Welcome back to Inside the Mind of an NYC VC, a new series at AlleyWatch in which we speak with New York City-based Venture Capitalists. In this hot seat this time is Joshua Siegel, General Partner at Rubicon Venture Capital, a NYC and SF-based venture firm with over 20 portfolio companies, now investing out of its second fund. Joshua sat down with AlleyWatch to talk about his journey from operator to investor, Rubicon’s evolution from an angel group to venture firm, its future plans, how it manages it relationships with LPs, its innovative “sidecar” investment offering, the differences between the west coast and NYC, and everything in between.
If you are a NYC-based VC interested in participating in this series, please send us an email. We’d love to chat. If you are interested in sponsoring this series that showcases the leading minds in venture in NYC, we’d also love to chat. Send us a note.
Inside the Mind of a New York VC: Joshua Siegel of Rubicon Venture Capital
Bart Clareman, AlleyWatch: Tell us about your journey into the Venture business and how you came to found Rubicon?
Joshua Siegel, Rubicon Venture Capital: My journey into the venture capital business was very atypical. It originally started back in ’07 when I had to shut down my real estate development company due to a death in the family and an illness with another family member. I was unable to hold down a full time job because of my responsibilities, and thus I became a professional angel investor in New York City.
In early 2012, I had a very extended conversation with my now-partner, Andrew Romans, whom I had met originally at business school in 1998 at Georgetown. We had done some deals together over the years – we’d made money, we’d lost money.
We ultimately decided that it would be in our best interest to start an angel group before starting a venture capital firm, and that was the birth of Georgetown Angels, and our plan was to transform it into Rubicon Venture Capital subsequently. We prepared for this right at the start as Georgetown Angels was set up to be a true VC with all the proper paperwork.
It took 15 months, almost to the day, from when we decided to start Georgetown Angels to when we fully transformed it into Rubicon Venture Capital, which is very short for an angel group.
Having run both an angel group and a VC, how do you compare the two?
Angel groups and VCs do need each other, it’s a very symbiotic relationship.
Angel groups typically do deals very early, pre-Seed or Seed stage deals, and occasionally they might be allowed into a Series A or beyond, but generally speaking they’re involved very early. So it’s a lot of risk; there could be a lot of reward but the risk far outweighs the reward.
As an angel group, you also don’t have a real pool of capital that would enable you to invest in a deal very quickly. When you get a deal you have to pass the hat so to speak. And then when you do pass the hat, the individual angels in the group may not be really sure what to make of an opportunity, and you tend not to have someone professionally managing the process, in general.
We did approach the process from a professional standpoint, because Andrew and I are professional investors. So we knew how to do that but it was still a challenge of corralling capital for every deal.
As an angel group we did five deals. One of them, OnePage, did spectacularly well; we made a 24x return in 27 months. One failed after almost 3 years, and the other three are still alive and kicking, although one went through a restart.
But we realized for us to be able to do this full time we needed a full fund to draw down management fees and get carry. You can’t live running an angel group, it just doesn’t work.
Rubicon offers a Sidecar investment strategy – tell us the genesis of that and why does that make sense for Rubicon?
Rubicon has a dedicated fund that Andrew and I manage directly. When we want to make an investment into a startup, the two of us decide on that and we’ll wire funds into the company. We’ll then go back to our LPs and say, “Rubicon is making an investment in this company, who would like to add additional capital alongside us through our SPV?”
The reason we allow that is we have quite a large number of LPs and a lot of them are very influential in their respective industry verticals. By allowing them to invest alongside us, they feel they have more skin in the game and are willing to help the company above and beyond what we might just ask them for on a normal day for fund investments. It makes them feel more attached to the company and that’s really important for us.
It’s also a way for the companies to get additional capital without having to sell it to everybody else. Andrew and I communicate to our LPs: we give them a memo telling them exactly what we’re doing, so they already know the company and for them to add additional capital is a very quick decision. And they can do it in increments as small as $10k, or as high as they like, as long as the company will accept it.
The other thing is it allows the LPs to continue to invest into a startup beyond a point where Rubicon will no longer invest. Rubicon will do late Seed, A, and B, and we typically won’t go beyond that because it doesn’t fit with our portfolio construction. But if a company’s raising a C round or a D round all the way through to an IPO, our LPs can participate because we have the pro rata.
That’s important because as a company grows it get de-risked – you might as well invest to get the return. But as a fund it doesn’t make sense from a returns standpoint, because our investors expect a certain level of return from us. If we invest later it’ll throw off our IRR.
Does that suggest your LPs participate more actively in later stage Sidecar opportunities, rather than in a company’s earlier, riskier days?
No – actually, historically a lot of our LPs have participated with us at the late Seed and A. It’s when we’re getting in to later stages that only certain LPs will participate with larger checks.
It’s often ironically noted that for a business at the forefront of innovation, there’s been very little innovation in the nature of venture capital. How do you assess the evolution of the industry and what do you perceive to be the most critical areas for innovation?
There is a lot of innovation in VC from the standpoint of data. Correlation Ventures invests based solely on data points and CB Insights has become quite influential in tracking startups as well as providing metrics that many firms use in their analysis.
Everyone brings up Correlation.
Well, they’re very good at it. They’re very unique in how they approach it.
The problem is, unless you’re a VC you generally speaking don’t understand the motivations of VCs. A lot of this goes to portfolio construction theory, and also where you are in your cycle as a fund. The reality is that 70% of venture capital goes to zero. 20% is even money, and 10% is outlier.
We don’t want that. We want to reinvent that model. We want 70% outlier, 20% even money, 10% failure. We have a thesis approach to make sure that we get that right.
What you have to understand about venture – let’s say you have a $100m fund. You’re in year 5 of your investment cycle and you still have $20m left. You might throw that $20m into a later stage deal that you otherwise might now have done and it might only be a 1x exit, because you have to spend the $20m during the investment period – or you have to give it back, and nobody wants to give it back.
Our typical investment horizon is typically 3.5 years. We’re very efficient at what we do. We just happen (wink wink) to get into some great stuff, which we work very hard to do.
70% outlier performance is tantalizing. Is it possible? How do you get there?
Tomorrow we’ll be investing into our 21st investment for Rubicon. We will then have 20 portfolio companies, with one exit.
Of those 20 portfolio companies, I would say seven already are achieving way outside returns – in terms of markups and follow-on rounds and revenue execution.
I would say three are in a challenging environment. And the other 10 are still too early to tell what’s happening; they’re generating revenue and they’re doing fine, but it’s unknown what’s going to happen with them.
So we’re already beating the model, but it’s still too early to tell. We’ve only been investing for three years out of the main fund. We did a first closing for Fund 2, which has a $20m target – Fund 1 was under $10m.
How are you beating the model? What’s the secret sauce?
The secret sauce is how we approach investing in a deal.
We want to make sure there’s a full team. We want to make sure there’s a real minimum viable product that has demonstrated traction with real customers, which for us means that the company’s generating about $100k in monthly recurring revenue.
We want to make sure the company’s in a large enough market. We want to make sure we have expertise or have connections in that market so we can help them. Even before we make an investment we’ll call people in that market to say, “hey, can you meet with this company, we’re thinking of investing,” and then we’ll watch the company go through a live sales cycle to see how they do. If we know we can help them, and if we know we can increase their revenues by getting them to decision makers, which we’ve done for a lot of our companies, that makes a big difference.
We want to make sure it’s an 8-10x return over a 3-5 year investment cycle. If we invest in a company with a pre-money of $10m and they’re raising $4m, and we can see them being an $80-140m company – we’ll invest. If we can’t see that, and it’s probably going to be a $30m company, we won’t invest. We need to get the risk-reward right.
A lot of this has to do with the founders – are they realistic, do they know what they’re doing, can we work with them, does the team like them, do their customers like them? We’ve had situations where a potential portfolio company will pitch us, and then we’ll call their customers and we’ve gotten negative feedback.
Some early stage companies don’t think you’re going to go through that diligence. We do. And we have contacts all over, we can always get to the right people.
Depending on the stage, some companies will assume you’ll just accept what they tell you. That’s a danger. It’s challenging because we believe that the founders believe in what they’re doing – that’s important. But it doesn’t necessarily make it correct – so we check.
And look, we’ve passed on deals that have gone on to get funding. We’ve also funded deals that other people have passed on and then they kicked themselves for it. Not every fund is appropriate for every deal.
You talked a bit about founders – what would the founder of one of your 20 portfolio companies or the one that exited say about Rubicon?
Without tooting our own horn, I would say that the founders, for the majority part, think of us as extremely value add and one of the best investors in their cap tables.
Some companies we’ve been able to help for years, because we can continually help them by making introductions. Some companies have outgrown our ability to help them, simply because they’re on their path, doing larger kinds of deals and they don’t need our help.
We try to maintain a great relationship with all of them. We try to be super supportive, super helpful, we introduce them to other VCs, to talent, customers, law firms, accounting firms – whatever we can do to help. And they know we’re there to help – I get calls at 1am sometimes.
Your partner Andrew is based in Palo Alto, so Rubicon has direct exposure to the entrepreneurial ecosystems in New York and Silicon Valley. Compare the two markets – what differences do you see between entrepreneurs, companies, and LPs on the East Coast vs. West?
There’s a ton of difference. In New York we’ve found that most of the entrepreneurs come from industry expertise areas. They’re typically a little older – late 20s and 30s as opposed to early 20s.
The New York entrepreneurs tend to try to achieve a bit more in terms of real revenue prior to raising real VC capital. They tend to get more money from friends and family first. They tend to be siloed into certain industries that are bigger here, like fintech, adtech, marketing tech, consumer stuff, things like that.
On the West Coast you’re seeing a lot of innovation in AI, computer science, machine learning, big data, IoT, enterprise SaaS, things of that nature which get a lot of support from the ecosystem – so it’s just different industry verticals.
You also see a lot of multi-time entrepreneurs – they’ve done something and they’ve either failed fast and started something else or they’ve done well and exited and on to their next thing.
There’s a lot more early stage ventures on the West Coast because there’s a lot more early stage capital available so you see a lot more deals there. The ecosystem itself has more entrepreneurs because you have Stanford, Cal-Berkeley, things like this that support computer engineering and computer science degrees. In New York you don’t really have that as much as the collegiate and advanced degrees available aren’t established for those areas.
The challenge I’ve found though is that what works in San Francisco doesn’t necessary work anywhere else. There are lots of companies that do things that work in the confined space of San Francisco but they can never grow out of San Francisco. That’s a problem.
Can you identify the ones that can only thrive in San Francisco, or will they only reveal themselves over time?
Things like “the Uber for something,” the on-demand economy stuff, “Pinterest for something,” things of that nature are the things that never make it off the ground. The originals have done well but the copycats won’t. There’s a lot of food company stuff that happens in San Francisco that will just never work anywhere else. Also a lot of service-based companies – a lot of people are doing on demand this or that which just doesn’t work. Those are the things I’m wary of.
True or False – New York can become a bigger venture capital and entrepreneurial hub than SF in the next 10 years?
Definitely false, although I hate to say it, San Francisco is as big as it is for a lot of reasons. It has a lot of money, it has a lot of success, it has a lot of entrepreneurs, it has a lot of support in the ecosystem from the ground up all the way to the exits.
New York has a lot of this, too, but the venture capital asset class isn’t as widely accepted or known here. You do have a lot more firms now, which is great. You still need more LPs and we need some bigger success stories, bigger exits in New York.
Ten years’ time is not enough time. This is a generational effect. So 30 years? Maybe, but it doesn’t need to be. There’s room for everybody. New York doesn’t need to overtake San Francisco, nor should it, probably.
Part of it is the culture as well; New York is a no-bullshit town, a lot of startup stuff is fake it ‘til you make it. We don’t have tolerance for that. If you’re faking it, we’re going to find out. So, there’s less room to maneuver in New York. We call bullshit.
You typically begin investing at the late Seed stage, after a firm has raised $1m. What do you require companies to have achieved in the early Seed stage?
Typically we want our companies to have at least $100k in monthly reoccurring revenue, that’s real revenue, plus we’re looking at 80% margins, we’re not looking at ad-tech type stuff where you only have like 20% margins. We want real margins on the product, or real volume on the product.
Our thesis stipulates that if we see this happening over a good period of time, and the company is growing, it’s accepted in the market, it’s been de-risked to a certain extent, so it makes sense for us to get involved at that stage because we know it’s a real business. It’s already proven itself to a certain extent.
If you look at a risk curve and investment horizon cycle, this represents a great opportunity. Because at the late Seed, they’ve already raised a Seed, they didn’t get as far as they wanted to but they still got pretty far. Nevertheless, they’re not quite ready for an A, but they’re still going to raise for 18 months of operational runway which will give them enough time to achieve the milestones that they really need to get an A and break out. That’s where we feel we’re getting the best bang for our risk versus reward type system.
At the late Seed stage, the company’s also usually tested stuff. They’ve spent money on stuff that has worked and other stuff that hasn’t. Because of that, they know what they need to do, so our dollars are being spent in a better way, it’s not experimental stuff.
When you invest too early, when you invest prior to that late Seed stage, you’re investing in possibilities, in ideas, in what-ifs. We feel that the pricing is usually too high and the companies haven’t learned fully how to spend their money yet, so they’re spending they’re money inefficiently, and we don’t like that. We want a certain level of learning and discipline.
What one thing should someone reading this article know about Rubicon? What makes you guys unique?
So many things. We have a tremendous amount of access to industry verticals throughout the world. We can get in to the decision makers at almost every Fortune 500 Company there is, but we also have access internationally.
Our LPs are spread throughout the world, they’re all high net worth individuals or family offices.
Either becoming a portfolio company of Rubicon or becoming an LP of Rubicon gives you tremendous access. We’re highly respected in our field, we respect our peers, we work well with them. We can leverage our network to help these portfolio companies from day one, which is what we do.
What can an entrepreneur do to make themselves interesting to Rubicon?
Hit real KPIs. Don’t use metrics of things that aren’t necessarily valid or representative of success in a company. Somebody might tell us they have a lot of GMV – gross market value – moving through their platform but they haven’t monetized it yet. That’s bad.
If you’re a business, businesses make money. We want to see that. We have opportunistically invested in earlier stage companies, but only when we really know the CEO already.
What we also like to do is, we like companies that have been referred to us by our portfolio CEOs. That helps.
It’s still (sort of) the New Year period – what trends are you watching closely in 2017? With particular emphasis on what you’re seeing here in New York?
The thing about us is we hear about the trends that are happening but we try to stay way ahead of the trends, because trend investing is very dangerous. VCs typically are doing stuff 2-3 years before anyone’s seen it. If the public knows about it, it’s too late.
Certainly artificial intelligence and machine learning is big, we’re looking at a lot of stuff in fintech but not in the payment space, really on the enterprise software side. Subscription services in different markets are interesting – different products, different services.
Drone management is an interesting thing; everyone wants to create a drone but how do you manage fleets of drones? Logistical companies are very interesting. Insurance tech companies are very interesting, not from the standpoint of customer acquisition, but from the standpoint of upending traditional insurance models.
Alternative viewing for the sports industry, eSports, things like that. Giving different perspectives when you’re viewing an eSports game.
eSports is fascinating to me. I simultaneously believe it will be really big but can’t possibly imagine sitting down and ever watching it myself.
All eSports is, is you’re watching someone play a computer game versus watching someone play football. There is a difference, but you’re essentially being entertained by watching someone play a game.
The data is there. People are watching eSports. It’s just a matter of finding the right, entertaining game. Maybe it’s team player sports versus solo player.
As an order of magnitude, what do you think is the right comp for eSports? Is it NASCAR? The NBA? NHL? Something else?
I think it can be larger than football, because football really is an American tradition. It does have international appeal, but you have so many young people who are on the computer all the time who play games that maybe they want to watch it.
How many young people actually play football? I don’t mean two-hand touch, but real football? But everyone somewhere has played Pacman and Defender and World of Warcraft or whatever, so it very well could appeal to more people. It just needs to enter more into the mainstream, and then you have it. The challenge is, parents don’t necessarily want their kids on a device all day – and as a parent, I understand that. My kids get access to devices sparingly.
What are the unique challenges and opportunities of entrepreneurship and investing in NYC?
The great thing about New York is you can always find people to do stuff with, although we do have a challenging environment for technical talent. But, it’s cheaper to live here than it is in San Francisco. It’s easier to get around because we have a functioning mass transit system. Good lifestyle, good food, full social possibilities – there is plenty of money around you just have to find it.
I think we need larger funds in New York. The challenge right now is, the larger funds in New York – Union Square Ventures, Bessemer, Susquehanna, Insight, FirstMark, Bain Capital, Tribeca Venture Partners – other than that most of the funds are under $100m dollars. And there’s probably only about 25-30 of us, General Partners that is, that are really active. Otherwise you have a lot of fringe stuff.
Do you have a number in mind as to how many >$100M funds the ecosystem needs?
If you had another 6-8 $100m funds that could lead real Series A rounds it would change the landscape dramatically. Because generally speaking, VCs like to invest within their local ecosystem. We at Rubicon don’t adhere to that model, we invest anywhere we find a great deal.
Will Rubicon ever be a $100M fund?
Oh yes. Fund 3 we’d like to get to $100M, Fund 4 we’d like to be $250M and up. Right now we’re still taking in capital for Fund 2.
For Rubicon, a number of our companies are really starting to break out – TodayTix, Navdy, Kanler, Agent IQ, Superhuman, and LISNR are all starting to really break out.
You hold a degree in gastronomy from the Institute of Culinary Education in New York and yet you do not invest in restaurants – what’s up with that?
Restaurants are not venture capital deals. Restaurants are operating companies where you’re getting a certain level of cash flow. Restaurants also close a lot, and they’re very finicky to consumer tastes.
Generally speaking food businesses can be dangerous. We tend to stay away from them. But Rule 10 of our thesis is “don’t be afraid to throw out Rules 1-9.”
Rule 1-9, is our thesis approach. We invest in teams, product, market size and opportunity, returns, areas we know we can help in, software technology, probable exit paths, and the like. We adhere to that generally but if we see something interesting, we’ll do it. The problem is, if you’re just a restaurant serving food, you’re not scalable. Scale requires lots of additional capital time and time again.
As to your culinary education, is there one dish that’s your specialty?
I’m known for three things: my duck, ribs, and my chocolate soufflé.