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 Ben Sun, General Partner at Primary Venture Partners, the city’s leading early stage firm focused on ecommerce and SaaS. Primary is currently investing out its $60M fund closed in 2016. Ben, an entrepreneur turned investor, stopped by to talk about the his start in tech with Community Connect (acquired), his move to the investment side with LaunchTime and Primary, the state of ecommerce startups, actionable tips for entrepreneurs, and much, 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.
Reza Chowdhury, AlleyWatch: Please tell us a little bit about your background and how you started in venture.
Ben Sun, Primary Venture Partners: My first job in New York City after college was in investment banking at Merrill Lynch. It didn’t take long before I realized I would never love being a banker. Right around that time was the dawn of the Internet industry, and I decided to give it my first go as an entrepreneur in 1996 when I launched Community Connect, which I bootstrapped out of my apartment for the first two years. The company, an early social networking company targeting niche demographics ran AsianAvenue.com, BlackPlanet.com, and MiGente.com, and eventually grew into one of the highest trafficked network of sites on the Web. We went on to raise $20 million from investors such as Comcast, Insight Ventures, and Sandler Capital. We grew the company into a profitable business, and it was acquired by Radio One in 2008.
After that, I took some time off to figure out my next move. I started personally investing because I have a passion for early-stage startups and I wanted to be involved in the NYC Tech scene (and, frankly, it’s way easier being an investor than a CEO…). I cofounded LaunchTime LLC, an early-stage investor and incubator focused on ecommerce and digital media companies, and our portfolio included companies like Coupang, Upsight, Yipit, and HowAboutWe.
I had some early investing success, and started brainstorming with my friend and now-partner Brad Svrluga, who’d run two successful prior funds and focused a lot of his attention on the B2B SaaS side. We were both extremely excited about the growth of the tech community in the city, and we wanted to create an early-stage venture firm focused on the city itself. Together, we cofounded Primary Venture Partners in 2015, armed with a mission to support early-stage, industry-transforming SaaS and NextGen Commerce companies. Moreover, we had spotted a gap in the market in terms of VCs who weren’t offering the hands-on support to seed-stage companies that we wanted to provide. Our goal has always been to be the most helpful guys on our portfolio companies’ cap table, and to provide material support that would help our companies navigate the difficult journey from seed to Series A. We built out our platform support services specifically to achieve these goals, and we continue to focus our strategy on finding the best ways to help our companies overcome the early obstacles inevitable in the startup lifecycle.
We built the Primary Expert Network (PEN) as a direct response to seeing founders make the critical mistake of wasting time and money trying to reinvent the tactical wheel, and tackling the same set of operational problems that their peers have already encountered and successfully resolved. Early-stage startups just don’t have the luxury of wasting this kind of time. So we established the PEN to address a set of consistent and predictable growth challenges faced by our portfolio companies as they progress from seed to Series A and beyond.
The PEN consists of 200-plus operators and functional experts from both SaaS and NextGen Commerce companies who are deeply experienced in key functional areas – for instance, inside sales, customer success, lead-gen, customer acquisition, SEO, and channel partnerships – and who are eager to provide fellow entrepreneurs with strategic and tactical advice. These are mostly VP- and director-level talent from later-stage tech companies who have their hands on the levers that control specific functions at their company, and who can offer detailed, actionable guidance to a portfolio company hungry for insights as they encounter new operational challenges.
The PEN has been hugely valuable to our portfolio companies, and we are committed to continually expanding the group. We hold frequent 4-on-1 advisory sessions between portfolio companies and PEN members focused on very specific pain points, and many of our PEN members have gone on to serve as mentors, advisors, and even board members to companies through the relationships they’ve built through this network.
Is the PEN a response to venture firms trying to differentiate themselves by providing more value add to portfolio companies in a number of ways?
Our main motivation is not to differentiate ourselves from other VCs, but rather to find ways of providing material benefit to our portfolio companies and helping them get from seed to Series A. That’s the lens through which we evaluate all of our decisions as both investors and as advisors. Portfolio support forms the core of our DNA as a firm, and we have built and continue to refine our platform support offerings – from the PEN to our in-house Talent Program to our new Market Development program – based on the services that will have the biggest impact on our companies. Because companies in the earliest stages are so small and under-resourced, we try to provide services that will really make a tangible difference.
What have you seen in the NYC ecosystem over the last 5 years and where are we going from your vantage point?
The biggest change over the last five years is that the caliber of talent in the city has gotten much better. As time goes on, these talented individuals continue to learn from each other and from the successful startups that came before them, paving the way for bigger and more successful startups coming out of the city.
Brad and I have collectively spent 40 years in NYC Tech, and the inflection point we saw was after the financial crisis in 2008. Before then, some of the smartest and most talented individuals in New York had their sights set on Goldman Sachs and the hedge funds of the city. But after the financial crisis took away much of the sexiness and stability of that world, that talent started hitting the startup market. So you had guys like Marc Lore, who left finance and eventually started buying packs of diapers from Costco and shipping them out of his garage in Montclair, N.J. (hence the birth of Diapers.com), or guys like Dave Gilboa who left Allen & Co. to start Warby Parker. We watched this migration of talent from the world of finance to entrepreneurship, and we knew these guys would learn and understand how to build great businesses. It became evident, too, that as this ecosystem grew, and as these guys started to take more swings at the plate, they’d have even greater chances of success and build even bigger businesses. So far, our thesis has been proven out.
Often we write about what’s it like to raise funds as an entrepreneur, but as VCs you are also raising funds. Can you provide us some perspective on that process as you closed your second fund earlier in the year.
Fundraising is a very difficult process, no matter who you are. Having been an entrepreneur and raised capital, and having invested in companies and helped them raise money, and now being a startup VC and having raised a fund, I’d say doing this from the position of a VC is probably the hardest.
A lot of the difficulty there is that, on the surface, VCs all look somewhat the same in what we do, and areas of differentiation are not easily evident. Moreover, a lot of LPs will invest only after they’ve seen your track record. As a startup VC, this can be really difficult. Fortunately for us, my partner Brad had managed two prior successful funds (High Peaks Venture Partners), and he had a really solid track record. My personal investing helped a bit, too, but in the eyes of LPs, we were basically starting from scratch. We were unproven as partners, we were developing our own ethos as a firm, and we were committed to building a fund highly focused on a particular geography, with a specific industry focus. This was fairly unchartered territory. They questioned all of these factors – rightly so – and these are the things we’ve had to prove out.
You are focused on the e-commerce side of things on the fund and evaluate hundreds of ecommerce companies routinely. Recently, in NYC it’s been a difficult environment for some e-commerce companies. What went wrong?
Startups, in general, are dangerous businesses. Some do well, some fail – it’s just the nature of the beast. But every situation is different, and for each failure, there’s a good outcome. For instance, look at Jet.com and Chewy, each of which was acquired for over $3 billion this year. And then there’s Blue Apron’s IPO; even though the stock hasn’t performed as they would have hoped, it’s been an amazing outcome for early investors when you think about how far the company has come over the last few years. The nuances of why some companies succeed and some fail boils down to a somewhat random combination of execution, competition, and overall market conditions. It’s hard to predict long-term outcomes in these businesses.
On the converse side, Jet can be considered a success and it was one of your investments. Tell us about what went right there?
It’s incredible when you think about some of the metrics Jet achieved in such a short period of time. Just one year post-launch, Jet was at a $1 billion GMV run rate – a record time for any commerce company to achieve that kind of run rate. People scoffed at Jet for losing a lot of money, but that was always the intention. You can’t get that big, grow that fast, and be profitable from Day 1. Marc’s intention was always to raise a couple billion dollars in order to get this company to $20 billion GMV in its first five years.
The other thing Marc was able to do really well with Jet was maintain a laser focus on a specific strategy. Whereas Amazon tries to offer customers a balance of price, selection, and convenience, Marc was solely focused on optimizing for price. From the outset, he focused the company first and foremost around offering the best prices to customers, and offered a high degree of optionality and transparency around pricing so that customers could be sure they were getting the best deal. When the company was able to hit amazing scale very early on, that was the real sign that Marc’s strategy and business model were on point and resonating with his customer base.
Do you think Jet could have accomplished what it did without that initial influx of capital ($565M in 4 rounds in 18 months)? Will successful ecommerce businesses moving forward require large amount of capital?
There are always going to be different ecommerce businesses with different capital needs. The companies that require a lot of capital need to be going after very, very large outcomes. For Jet.com to succeed, Marc absolutely needed a lot of capital in order to build the company with the vision he had set out to achieve. Would he have gotten to that point without the Walmart acquisition? I think he had a really good chance, and he was on track with his goals. All signs – especially his Year 1 run rate – indicated that things were working according to plan, and one of the biggest reasons Walmart wanted to buy Jet was to adopt Marc’s strategy as its own.
Switching gears, what do you think about LPs that are now investing directly in startups? Is that a breach of fiduciary duty? Are there benefits or disadvantages that you foresee?
I don’t think it’s a breach of fiduciary duty. LPs, regardless of where they’re investing, are responsible to their own investors. So if you have a fund of funds that’s investing in VCs as well as directly into deals, they’re doing this in the best financial interest of their LPs. The more sophisticated and experienced investors who are investing in both funds and directly into deals will be aware of any conflicts of interest and make adjustments as needed. This is a business that’s based on trust, and if you’re in breach of that, your career is ruined.
We have a number of LPs in our fund who also do direct deals, and we believe it’s also just smart business. We like to coinvest alongside them, or have them invest in our companies later on down the line. In this way, they get to know these companies and us, and we try to work together to build great businesses.
There are certainly benefits to this approach. For one, by getting to build out a network of managers you’re investing in, you can better understand how they invest and learn more about their strategy, and this is all information that hopefully makes you smarter about the direct deals you do. It also gives you time to observe companies pretty closely before you invest in them.
Do you ever consider an investment on the basis of whether one of your LPs could offer strategic value?
Definitely. When we invested in enterprise-grade smart access control platform Latch, we brought the deal to one of our LPs – a family office that owns a lot of multi-unit residential buildings in NYC. We brought them in to help co-lead the deal with us. They loved the product and, seeing the value of what Latch was doing for building managers, residents, and service providers alike, they wanted to pilot it in some of their buildings. That really gave us conviction in the product because we knew these guys wouldn’t allow a pilot in their buildings unless they saw real value. The fact that we could get that information back directly from an LP allowed us to be smarter about the deal; we were better able to track user data about product performance, and develop relationships with other real estate owners who might be interested in Latch.
What metrics do entrepreneurs overlook or not place enough emphasis on that are important to consider when you are evaluating investment merit of a business? What metrics are very specific to ecommerce businesses that are important?
First and foremost, I would say it’s critical for entrepreneurs to look at lifetime value – and not on a revenue basis, but on gross-margin or contribution-margin basis. The reason it’s so important is because the size of that LTV, especially in the first year of its life, helps you understand the capital efficiency of a business. But perhaps more importantly, it also helps you understand how big a company could potentially get. It’s incredibly difficult to scale a company with a small LTV, especially in that first year, when you can’t recoup things like marketing, or cost of initial customers who aren’t generating a lot of margin. In those instances, it’s nearly impossible to generate escape velocity.
The second big thing, especially on the ecommerce/consumer side of the business is Net Promoter Score, and having a deep understanding of what your customers really think about your product or service. Additionally, we want to make sure that the NPS is accurately measured; these numbers shouldn’t just be from customers who have been loyal to you over the past six months, but rather should be reflective of all customers who have ever tried your product. This is the best indication of what your customers really think about you. Aside from NPS, you should be looking at Facebook, Twitter, Instagram, and any place where you can gather data points on customer feedback. In this day and age, if your customers aren’t really championing you, it’s going to be incredibly difficult for your business to stand out and have escape velocity.
What are three things that entrepreneurs can do to get on your radar in an efficient and effective manner outside of the warm introduction?
We are pretty well-networked with the outstanding operators in NYC, so hearing about particular entrepreneurs from other operators in our network is probably the best way to get on our radar. For us, the people who stand out the most are those who can show they’ve networked with well-known entities in the industry, and are thought of favorably by those people – either from a recruiting standpoint or as someone in whom they would potentially invest.
We spend so much time analyzing success in the industry but most startups fail. Are there any common themes that you have seen in businesses that have failed? (No need to mention specific portfolio companies; just looking for general themes).
There are a lot of reasons why startups fail. Not knowing how to hire and fire well is probably one of the biggest reasons for startup failure. Obviously you want to hire well, but if you know a person’s not going to work out, it’s important to be able to cut bait quickly, move on, and try to get the great hire. In early-stage companies, there’s very little room for poor and underperformers, so if you see that someone on your team isn’t pulling his/her weight, it’s time to move on and find a replacement who will make a difference.
Secondly, a big mistake founders make is trying to reinvent the wheel on specific tactical problems or opportunities. These issues come up all the time for early-stage startups, and include things like go-to-market tactics or how to scale an engineering team. Instead of trying to figure out how to solve these common problems on your own dime, which results in a huge loss of resources, you should take the shortcut to getting ahead: Build networks of people who have lived through these experiences themselves, learn from their mistakes, and apply their strategies to work through the problems more efficiently and effectively.