hiring, marketing and sales to achieve those milestones.
DA: And the milestones are not just a specific MRR or something; we’re looking to unpack the process that drives the business. We’re looking for a profitable, repeatable, sustainable model. We’ve passed on companies that had a great MRR that were too rolodex-driven, for instance, and the entrepreneur doesn’t really understand how to build a process around revenue generation. The process is seriously important.
What percentage of founders come to you and you find in fact they have been thoughtful around how the operating plan aligns with the capital strategy? If it’s a small amount, why is that?
JS: I think it’s the ecosystem. I really think the ecosystem has convinced people that it’s all a race to raise money, and that people’s success is based upon how much money they’ve raised and at what valuation.
We look at the capital raise as one part of the entire execution plan. We want to invest in companies that are capital efficient. It’s not rare for us to say to our companies, “You don’t need to raise that much money.” We want to be sure our entrepreneurs have a nice piece of the equity.
The analogy I’ll use is, if a company has to go from one milestone to the next milestone, and they raise a tremendous amount of money, then their room for error gets very, very small. It’s like they’re walking on a tightrope made of dental floss. If they don’t raise a tremendous amount of money and only raise the money they require, then the level of expectation isn’t as great and that enables them to pursue nice consistent growth.
DA: Staged growth. What are the stages? Our observation is, you build great companies step by step in small chunks. The more you can break it down into small chunks, the greater the chance you’ll be able to continue building your business. Swinging for the fences is not a plan.
JS: And what’s the race? If you’ve got a good product and you found market fit – grow the business.
DA: Even in our approach to revenue and valuation and capital efficiency, we tend to look at it through a value prism. We joke that we’re “early stage value investors,” and it’s because we really pay attention to the fundamentals of a business: how are you going to make money? How is this going to serve a customer, add value, generate revenue, and produce cash flow?
The business sectors that we’re looking at, since a lot of what we’re looking at is the digitization of manual work flows – these businesses, for the most part, are not going to be billion dollar assets. But they don’t need to be at the level we’re investing. If we’re correct in our assessment that they’re solving a high pain point problem, you’ll eventually build a good business and you’ll have a good liquidity event.
What do you need to see from teams, both qualitatively and quantitatively, in order to invest?
JS: One of the most amazing things is, when we do our portfolio roundtable or our LP-portfolio dinners, to sit at the table, look around and see the founders of our portfolio companies – they all have a similar DNA.
What I mean by that is, they can talk about their business, the metrics that move their business, and the levers they have to push and pull, without looking at an Excel spreadsheet. It’s that granular detail that they know that we look for.
DA: Along with that comes a sharpness and an intensity that they all seem to have. Not arrogance. All of the entrepreneurs we invest in are great listeners.
JS: And they’re looking to build a business, they’re not looking to build their brand – there’s a big difference.
DA: They’re not self-promoters. In fact, when we have an entrepreneur come in and pitch us, if they’re really sales-y, it’s a total turnoff.
JS: Totally – and I’m a salesperson!
DA: We both have sales backgrounds, but we want someone coming in who’s looking to us because they want to solve a problem, and they want help customers. They know if they solve that problem, they’ll create a great business.
It may be cliché, but an entrepreneur is going to be with us for at least five years probably – that’s a marriage, so there has to be extreme mutuality in the relationship. If you’re coming right out of the box and you’re trying to hard sell us, that’s a one night stand.
JS: We have many dating analogies.
DA: Two middle-aged married men, I wonder why.
Let’s turn the tables: what do you imagine, or hope, your entrepreneurs would say about you guys as investors?
JS: I think the words they would use are accessible, empathetic, dependable, and transparent. I would tell you, our LPs would say the same thing.
DA: I think they’d say as well that we make the extra effort – and they have. We’ll go to the mat for them.
JS: We do, and it’s through good times and bad times. It’s funny, when entrepreneurs come to us and they’re looking at other VCs, we always say to them, “As much as we’re doing due diligence on you, you should do due diligence on us.” So go to our website, look up our portfolio companies, and you can call whoever you want to call – the ones who were successful, the ones who weren’t successful, because the way an investor handles the good times and the bad times is important.
What sorts of reporting requirements or requests do you have of your startups?
JS: We would like to see a monthly email from our portfolio companies that states the current elevator pitch, which may sound crazy, but it evolves, and I want to be as aware as possible of your elevator pitch so that I can carry the flag for you.
Two, we want to see what’s good, what’s bad, and what’s your ask. The ask cannot be broad; it can’t be, “I’d like to get into an ad agency.” Let the ask be something like, I’m trying to get into one of these five retailers…
DA: Or this is the person I’m trying to get to.
JS: We’re not trying to make work for them, but to put three or four bullet points together on what’s gone well the last month, and another three to four on what’s not gone not well, whatever it might be, just gives us quick insight ahead of our quarterly board meeting.
We’ll also work closely with them on their cash flow. During the due diligence process, we’ll talk about the use of proceeds. Use of proceeds becomes real when you’re about to get wired money. That’s when we’ll sit down again with them and say, “We’ve talked about use of proceeds, but you’re about to have X millions of dollars hit your bank in two days – let’s talk about use of proceeds.” We’ll hear the plan and then a few months later we’ll sit down with them again.
You often have two types of entrepreneurs, actually: those that think they’re still poor and don’t want to spend the money, and those that think they’re rich and they spend the money too quickly. We want to control for both.
Because, yes, you have this money, you have to hire, you have to grow this business, you need to spend the money; but at the same time, you don’t have to give someone a raise from $60,000 to $95,000 tomorrow.
You hear so much about the Series A crunch – you guys are operating at the late seed stage so you have a lens into that part of the ecosystem. Is the Series A crunch a real phenomenon or is it overhyped? And what does a company need to do to raise an A?
DA: I think the Series A crunch is overhyped – and appropriately so. It should be hard and difficult to get a Series A. At the very early friends and family stage and at the angel stage, that – again, appropriately so – is throwing money at a lot of businesses, and those businesses are either going to sink or swim, so there should be a high hurdle to get an A round.
JS: To raise an A, I think companies have to show a repeatable sales process. The MRR has to be $100-125k. But I think the key things we’re looking for are, from a sales channel perspective, that you know who your prospects are and that you know the qualifying questions. A spray and pray methodology in sales is not going to work.
At the point when you’re approaching the A, you have to be able to say, “This is who my client is.” You have to know how you’re moving them through the pipeline, what the touch points look like, how long is the sales cycle, how long the onboarding is, and show that it can be a repeatable scalable process.
From the moment we bring somebody into our group, we’re very focused on the KPIs, making sure they’re the right KPIs and tracking those, because that’s really going to be important for the next round.
DA: The more granular that an entrepreneur can get around the sales process, market segmentation, prioritizing the ideal customer, the better – in business school, my first year marketing professor would constantly ask, “Who’s the customer, who’s the customer, who’s the customer?” Entrepreneurs often don’t ask themselves that question enough.
JS: They lose sight of it; some of them get more wowed by technology. Our view is that technology is a commodity now. We’ll definitely do our technology due diligence in terms of what their stack looks like, but the best technology does not make you win. It’s the sales process that’s going to make you win. Facebook was not the first out there, Snapchat was not the first one out there. It’s all a question of who can execute.
DA: And the value proposition that you’re offering customers.
JS: For the market we go after – we’re not bleeding edge technologies, we’re not going after virtual reality, drones, and all that. We’re talking about companies making current marketplaces more efficient.
Urban delivery, for instance, is a need, and it’s always going to be a need. We looked at the landscape out there, and we came across Adam Price, founder of Homer Logistics, and our feeling was, “Wow, Homer really gets urban delivery, and he nails the metrics of his business.”
We’ve also invested in a company called Sports Recruits, which is LinkedIn for high school athletes. It streamlines the college recruitment process for the high school athlete much more efficiently. Those are the types of businesses we continue to look at.
DA: We ask ourselves, “Is a solution to this problem inevitable?” And if it is, the next question is, “Is this the right team?”
Laconia focuses on companies in New York, Philadelphia, Boston, and DC. Why keep it so tight, and do you ever get feelings of FOMO about what’s happening in the Bay Area or LA?
DA & JS (simultaneously): No.
DA: It’s an $18T economy, we’ll find something.
JS: Plus, we want the companies to be in our backyard; we don’t just want to be a name on the cap table. If we start to go to the West Coast, then we risk becoming that. Now, we do have portfolio companies, like AutoFi, that started in New York but are now out in San Francisco. But by the time they moved out, we had developed very strong relationships with the two founders.
But yeah, as David said, there’s a lot of opportunity out here, so we’re OK.
David, you’re a member of New York Angels, as is Jeff, and HBS Angels. Say a word about the significance of those two institutions in the NYC tech ecosystem, and about how the ecosystem has changed in the years you’ve been involved in it.
DA: At a macro level, going back to when I first cofounded UGO in 1998, the growth and maturity of New York City’s early stage VC ecosystem have been nothing short of phenomenal.
It was the Wild West then and nobody quite knew what they were doing in ‘98, and today, it’s very professional. The structure, whether it’s having great technologists, investors, strong entrepreneurs – all the resources have come together, so New York City is a very exciting marketplace.
It’s also a very collegial marketplace. I don’t have direct experience with the West Coast, but the kind of competitiveness I hear about on the West Coast I seldom see on the East Coast.
It’s so different from what you might expect, isn’t it? If you knew nothing about tech and you had to guess which of New York or San Francisco’s ecosystems would have sharper elbows, you’d guess New York every time – but you’re saying that’s not the case?
JS: We’ve talked about collaboration and transparency – we’re like that in every aspect of our business, from our LPs to our portfolio companies to our venture partners. We have no problem going out to lunch and telling the VCs we’d like to work with them on the deals we’re looking at right now. We’re not going to take up an entire round, and we don’t think they’re going to come in and take a whole round – so we need each other. And if the entrepreneur ends up saying to us, “Thanks for introducing me to so and so, they came in and took the round,” then that probably wasn’t the right deal for us.
For us, speaking with other VCs is a way to continue to test the process – we want their feedback, we want their insights. We’re not paranoid or concerned about needing to be inside on every deal before they get introduced.
DA: The origins of Silicon Valley are all about technology. New York City is a highly diversified economic center – finance is large here, but you also have media and book publishing and advertising and fashion and a giant healthcare sector and real estate sector. It really functions like a city-state. I think the diversification of New York lends itself to people being curious about one other. There’s no dominant core, and that produces some wonderful opportunities for B2B investments.
JS: I think the angel groups have continued to evolve, and they’re essential to the ecosystem. New York Angels brought me into the ecosystem officially; it brought David in – we met through them. It allows people who are interested to dip their toe into this ecosystem. And it provides a lot of mentorship and guidance for young entrepreneurs.
DA: I’ll throw in the accelerator and incubator community, which goes hand in hand with the angel community in many ways. That very early stage, seed stage infrastructure is essential.
Jeff, I want to go back to your experience at DoubleClick. In the course of this series I’ve often heard people talk almost ruefully about the DoubleClick acquisition, and about how that acquisition didn’t allow New York to take the big leap forward and become a true rival to Silicon Valley. Why do you think that was?
I will tell you right now: there’s a fund down in Philadelphia, the Blue & Red Fund, that only invests in Penn graduates. I just read about one that only does Dartmouth alums.
If there was a fund that just did DoubleClick employees, do you understand how successful that fund would be? Oh my god. You’ve got Mike Walrath with Right Media, Bill Wise with MediaOcean, Jon Heller & Doug Knopper with FreeWheel, Kevin Ryan and Dwight Merriman, MongoDB, Mehdi Daoudi & Dritan Suljoti with Catchpoint and this is just the tip of the DCLK Alumni success list.
Whether people started their own business or became senior leaders – the DCLK DNA can be found in almost every adtech company. So in short, I think what DoubleClick did, what Kevin O’Conner and Dwight Merrimen and the team built, has been remarkably successful. And I’m proud to just be associated with that company as an alumnus.
So in short – I think DoubleClick did so much for the ecosystem. And I think Google got it for a steal.
What trends are you watching closely in 2017?
DA: Well, obviously it’s here to stay and it’s no longer a trend, but the incorporation of AI functionality into every workflow is a big one. In some sense, it’s emerging as a commoditized level of the tech stack. We’re not interested in the pioneering technologies around AI, but what exists today is very practical and we’re seeing it everywhere.
I think most people hear AI and they think bleeding edge technology – you’re saying it’s becoming almost table stakes for companies?
DA: There’s nascent AI functionality that exists in the world today. Is where it’s heading going to be mind-blowing even five years from now versus where we are today? Of course. And five years from then it will be even more amazing. But no matter where it’s going, it’s now beginning to have a practical impact. The dream is not fulfilled but technology never works that way.
JS: Put it this way, AI has been added to our tech due diligence. We want to know where AI fits in the broader technology roadmap. As David said, AI is part of the tech stack. Like anything in the tech stack, it will improve and it will be enhanced, but you have to have it on your technology roadmap.
As far as other things we’re watching, we’re very curious from our roots of sales to see how the sales process is evolving, and how technology is being used to make a salesperson’s life easier and more efficient. We’re looking at companies in that space in the sales stack.
We also like the food tech space. What’s interesting when we look at areas is we try to look 10 years out and say, is that business going to be wiped out by technology? With the restaurant business, you know people are going to have to eat, so I think the restaurant business is always going to be around, at least for the foreseeable future.
We look at that space and see a lot of opportunity for efficiency. You go into a restaurant and you see how it works and there’s lot of inefficiencies there. As rents go up for restaurants, they’re being pressured to find cost savings elsewhere. We’re interested in seeing how technology can provide the cost savings.
Restaurants have two major costs: rent and employees. The minimum wage just went up. Food prices can only go up so high. There are a lot of areas for efficiencies there.
Someone told me once that restaurateurs, as a group, tend to be more top-line focused than bottom-life focused. Is that your experience?
JS: We’re starting to see shifts in that. What’s hit them the last two years has been, one, an increase in retail rent and, two, the increase in minimum wage.
Our insight into that came from our investment in Homer. We’ll look at our partners and say, “Oh my god, they’re solving a need” and we get a deeper insight into that.
We’ve gotten a really strong insight into the automobile industry, not from the autonomous vehicle perspective, but as far as how cars are sold and serviced from our investment in AutoFi.
DA: You learn a lot from your portfolio companies.
Favorite book and why?
JS: The Fountainhead or Atlas Shrugged. You can’t legislate against technology.
DA: I was a philosophy major. Anything by Herman Hess. Siddhartha is always a good beginning. What the connection between the path to enlightenment and entrepreneurialism is I’m not exactly sure, but they’ll probably meet at some point.
Most underhyped corner of the tech ecosystem?
JS: I think technology replacing Excel spreadsheets isn’t sexy.
DA: What we do isn’t sexy.
JS: Some VCs would look at our portfolio and say it’s not cutting edge, it’s not pushing the envelope. But our companies all address a need, they make money, and they grow month to month.
DA: In some sense, the underhype is because the unicorns and the big money raisers get all the press. But there’s a whole world of entrepreneurial and venture capital activity that’s never going to make a headline and they’re going to have exits of $200M, maybe hitting $300M, and you can make a lot of money in that space, but no one’s ever going to read about it. I think that’s underhyped.
JS: How’s this for underhyped? A cashflow positive company. What’s wrong with building a business that’s cash flow positive, and growing it?
DA: You won’t get a $5B valuation.
On iconoclastic take: How will the world be different in 20 years’ time?
JS: The book I’m reading is Rise of the Robots: Technology and the Threat of a Jobless Future, by Martin Ford. I am very concerned that in the next 20-25 years, we are going to have 20-25% unemployment, because the technology being developed and enhanced now is replacing the unskilled labor force. When you introduced computers many decades ago, it was replacing the skilled worker and making the skilled worker more efficient, and now we’re starting to see unskilled labor jobs that are going to be replaced by robots.
Look at autonomous cars — what will that do to the trucking and shipping and automobile industries? Where are those people going to go?
When you look at agriculture and what’s being done there, and you look at our education system, I just don’t see our education system producing the type of skilled labor force we need for where the jobs are going to be.
I’ve got a huge concern about that. That’s why I’m moving to Costa Rica in 15 years. And David’s going to Italy. These are conversations we’ve already had.
DA: So, the future. In a certain sense, Jeff is asking the right questions. The two big issues that technology is placing upon us are robotics on one hand and privacy on the other. There’s certainly a utopian view of those two things, but there’s a challenge to make sure it doesn’t turn into a dystopian future.
I will say, my kids, who are very politically minded, are always asking me the question, “Are you contributing in a negative way to those issues by creating companies and supporting technologies that can be used in detrimental ways?” As investors and as human beings, we have to be somewhat aware of that.
It’s interesting, I’ll get philosophical for a minute: our stated ambition is to create efficiencies. In some respects, I think that as human beings, the meaning in our life comes about from the inefficiencies. If you whittle away all of the inefficiencies to human existence, you’re not left with much.
If you were to peg the odds of the technology leading us towards utopia or dystopia, how would you do it?
DA: The world is definitely at an inflection point with these issues, and which way it tips is not clear. It takes an enormous amount of political sophistication to navigate through these challenges that are being presented by technology.
There’s no question that the populist movement that’s happening globally is greatly impacted, if not driven by, the technological changes of the past 20-30 years. It’s a big challenge for our society. It’s very serious.
JS: There are really tough decisions that have to be made, and we’re not structured for this.
You know what’s interesting? I’m looking at colleges and universities with my daughter, and all the schools have set up design thinking courses. The rooms have been redone where you don’t have a table or chairs bolted down; they’re all on wheels. All of the colleges now, it’s all about collaboration. My son will tell you, most of his assignments are collaborative assignments.
You look at the WeWorks of the world or just offices the world over, they’re open. They’re collaborative. And yet we have a government that is completely opposite of everything we’re all being taught. There’s no collaboration.
DA: To build on that, if you look at the traditional political frameworks of past 200 years, they do tend to be structured in oppositional terms, not collaborative terms. Labor versus capital for instance. The challenge for future political frameworks is to create incentives for compromise through collaboration rather than through political conflict.
Economists right now are back to the drawing board; they’re trying to understand the relationship of capital and labor in a hyper technological world. The old paradigms are breaking down. We’re seeing economic outcomes that don’t fit the boxes. There are things that traditional economics are not predicting in the way they have, so what’s going on and what’s technology’s role in that? These are interesting questions.