Welcome back to Inside the Mind of an NYC VC, a highly acclaimed series at AlleyWatch in which we speak with leading New York City-based Venture Capitalists. In the hot seat this time is Steve Schlafman, General Partner at Primary Venture Partners, one of the leading Seed-focused investment funds supporting New York City founders. Schlafman’s tenure as a venture capitalist spans nearly a decade with early roles at Lerer Hippeau and RRE and he has had a pivotal role in the development of the startup ecosystem in the city as a whole. He has backed some of the fastest growing and most successful NYC startups including Bowery Farming, Giphy, Managed by Q, theSkimm, Care/of, and Citizen.
Schlafman, or “Schlaf “as he is commonly referred to, was kind enough to join us to provide some insight into his accidental path to venture, the evolution of the venture landscape and tech ecosystem in New York, his human-centric approach to investing, how Primary differentiates itself as a value-add investor for founders, 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.
Bart Clareman, AlleyWatch: Tell us about your journey into the venture business and how you came to be a partner at Primary Ventures?
Steve Schlafman, Primary Venture Partners: I would say that I didn’t really have the desire to become a venture capitalist, it all happened by accident. I was in the right place at the right time at a few points in my career. Luck and serendipity have definitely played a big part. I started my career at Microsoft, interning for six months on the Deal Governance team, which monitored all the strategic investments that Microsoft had made in the dotcom era. That was really my first exposure to the venture capital business.
After graduating from Northeastern University, I went back to Microsoft and spent four years working in Redmond [WA] and living in Seattle. The first two years was in a corporate finance-leadership rotation program where every six months I would rotate into a new area of finance. Then I spent two years effectively doing strategy and M&A for the Microsoft Business Division, which was responsible for Microsoft’s Business Applications such as Office and SharePoint.
After nearly five great years at Microsoft, I wanted to move closer to family and friends – I’m originally from Boston – and I wanted to get a taste of the startup life. That brought me to New York for a first tour of duty here in the city. I worked for a company called Massive, which was an advertising network for video games. It was the first ad platform for connected consoles and PC games. We worked with some of the largest publishers, including EA, Activision, and others, and served ads into games like Call of Duty and Madden. In this role, I was able to marry two of my passions: new media and video games.
I was about one year into my job at Massive, when an unexpected opportunity literally fell in my lap: I had a chance to move home to Boston to work for The Kraft Group. They own and operate the New England Patriots and a number of other businesses in sectors ranging from paper and packaging to real estate. My role at The Kraft Group was to support Mr. Kraft and his son Jonathan, who is the President & COO, on a variety of strategic projects that ranged from venture investments all the way through to digital media strategy to incubations to acquisitions and even random one-off projects. It was a perfect blend of investing, operating and strategy roles. I have to admit for a while it was my dream job. During this time, we made a number of direct investments into startups as well as some venture funds. This was my first real taste of the venture business. I owe a huge amount of gratitude to Mr. Kraft and Jonathan for giving me a shot. At the time, I didn’t really know what I was doing.
While I was at The Kraft Group, we made a number of investments and strategic partnerships with companies in the New York ecosystem. I saw first-hand the burgeoning community that was growing here and I wanted to be a part of it. It was impossible to ignore all of the startups and innovation that was happening here – around 2009 and 2010. As much as my wife and I loved being in Boston, we both knew New York was where we wanted to be long term. You could just feel the wave that was coming. Betaworks had just gotten formed, there were a handful of relatively new funds and some incredibly innovative companies were being started like FourSquare, Tumblr and Kickstarter to name a few.
I was recruited by Seth Goldstein and Billy Chasen to join an early startup as effectively the first business hire. It was called Stickybits, and it was backed by First Round Capital and Chris Sacca and a bunch of other well-known angels. I was effectively responsible for Business Development, Finance and other admin functions. I helped broker partnerships with Pepsi, Ben & Jerry’s, Unilever, Toyota and some other amazing brands. About nine months into my time at Stickybits, we pivoted into Turntable.fm, so I lived through that whole experience. It went viral, but I ultimately didn’t want to be in the music business for a whole bunch of reasons. I like to joke that all of our servers were named after dead music ventures, so that was kind of the writing on the wall.
At that point, I had the very good fortune of joining Lerer Hippeau as the first investing principal. At the time it was four partners and an admin, and they brought me in to help build out a lot of the infrastructure for managing the deal pipeline and the support platform. It was a wild time.
I was at Lerer for roughly 2.5 years. While I was on the team, we made about 100 investments, 40-50% of which were in New York, the other half were spread throughout the rest of the country. We invested across every sector imaginable, including e-commerce, software as a service, hardware, healthcare, media, marketplaces, and everything in between.
After an amazing run at Lerer, I was recruited to join RRE Ventures to focus not just on Seed but also Series A. I figured it was a great opportunity to see which stage of investing, Seed or Series A, was right for me in the long term. I knew I loved Seed investing from my time at Lerer – we were effectively making an investment per week, if you can believe it. At RRE it was a more traditional Series A fund, where we made two to three investments per partner per year and no more than ten per year for the entire fund. Essentially, I wanted to know whether Seed or Series A investing was more compelling to me if I was going to make a career in venture capital.
My four years at RRE were incredibly productive. During that time, I sourced more than twenty investments and was on the Board of a handful of those companies. I was fortunate to partner with a pretty eclectic group of founders and companies, including Boom Aerospace, Bowery Farming, Hightower (which merged with VTS), Giphy, Brightwheel, Managed by Q (sold to WeWork), Breather, Groups, theSkimm, Care/of, Citizen – those are some that come to mind. While I was there, I also made a number of angel investments in companies like Zipline and Lola.
I left RRE roughly 2 years ago. I took a year off to find myself and figure out what I wanted to do with the rest of my life. I actually considered leaving venture altogether for a variety of reasons. About three months after I had left RRE, I went back to school to get trained and certified as an executive coach. I just love nothing more than helping founders and executives in transition bring their visions to life.
After months of reflection and soul searching, I decided to join Primary Venture Partners which is one of the top seed funds here in New York City. I initially joined as a Venture Partner which allowed me to focus on both investing and coaching. But after three months, Ben and Brad convinced me to come on board as the third partner. I’ve now been at Primary for about fifteen months
My mission and my life’s work is to marry venture capital with human capital. The venture capital comes from deploying capital into companies, and the human capital comes through the leadership coaching and really focusing on a human approach to not only picking companies but also partnering with founders to help them navigate the everyday challenges of company building.
You’ve been in New York City’s venture investing community for nearly 10 years. How has the ecosystem here changed in that time?
It’s amazing how much has changed. When I was investing at The Kraft Group, we had made a number of investments here. At the time it was a lot of angels, and a lot of the VC firms were what I would call the legacy players, but there wasn’t this new wave of funds yet.
Lerer was just getting started around the time I moved back to New York, in 2010. Dave Tisch had formed Box Group, Spark was coming up – USV was founded in 2005-2006, but there was this next wave of funds that were starting and it was predominantly at Seed. There were others like Josh Kushner, Craig Shapiro at Collaborative Fund – there was a whole group of us that were effectively getting into the business at the time with the belief that New York was going to be one of the next great places in the globe to create amazing companies.
The way that the ecosystem here has evolved is really incredible. To give you a sense of scale – when I started at Primary about a year ago, one of my first initiatives was to implement a new CRM system to track all of the deals, entrepreneurs and operators in the ecosystem. Over the last 12 months, we’ve seen more than 1,200 Seed stage opportunities, 80-90% of those are in New York. Primary is one of the very few funds here in town that not only leads Seed but also invests exclusively in New York City. The sheer volume of companies getting started here each year is incredible. Many of the companies we’ve seen are raising anywhere from $500K to $4M. Seed has evolved to the point where there’s now Pre-Seed, Seed and Seed+. The amount of new funds that have arisen to meet that demand is incredible. Even Primary is relatively new at four years old. The sources and volume of capital in the NYC ecosystem is like nothing I’ve seen in the last decade. The market is definitely more competitive than ever before.
The diversity of companies has really expanded, too. Eight or ten years ago, a lot of what was happening in New York was adtech, media, social networking, a little bit of e-commerce. Now we’re seeing companies in every sector imaginable, all the way to very hard and technical companies in sectors such as robotics, developer tools, AI, bio, aerospace, manufacturing – pretty much every type of company is being started here now.
When you think about the maturity of the ecosystem, over the last decade you’ve had some really big outcomes – including Mongo, Etsy, Tumblr, and Huffington Post. We’re now seeing the next wave of big exits in Flatiron Health, WeWork, DataDog and Peloton. I have no doubt there will be more. Big exits have a ripple effect in the ecosystem for a variety of reasons. First, wealth is created for the team which then creates a new set of angel actively investing in the community. Additionally, there are more executives and operators who have been through the experience of scaling a company through an exit. The alumni of those companies eventually go on to create their own companies. We’re seeing that dynamic now. Finally, the ecosystem is now at a point where we’re seeing repeat founders who are now starting their second or third ventures. There’s no doubt that a flywheel effect has started.
That said, there’s a lot more maturation that needs to happen, particularly on the talent front. There’s still a war for talent, which is amazing in a city of 8.5M people. So there’s still a lot of room for growth in building out the leadership and management ranks. As some of those 1200 companies I just talked about grow and scale, we’re going to need to build the teams in every function that can help them thrive.
How have you changed in those 10 years? How are you different as an investor today than you were in 2011 when you joined Lerer?
I’ve changed quite a bit since I got to New York nearly a decade ago. I think a lot of the change has come personally, which has spilled over into my work. I don’t see myself as “Steve the VC.” I see myself as Steve the coach, husband, father, meditator, cyclist, cook, and creative – all the different parts of me. I try to bring myself fully into my role as an investor and a supporter of entrepreneurs.
When I was at Lerer, we had a high-volume investment strategy, so the aim was to try to get into every good deal. What I realized over time is that writing a check is the easy part. This is a 10-year journey for most companies if they’re successful, and it’s really, really hard. The emotional ups and downs of being an entrepreneur are incredibly hard. I know this because my wife is a founder/CEO. So, rather than try to be in every deal, it’s a matter of trying to be in the right deals with the right companies. I want to partner with entrepreneurs I believe in, where I care about the opportunity, where of course we can make money, but where we can have real impact, too – not just social impact, but perhaps societal or technological impact. I want to work with great people. The old Steve would have done whatever I could to partner with any company that I felt had momentum, even if I didn’t necessarily love the founder, whereas now, if I’m going to invest in 2-4 companies per year I really have to love the people and the market opportunity. That’s even truer when we take a board seat.
So, rather than try to be in every deal, it’s a matter of trying to be in the right deals with the right companies. I want to partner with entrepreneurs I believe in, where I care about the opportunity, where of course we can make money, but where we can have real impact, too – not just social impact, but perhaps societal or technological impact. I want to work with great people. The old Steve would have done whatever I could to partner with any company that I felt had momentum, even if I didn’t necessarily love the founder, whereas now, if I’m going to invest in 2-4 companies per year I really have to love the people and the market opportunity. That’s even truer when we take a board seat.
For me, the other thing is slowing down. A big part of our job is email and meetings. I could easily work from 7AM to midnight every single day doing nothing but email and meetings. Earlier in my career, I tried to pack my schedule every single day 8AM to 10PM plus two hours of email at night, really grinding. The older I get, the more I try to be deliberate, both in terms of how I spend my time and in terms of really focusing on specific sectors and people I’m intellectually curious about and want to build or grow a long term relationship with.
The other thing I’m trying to do at this stage of my career is processing as opposed to just running around taking meetings all day. I’ve been deliberately blocking out an hour and a half each morning, which is my processing and creative time. I’ve been thinking a lot more about creation, whether it’s writing or producing a podcast, just starting to get more creative because if I just do email and meetings for the next 10-20 years I know that I won’t be happy or a very effective partner and investor.
You joined Primary Ventures in May of last year and became a partner in October 2018. It was reported then that you had explored raising your own fund – what was the appeal of that, and why in the end did you decide to join Primary rather than start your own fund?
I’ve always wanted to build something. At this stage of my life, I’m almost 40, and I have more creative energy than I ever have in my life. I felt there was an opportunity in this market to effectively build a fund where I operated as a solo GP and where I behaved more as an advisor and a coach as opposed to a traditional institutional investor. Almost the idea of being a leadership Sherpa/coach. I still believe in that idea.
While I was in my coaching training, I participated in a workshop where we covered the ‘needs and values’ coaching pathway. Over that weekend, we were exploring how needs and values impact human behavior. Needs are effectively what you’d like to fulfill in the short term whereas values are the things you deem most important over the long term, the things that are non-negotiable. When you’re not behaving in line with your needs and values, there’s a term called alignment – when your actions don’t match your insides and what you hold most important, you’re out of alignment and you feel it. You may be lethargic, not feeling like yourself, not being inspired – there’s a bunch of ways it can show up.
I was sitting in this workshop thinking “holy shit,” because one of my core values is the deep need for collaboration. I’m an identical twin so I literally shared a womb with another human being. I played team sports growing up. I love collaborating with other people, and at that moment it became clear that as a solo GP, at least for 2-3 years before I would go and raise another fund, I would effectively be all by myself. It became very clear that that was not the right path for me at least at that time.
As far as potentially going to find a partner, I didn’t view it as a quick dating exercise. Each fund is designed to last 10 years with two two-year optional extensions – so you’re talking about a 10-15 year relationship, so it really has to work. LPs don’t want to underwrite partnerships that have a tremendous amount of risk. It wasn’t abundantly clear to me who that partner would be. Many of my former colleagues were on the West Coast or gainfully employed as GPs at other funds – I didn’t want to go through a potentially 12-month process to find a partner and then try to raise a fund for another 12-18 months. It would have meant that I was on the sidelines for quite a while.
On the other side of it, I’ve known both Ben Sun and Brad Svrluga since before Primary was started. I met Brad when he was a partner at High Peaks and Ben when he was an entrepreneur and an angel. Initially, they had been trying to convince me to join Primary not as a partner, but as an advisor. At the time I didn’t want to align myself with any firm because I wasn’t really sure how my fundraising process would go – I said, “I’d rather be Switzerland.” But then when it became clear I wasn’t going to go out on my own, to their credit, they were very opportunistic. They said, “what do you think about just hanging out with us? We’ll give you a desk in our office, you can work part-time for us and figure out what you want to do.” I thought that was great. I’d been out of RRE for a year, there were elements I could contribute to Primary while having the flexibility to continue to be creative and figure out what I wanted to do with the rest of my life.
After three months as a part-time Venture Partner, I was very happy. The thing that struck me most about Primary during that time was how hands-on they were in a way I had never seen before in a firm. With all due respect to my previous employers, which are amazing firms, Primary felt very different in terms of the way that we engage and support our founders. I have never seen a firm work so hard on behalf of their founders. It was really inspiring. I had also talked to a bunch of the entrepreneurs, particularly the second-timers, and each of them said they’d never had an investor this supportive and helpful and empathetic.
Say more about “the Primary difference” – what is it that sets Primary apart from other funds?
There are a few things. First and foremost, we’re building Primary as a company. We very much view Primary as a startup, so the way we operate it is very much the way a company operates, not the way a fund operates. We have planning cycles, we have reviews; we certainly have our weekly meetings, but we very much view this as a company and as a startup, and the analogy we use is we’re in our Series A phase. Fund 1, before I joined, was about establishing product-market fit, we did that. Fund 2 is about scaling teams and systems and networks. That work isn’t finished, but we do have in mind that with Fund 3 we’ll continue to execute on our vision and strategy. We have a roadmap, we have a vision, and we have a very clear plan of the kind of firm we want to build.
The second difference is, there are some firms where you invest as minimally as you can in overhead so that the partners can make a nice salary. There are what I call “partner-driven funds” and “platform-driven funds” – we’re building a platform-driven fund. It’s very hard to do; I think we’re doing a great job of it, but we’re still in the 1st or 2nd inning. But we’re committed to it; the majority of dollars that come in we’re spending on headcount and platform. We believe this also aligns us with our founders and Limited Partners. We only get rich if they do.
For a firm of our size – we have $165M in AUM – we have 11 full-time employees and we’ll have 13 or 14 by the end of this year. Everybody is taking a pay cut to build this. We’re putting our money where our mouth is and trying to usher as many resources as possible into supporting our companies.
There’s a third element that makes us unique. It’s one of our core values, which we talk about a lot. The value that immediately comes to mind is “we team.” Often times you have a venture capital firm where you have a principal or partner who spends their week straying from the wolfpack, so to speak, and then you have a partner meeting where everyone comes together finally to make decisions. We very much operate as a wolfpack. It’s a very team-oriented approach to venture capital, not just in terms of the way we build relationships and build our networks, but it’s also how we evaluate opportunities, how we make decisions, and, most importantly, how we show up for and support our founders. It’s very much a team-oriented approach; as a matter of fact, this morning we hand-delivered a term sheet to a company as a team.
Beyond that, the way we think about portfolio impact is different, too. We don’t think of our platform as window dressing; portfolio impact is core to what we do. We have three people on our talent team, led by Cat Hernandez, who is an Operating Partner – she’s amazing. We have a Director of Community under her, Gina Yocom. We have a new Director of Talent coming from one of the top startups in New York City. We have Jackie Wasilczyk who was Director of Comms & Brand at Plated, she’s filling that role for us and for the portfolio. We have Bob Peruzzi, who’s our CFO. He works with our companies on all strategic finance initiatives. Then we have our market development team that’s all about accelerating revenue and relationships at all of our companies, led by Eric Hansell.
We think of these as operating pods we can deploy into our companies when they need help and resources. We’re big believers that it takes a village to raise a startup. We 110% believe in our founders to operate their businesses on their own, but if we can accelerate their time to market or accelerate the time it takes to hire a Head of Product or CRO or customer success rep, we’re doing our job because everything is about speed at a startup.
I see the power of our model every day. It’s as simple as, no one is great at everything – certainly that goes for me and my partners. By investing in our platform and building out our team of operating partners and other capabilities, we can fill the gaps with real operational expertise. Those capabilities can then be leveraged by our companies, so I think it’s only a matter of time until everyone knows we’re the best place in town to go for capital if you really want a strong partner at Seed.
To be sure, we don’t tell our companies how to run their companies – we’re purely there for support. Our engagement really varies based on the company. I recently led an investment in a company we can’t talk about yet, but it was started by two remarkable founders and expert operators who scaled their first company to $40M+ in revenue. They’ve done it before and know what they’re doing. We’re certainly helping them where we can, but their needs are very different from the needs of a first-time founder. So we view how we support our companies as very bespoke and customized. Our engagement is always designed to say if Seed to Series A is the next phase of the business, what can we do to increase the chances of you getting to that next round?
To be sure, we don’t tell our companies how to run their companies – we’re purely there for support. We view how we support our companies as very bespoke and customized. Our engagement is always designed to say if Seed to Series A is the next phase of the business, what can we do to increase the chances of you getting to that next round?
Tell us about the prototypical Primary Ventures portfolio company – for you to invest, what do you need to see in them and what do they need to have accomplished?
It really varies. It largely depends on the partner. We are a “we firm,” as I said, but every partner has their own strike zone.
Ben loves transactional businesses. He’s been investing and building commerce and marketplace businesses for the last 20 years. There are very few investors here in New York that are as operationally minded as Ben, especially when it comes to marketplaces and e-commerce. Ben also runs our incubation efforts, we incubate 2-4 companies each fund.
Brad largely focuses on software as a service, which includes infrastructure software developer tools, healthcare IT, business applications, etc.
I’m a bit of a mutt. I’ve invested in everything from drone delivery companies, to supersonic airplane businesses, indoor farms, media companies, marketplaces, and SaaS. I very much have a human-centric investment thesis and philosophy.
I’ve invested in four companies in my first year at Primary. One is a consumer hardware fitness device, one is a managed marketplace, one is a SaaS company, and today we put a term sheet down on a consumer internet company, it’s a combination of media and commerce.
The things I look for are a real problem that’s being felt today, a pragmatic solution that will drive impact and then a genuine and focused founding team with a relentless focus on execution and an insatiable appetite to learn. I also like to ask, ‘how does the business evoke emotions? What does a consumer think about it, do they have a real pain point, what’s the emotional bent of the customer? Finally, I like to ask myself if the opportunity makes me uncomfortable in any way. I’ve found my best investments to date have made me pretty comfortable. I believe finding non-consensus opportunities is all about tuning into human psychology and emotions.
Another important aspect is being able to articulate what the market opportunity is. That’s not just market size, but also explaining why should this exist? What gap does it fill, and if a gap doesn’t exist but the product should exist in the market anyway, why is that? I want to understand all of that, but really more from a human angle, from the customer-centric view. What does the customer think about it, who are they, what do they look like, what do they spend their money on? The other thing is impact. It doesn’t necessarily need to be social impact. It can be real impact in the enterprise because they’ve uncovered a problem that’s real and significant, and if the company is able to solve it it’s going to have an impact on the way that people work. My definition of impact is fairly broad.
Finally, I ask myself if this is a company people are going to want to work for? Do we believe the founders love to learn and evolve as leaders and operators? We ask the question internally, “Do we think the team can sell stock?” Said another way, can they go out and raise, tell the story and articulate the vision?
I’m not smart enough to predict where the world is going. I’ve studied Buddhist philosophy over the years and I love this idea of a “beginner’s mind.” I try to show up every day, check my ego at the door and remind myself that I don’t know a lot about a lot. But if I show up with an open mind, I can at least be willing to see new ideas and be inspired.
In your bio on the Primary website, it says you aim to be the most “human-centric” investor in NYC – what does that mean, and why is that your mission?
It’s my mission because oftentimes being an entrepreneur is very lonely. It’s probably the hardest job in the world. I figured this out because my wife is a founder, she runs a company called The Sill and she’s been doing it for seven-plus years. I’ve seen how hard it is, and for me, it’s a big reason why I went into coaching.
Theoretically, a company is a corporate charter in a filing cabinet in Delaware – on some level that’s all a company is. But at the end of the day, it’s a collection of human beings with different needs and values and skills and experiences and anxieties and all the rest. It’s hard to be an investor if you don’t understand that building companies and innovating is all about people. It’s about how do you motivate, how do you lead, how do you learn, how do you manage, how do you fire, how do you show up every day in the face of adversity? I want to be there to support entrepreneurs through the toughest times and I want to be there to celebrate the successes.
It’s funny, I was doing a visualization session with one of my coaches when I was thinking of starting my fund. My coach said to me, “What does success look like to you? Close your eyes and envision it.” The thing I envisioned was an entrepreneur and her family celebrating a successful outcome of their own company. It wasn’t material possessions on my end. I deeply care about the people, it’s why I do this.
According to your bio, you have a “media consumption problem” when it comes to reading books and listening to podcasts. Start with books – what’s your favorite fiction and non-fiction book and why?
Reading is one of my passions and curiosity is one of my core values. In order to honor and satisfy these, I read between 15-30 books each year. I tend to consume mainly non-fiction but occasionally I will sneak in some fiction when I am looking for a change of pace. Regular topics of interest include spirituality, philosophy, leadership, management, history, and psychology.
There are really too many to mention here. It wouldn’t be fair to name a few because many books have shaped how I think and/or had a big impact on me. I have a list on my blog that I always encourage folks to check out. This list is far from comprehensive or organized in any fashion. It is meant to casually browse.
What are your must-listen podcasts and why?
I subscribe to more than fifty podcasts. I am definitely an addict though I’m trying to consume less audio right now. That means listening to only a few select episodes every week. Quality over quantity!
Some notables include Akimbo from Seth Godin, Coaches Rising, Joe Rogan, The Knowledge Project with Shane Parish, Making Sense with Sam Harris, The Reboot Podcast, This Week In Startups, The Tim Ferris Show and The Village Global Podcast.
2030 Vision: Give us one wild prediction for how the world will be different in 2030?
I think that for a lot of people, traditional 4-yar college is not going to be the only path for high school graduates. I think that the value of an education relative to the payoff isn’t necessarily in line. I believe there are going to be a number of options and opportunities for graduating seniors to train and enter the work world without having to do 4 years of school.
The other prediction I’ll make is, as we become a more tech-dominated society, I think professions that are focused around caregiving are going to explode – everything from nursing to coaching. I believe coaching is going to explode. By 2030 or so I believe coaching is going to be a much more established profession. The notion of having a coach to help you will probably be more common than having a therapist.