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<\/center>\n42 Questions is a YouTube series<\/a> exploring options for startups seeking venture capital funding. We interview leading active VCs from around the world, who share advice and shed light on their preferences and priorities\u200a\u2014\u200agiving an inside track to startups who want to learn more about the personalities behind the funds.<\/p>\n
Sean: We\u2019re going to meet with Fabrice Grinda of FJ Labs, the famed angel investor, in an undisclosed location somewhere in the New York metropolitan area. Here we go.<\/p>\n
Fabrice: Hi, welcome.<\/p>\n
Sean: Hey, Fabrice, how are you? Great to see you.<\/p>\n
Fabrice: Likewise.<\/p>\n
Sean: Thanks for having us over for 42 Questions.<\/p>\n
Fabrice: Thank you for coming.<\/p>\n
Sean: Do you spend most of your time in New York? Do you spend most of your time traveling?<\/p>\n
Fabrice: I spend four or five months here in New York, and then the rest is on the road for partly personal reasons. I love adventure travel, so last year, I went Heliskking in Greenland. I go ice climbing, I race cars, I go kite surfing in the Dominican Republic, and even though I don\u2019t actually sound French, so my family is in Nice in the south of France, so I go see them reasonably regularly. And then I\u2019m an investor in hundreds of startups around the world, so I also go see them and speak to conferences, et cetera.<\/p>\n
Sean: And you also have FJ Labs here in New York as well, which is an office set up with some staff with those investments. Can you tell us a little bit about FJ Labs?<\/p>\n
Fabrice: It\u2019s a hybrid venture fund and startup studio where, every year, we invest in 50 to 100 startups, especially marketplace startups, kind of on a global level. It\u2019s really 70% U.S., 70% percent seed, and 70% marketplaces.<\/p>\n
Sean: As an investor, what is the scale of the businesses you\u2019re looking to invest in very early? What sort of check sizes are you targeting?<\/p>\n
Fabrice: So, these days, on average, we write $400K checks as seeds. Seeds these days means a $2-$3 million check that\u2019s being raised. The company is typically live, and has been live for a little while, and is post revenue but low revenue. So, maybe $100K a month in GMV, or a $200K a month in GMV. They\u2019re raising maybe two or three at eight pre or seven pre, and of that we will put $400K. Now, we\u2019re rather different because we\u2019re not leading, we\u2019re not pricing, we\u2019re not drawing boards, we don\u2019t have minimum equity requirements, nor do we care if it\u2019s a node, a safe or a price round.<\/p>\n
If you don\u2019t have a lead and we love you, we\u2019ll help you find a lead. Part of the way we work is we actually work with and we share deal flow with many other VCs. Our real value add is threefold, because we think, you know, today we have made 400 investments. We\u2019ve actually had over 110 exits, and on these 110 exits\u2026<\/p>\n
Sean: A hundred and ten exists.<\/p>\n
Fabrice: Realize exits on foreign investments. And on these 110 exits, we\u2019ve had a 67% net IRR, and an average 6X multiple including all the losses and all the zeros et cetera. And..<\/p>\n
Sean: When you say net IRR, does that mean you\u2019re managing other people\u2019s money?<\/p>\n
Fabrice: So, we started with almost only our own money. We do have two other little pools of capital. We\u2019ve created a co-investment vehicle where when we put $100K, the co-investment vehicle equal puts $100K. And so, now, it\u2019s not a traditional fund because there\u2019s only one capital call upfront\u2026and we don\u2019t keep any money for follow-on apparatus, and whenever we run out of money, we just do the next one. In the last two years, we\u2019ve done five funds. So we\u2019re at fund five, but we already have about 40 million under management from these angels\u2019 co-investment vehicle. Then we have one traditional fund with traditional LPs. One strategic LP, which is Telenor, a big Norwegian telco from Norway, is one of the largest mobile operators in the world. They operate classified marketplaces and businesses in Southeast Asia, and they kind of wanted a window in what was going on in the US, so they gave us a big pool of money to manage.<\/p>\n
Whenever we write a check, it\u2019s typically three vehicles. But last year, to give you a sense of scale, we deployed 52 million. Of that, 21 million was mostly my money. So, it\u2019s still like 40% of our own capital, which in fact is kind of the only way this works, because if you\u2019re really good at investing, you\u2019re way better off having a one or two billion dollar fund if you want to make money from fees. If you\u2019re investing from 100 million, I find, ultimately, you\u2019re not really going to make that much money.<\/p>\n
Sean: Even if you\u2019re investing your own money.<\/p>\n
Fabrice: It only works because we\u2019re mostly investors, or largely investing our money.<\/p>\n
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\nSean: You\u2019re now starting to invest in other areas. You mentioned, I mean, one of the reasons we\u2019re working together on some deals is we\u2019re doing some things in the hardware and life sciences area. What do you think are the interesting areas going forward?<\/p>\n
Fabrice: We are thesis-driven. At this point in time, there two main thesis we\u2019re investing against. One is bringing all of the best practices of what\u2019s happening in the consumer world to the B2B world through a marketplace one. We like marketplaces because it brings liquidity and transparency to previously opaque markets, and fragmented markets where you had no liquidity. So this year we\u2019ve invested in marketplaces for scrap metal, marketplaces for petrochemicals, marketplaces for logistics like Flex Corp, marketplaces where restaurants order for farmers. And all of these have the right dynamic, meaning they\u2019re fragmented enough, have high average order value, high margin, high recurrency, and they\u2019re really great businesses. And often, everything is still done by Rolodex and Excel, or e-mail.<\/p>\n
Sean: There\u2019s so much automation that can benefit their consumers.<\/p>\n
Fabrice: We\u2019re at the very beginning of the tech revolution. I mean, if you look even just e-commerce, is like 12% of overall commerce in general. But if you look at healthcare, there\u2019s a negative productivity. In education, there\u2019s a negative productivity. In public services, there\u2019s a negative productivity. And so, all of these various industries are at the cusp of a massive productivity revolution, part of which will be driven by marketplace.<\/p>\n
Now not everything is marketplaces. We usually prefer to invest not in the technology itself, but in the application of the technology. So, less in the hardware, but someone using the hardware to do something cool. The other trend or thesis we have right now is we\u2019re seeing businesses move from horizontal platforms which are kind of a jack-of-all-trades, but require users to do a lot of work, and where the Net Promoter Score, ultimately, is not that high.<\/p>\n
If you look at Craigslist, or eBay, or Upwork, or Thumbtack, the net promoter score of these businesses are not great because as a user, you need to do a lot of work. So, if I wanna redo my floor here, I go to Thumbtack, I say\u2026<\/p>\n
Sean: I don\u2019t think you need to redo your floor.<\/p>\n
Fabrice: I don\u2019t need to, but if I wanted to, and I say, \u201cWill you redo my floor?\u201d I get a whole bunch of bids from a bunch of people. I\u2019m really not qualified to evaluate them, but then I still am going to pick someone, and then they\u2019re gonna overbill me by 30% and deliver it three months late. And I\u2019m not going to be happy with the experience. And so, instead, we recently backed something called Renoviso, where, essentially, you take a picture of your floor, you say your square footage, and they will pick the supplier for you. You just pay them, and they manage the entire process.<\/p>\n
And so, doing these kind of managed marketplaces or supply pick marketplaces, where it looks to you the consumer as though the marketplace is the provider, even though it actually is a marketplace, it leads to much higher net promoter score. And we\u2019re doing this in every category like re-doing your windows, redoing your boiler, finding a plumber. But you can also do it for\u2026in the Upwork business, for finding developers, or finding a customer care agent, or whatever.<\/p>\n
Sean: Are you also looking in any other areas besides those kind of platforms, those kind of marketplaces? I mean, you mentioned having an interest in looking at some of the like science revolution that\u2019s coming down the road. Is that sort of where you\u2019re doing a deal by deal, but not really a theme for you yet?<\/p>\n
Fabrice: There are a number of developing themes we\u2019re considering. Like, for instance, in food, right now we\u2019ve only reinvented, or used technology to reinvent food ordering, and to some extent, food delivery. And even then, like only the basics of it because it\u2019s like people delivering. But in food automation, on the ordering side in restaurants, for instance, is something we\u2019re interested in. So, we didn\u2019t invest in pizza, but it would be the type of thing we\u2019d be interested in. We invested in company called Zume Pizza where they used robots to cook the pizzas. And so, you no longer have venues, you no longer have people, and whenever you order the pizza, the truck drives to you, cooks a pizza on the way. So, they have higher quality ingredients that comes out of the oven fresh, and gets it to you closer. And despite being better and better ingredients and fresh out of the oven, it\u2019s 20\u201330% cheaper than Pizza Hut because it\u2019s made by the robots and not by people.<\/p>\n
Sean: You\u2019re looking geographically at these opportunities, you know, beyond Silicon Valley, obviously, you\u2019re based here in New York. Where would you look in particular, you know, or pretty much anywhere where there is a good opportunity?<\/p>\n
Fabrice: The problem is, as investors, we\u2019re driven by where can we deploy capital effectively, which means, where are there exits. And so, market sizes actually matters, tremendously, and so we only look at large markets. Part of the issue with smaller markets, beyond the lack of exits, also there\u2019s no series A or series B available. So, seed money is kind of available anywhere around the world. Late stage money, once you get there, is available anywhere around the world because the Tiger Globals or Insights will find you.<\/p>\n
But series A and B money is actually really hard to come by in most countries, and so we only focus on the larger ones. These days, 70% is US, kind of everywhere in the U.S., but of course New York and Silicon Valley. Twenty percent is Europe especially Germany, UK, France, Spain, and Sweden actually, because they have a tendency to build global companies because the domestic market is small, and then 10% is Brazil, India, and a splattering of China, because their domestic markets are large enough, so they actually have VCs, they actually have exits, and many of the companies also have global ambitions, so you can actually make it work. We don\u2019t invest in\u2026I don\u2019t know, Chile, for instance, because the domestic market is too small, unless you actually really have global, or at least regional ambitions.<\/p>\n
Sean: And how do people approach FJ Labs for funding?<\/p>\n
Fabrice: So, every week, we get about 100 deals. We have a team of 15 people, and the team looks over deals. Now, usually about 50 of them are really out of scope, so they are amazing, but they\u2019re like agriculture tech, or hardware, or something, or like, bio-tech where we don\u2019t really have any expertise, so we tell the entrepreneurs, you know, \u201cThank you, but no thank you. I mean, we cannot help you because we don\u2019t know how to evaluate those.\u201d To the other 50, we typically interact. We do a one hour call, then the team, on every Tuesday, we have an investment committee meeting, and for over two hours summarizes all of their interactions and their recommendation, and then Jose and I will take a call, and it\u2019s a one-hour call.<\/p>\n
So, on the basis of two one-hour meetings, we will make an investment decision. So, usually in less than a week, you can get a yes or no as to whether we\u2019re investing or not. And we\u2019ve been investing in one to two companies a week, basically, for the last few years, and that process works rather well, but it really works because there\u2019s a team to whom we\u2019ve taught both our philosophy and thesis, but also a Euro 6. So, the way we decide whether we invest this three-core Euro 6 that has sub Euro 6. So, \u201cDo we like the team?\u201d which is an assessment of intellect, ambition, passion, ability to execute, grit, tenacity.<\/p>\n
\u201cDo we like the deal terms?\u201d And we\u2019re somewhat price sensitive. And number three, \u201cDo we like the business?\u201d And now, do we like the businesses as nine or going heuristics, is like total addressable market size, good in economics, capital efficiency, business model, scalability, little risk, and this could mean a number of those. And basically, we have kind of this checklist and we evaluate every company on that checklist, and if we like everything, we need to like everything; we need to like the team, the business, and the deal terms, and then we pull the trigger.<\/p>\n
Sean: And that\u2019s also on a deal that\u2019s already being led by another lead investor?<\/p>\n
Fabrice: The deal may be being led, and if it\u2019s not led, we will help them find a lead. So, we\u2019re not leading, we\u2019re not pricing, we\u2019re not seeing void seeds. The way the deals come in, by the way, about a third come in directly because we\u2019re known as investors. A third come in because we share deal flow with other venture capitalists. By virtue of not leading, and not pricing, and not having minimum equity requirements, we don\u2019t compete with them. And, in fact, many of them, we will bring great deals from C to ABC to later-stage VCs, and so they send us deals so we can go invest with them. And often, we will find the company\u2019s leads, and so we will bring them seed lead investors if we find something and someone that we like.<\/p>\n
And so, because we\u2019re not really competing with VCs, we get a lot of deals from them. And then the third aspect is, to date, we\u2019ve backed 400 startups, which means about 1000 entrepreneurs. They come back for the next company, they send us their friends, they send us their employees who decided to become entrepreneurs. And so that\u2019s another great source of the deals.<\/p>\n
Sean: You also find yourself as an investor, you put in, say, that average, say, 400 check size. Do you follow as well into the later rounds, or is it really at the one stage that they need you most that you put in?<\/p>\n
Fabrice: We follow on opportunistically. So, maybe we follow on 25% of the cases. We don\u2019t usually have enough capital to really do proper follow-ons, and because we own very little, on average we own like 2%, 3%, there\u2019s no negative signaling in us not following on\u2026and we\u2019re not team boards, so it doesn\u2019t really matter. Usually, we try to build a close relationship with the entrepreneurs. So, the entrepreneurs, even though we\u2019re not in the board, and were active in 400, or we\u2019re investors in 400 companies, they often find this to be the most useful investors they have because, first of all, we don\u2019t actually bother them, we don\u2019t ask for reporting, we don\u2019t ask for anything. If they want to give it, great.<\/p>\n
The reason we\u2019re helpful is when they want to fundraise in the next rounds, because we do full deal flow sharing with a number of VCs, we will actually help them work on their deck, and we will introduce them to the VCs. And by virtue of making those introductions, they\u2019re going to get the meetings, and that saves them a huge amount of time, because we\u2019re not conflicting, we\u2019re not going be leading the rounds any way, shape or form, whereas the lead VC from the previous round may want to actually lead that round, and so he\u2019s definitely not going to be introducing them to competing VCs. And so, the entrepreneurs find that role of helping them fundraise, probably, the most value-added thing we\u2019d do for them.<\/p>\n
Sean: That\u2019s great. Any last word of advice for entrepreneurs as to what it takes?<\/p>\n
Fabrice: Few general advice, I guess. One, it\u2019s actually, these days, very easy to build things for very, very little. So, don\u2019t go to investors, ask for money to build a company. That actually proves you probably can\u2019t execute and bootstrap a business, so I\u2019d rather you found like a couple of $100K, and love money, and pull friends\u2019 and family money, execute it, build something, and launch. That shows you know how to execute. And then, for me, it\u2019s a little bit of risk. And then I\u2019m taking market risk, but I\u2019m not taking execution risk.<\/p>\n
Second thing is everything should be tested. Like, whatever your assumptions are, we live in a world where we can measure, which is the beauty of the internet, and so you should multi vary test everything you do. For disruptive product change is the sum total of 1% improvement is done 1000 times over. And so, if you keep doing statistically significant improvements over every step of your funnel, and every set of your product, you ultimately end up with something that\u2019s massively better than what anyone else has.<\/p>\n
And third, don\u2019t worry that much about competition. For the most part, things that destroy businesses, or either the co-founder is fighting or fighting their board, or product market fit, business model, etc. Like, it\u2019s rarely competition. So, be careful of your unit economics, control your burn. It\u2019s not like a land grab where you need to actually capture the entire country. You may actually be better off making sure your business really, truly works in a city, getting the scale there, getting to profitability, at least, definitely, you need economic profitability, and then expand, and then expand first. But really create a sound solid base from which to expand on, rather than a rush thinking that it\u2019s a land grab, which will probably set you up for failure.<\/p>\n
Sean: Yeah, that\u2019s what we call it. Nail it and then scale it.<\/p>\n
Fabrice: Exactly.<\/p>\n
Watch the full 42Q interview with Fabrice Grinda of FJ Labs here<\/a>.<\/p>\n Keep up with the latest VC trends by following SOSV’s Medium publication: Inspiration from Acceleration.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"