Capital Series: Rick Zullo, Equal Ventures
This episode is part of our new Capital Series hosted by MCJ partner, Jason Jacobs. This series explores a diverse range of capital sources and the individuals who drive them. From family offices and institutional LPs to private equity, government funding, and more, we take a deep dive into the world of capital and its critical role in driving innovation and progress.
Rick Zullo is co-founder and general partner at Equal Ventures, a firm that is purpose-built to deploy technology across society and industry. And as they say on their website, they back the non-obvious founders before it's obvious. There are a few categories where they spend most of their time in: retail, insurance, supply chain, care, and climate.
Rick and Jason have a great discussion in this episode about the origin story of the firm, what makes them different, their strategy, their approach, what it was like to raise Fund I, where they're at today, what criteria they use when they make their investments, what their process is, and how their firm fits into the broader investment landscape in climate and beyond.
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Episode recorded on April 20, 2023.
In this episode, we cover:
[02:46]: Overview of Equal Ventures
[04:23]: What sectors and stages Equal invests in
[06:09]: Origins of Equal Ventures
[08:35]: Rick's thoughts on the "conviction gap"
[11:02]: Three big questions he asks for every opportunity
[17:40]: Overview of Equal's Fund I
[18:13]: Rick's thoughts on reserves
[24:16]: Equal Venture's differentiators
[28:07]: Their views on disciplined pricing and founder alignment
[32:33]: Domain expertise, portfolio balancing, and power law dynamics
[39:52]: Bandwidth constraints and scaling
[44:44]: How the climate playbook differs from other sectors
[51:01]: What Rick's most excited about in climate
[54:13]: Who Rick wants to hear from
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Jason Jacobs (00:00):
Today on My Climate Journey Capital series, our guest is Rick Zullo, who is co-founder and general partner at Equal Ventures. Equal Ventures is purpose-built to deploy technology across society and industry. And as they say on their website, they back the non-obvious founders before it's obvious. There are a few categories where they spend most of their time in, retail, insurance, supply chain, care, and climate. We have a great discussion in this episode about the origin story of the firm, what makes them different, their strategy, their approach, what it was like to raise Fund I, where they're at today, what criteria they use when they make their investments, what their process is, and how their firm fits into the broader investment landscape in climate and beyond. But before we start.
Cody Simms (00:57):
I'm Cody Sims.
Yin Lu (00:58):
I'm Yin Lu.
Jason Jacobs (00:59):
And I'm Jason Jacobs. And welcome to My Climate Journey.
Yin Lu (01:06):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (01:11):
In this podcast we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help.
Jason Jacobs (01:24):
And with that, Rick Zullo, welcome to the show.
Rick Zullo (01:28):
Thanks for having me.
Jason Jacobs (01:29):
Thanks for coming. I can't remember exactly how we were introduced, but it feels like it was a lot.
Rick Zullo (01:35):
I think the beauty of Twitter, believe it or not, that was, I think-
Jason Jacobs (01:39):
Back when Twitter was cool.
Rick Zullo (01:40):
We were the first climate Twitter people out there before climate Twitter became dominated and now it's a war for the Twitterverse. It's a beautiful thing now, or at least used to be, so.
Jason Jacobs (01:53):
Yeah, and I know we've co-invested a number of times, and you also do a lot for emerging managers, which I'm excited about as an emerging manager myself. But as we talked about a little bit before recording, the purpose of this new series we're doing is to learn from the people that have been doing this for a while about your story and what makes you tick and affirm and strategy and approach and challenges along the way and stuff like that. Both selfishly, because I'm kind of setting out and on the earlier side of building a firm myself and have a lot to learn. And also, there's just a lot of other people that are out there that want to know what's happening in Climate Capital from a variety of perspectives and it's kind of a black box. So we wanted to kind of fix that for ourselves and for anyone else that cares.
Rick Zullo (02:37):
Well, I'm sure it'll be more cautionary tale than best practices, but very happy to share our story and very much appreciate the opportunity to be here.
Jason Jacobs (02:45):
Great. Well, for starters, what is Equal Ventures? What's the elevator pitch?
Rick Zullo (02:49):
The story behind Equal Ventures is bridging the digital divide, which may seem like this very opaque thing, but as I was working venture capital, I've been in venture capital and private equity for a little bit, north of 10 years. I think one of the things that I noticed that was if you were a founder building an enterprise IT solution, some next version of Datadog or something, compete against Google, you could walk into a venture capital firm, and yet people who really hadn't prepared mind about what you were doing and with that they understood your category. They probably had built or invested in a company in that space, they knew your customers, they could actually really, really help you. And then as I looked at a lot of this, of what I would say is this next evolution of what's happening in technology and startups as software eats the world, if you're building a company in the energy space, or supply chain, or insurance, or some of these things that aren't exactly native to the traditional technology world, it's a fundamentally different product, experience.
(03:43):
You're walking to someone who may not understand the energy market, they definitely don't know your customer base. They're probably giving you advice from a very, very different perspective, which frankly is I think a bit dangerous and a big reason why we saw the Cleantech bubble pop 10, 15 years ago. And my admission was just to provide that same product that enterprise IT founders have gotten, a high quality prepared mind relationship with value ed partners, but provide that for founders in markets like the energy industry that we can bring that prepared mind to and bring something a little bit different. And it's been a great experience doing that with founders at their earliest stages over the last, I guess four years we've been up and running now.
Jason Jacobs (04:23):
And you mentioned some sectors on the website, and one of the sectors you mentioned was climate. Maybe talk a little bit about what sectors you focus on, and also, it's always tricky to me whether climate is a sector, so I'd love to just get your take there on how to think about climate relative to the other sectors that you play in?
Rick Zullo (04:43):
Yeah, hold on. Play is the right word, since none of this feels like work. But the reality is we invest across four sectors, insurance, supply chain, retail commerce enablement and climate. And we'll see some intersection across, you can imagine a climate insurance company. It's both of those. We have several investments in sustainable supply chain. We think about climate, it's really around core, like clean energy, power, utilities and so forth, which is my core background that I have coming up in the industry, really focusing on power, electrification and the utility side of the fence. But we believe that there's a lot of harmony actually investing across those categories. Not only because they give you different perspectives and you see business models to work one place and another, but create some cognitive diversity as we build a team that we can invest across some cycles where sometimes it's great to invest in energy and sometimes it's great to invest in other categories, that it keeps life nice and interesting.
Jason Jacobs (05:36):
Got it. And then just some housekeeping, what stage do you typically invest and what type of check size?
Rick Zullo (05:43):
We're exclusively seed stage. Our cortex size is about a million and a half to two and a half million dollars. We're lead investor generally in everything that we've done. That's not to say that we wouldn't co-lead, but generally taking board seats in that. So, I'm currently on the board of eight companies and observe, we're on the ninth, which was a company that we incubated. So really preferred to be there at the earliest stages and to be a really meaningful partner.
Jason Jacobs (06:08):
Got it. And how did the firm come to be and why did the firm come to be?
Rick Zullo (06:12):
Myself and my partner, Richard Kirby, we've known each other for north of 10 years, met him when I was back in business school. He was working, I just made a transition from IVP to Vetrock and he had been someone who was installed in the Bay Area, working at IVP then Rock, two very well regarded firms. I was someone coming from New York with there barely was a venture scene back then in 2012 when we first met. So trying to figure out how I could break into venture, the very few VCs that were in New York at the time connected me to Rich as the help of me navigating that transition from being a private equity guy interning in venture capital, getting his MBA, trying to break into venture. Rich was immensely helpful through that process. And I eventually landed at a firm called Foundation Capital that had done a lot in clean energy as well as IT, and we stayed in touch over the years.
(07:02):
And I think the two of us, as I was ultimately went to go work at a venture firm in Chicago called Lightbank that really let me explore this thesis on deploying technology into some of these legacy verticals, rather than being a pure IT guy. I think Rich could see that a lot of things were changing in the valley, that new natives were popping up like Andreessen Horowitz and trying to figure out, "Okay, how can I go and be part of doing something entrepreneurial in this space?" And seeing what I was doing in Chicago, Rich and I really connected as both trying to find new models and new approaches as a source of competitive advantage, but also as frankly people who shared a lot in common. Both of us call the New York City area our home and have grown up here.
(07:44):
Both of us are huge sports fans, both of us have the same name and basically the same name. So there's a lot of commonality in that and I think much the way that must start, sorry you find that like-minded and get excited about an idea coming together, which as I started pitching Rich this concept of investing in some of these verticals where we could partner with industry and health and transform really bring that prepared mind approach. It was clear that it was an underserved opportunity that was something that the firms in the valley definitely weren't doing, and it created a great opportunity for us to do that in a place like New York City where many of these industries have such a tremendous presence.
Jason Jacobs (08:19):
And what are the biggest differences between investing in some of the categories that you mentioned, versus some of the other places where a typical enterprise software fund might be investing in? And along the same lines, what are the implications of those differences as well?
Rick Zullo (08:35):
Yeah, I think there's really two things that we see and one is what I'll probably call the conviction gap. That if you have a prepared mind on something and you can move much, much earlier into something, and I think a lot of people will look at this, especially about if someone's developing a hot new AI concept right now. That company doesn't need traction, it doesn't need years of customer proof. It can get funded at a ridiculous price, because investors know and believe in that category. I just heard of early stage healthcare deal that was nothing more than a PowerPoint that raised $50 million. Now, that's not going to happen from an investor who doesn't understand that category, unless they're wildly, wildly irresponsible. As we're looking at some of these sectors where people don't have a prepared mind, there is a tremendous burden of proof that a founder has to show, which generally they don't have a ton of resources or a ton of angel dollars that they can go bring into these companies to show that.
(09:29):
And I think that's largely the reason why we've seen a lot of these legacy verticals blank in the energy sector under innovated on from a digital perspective, because it requires so much burden of proof to be able to even get venture capital dollars, which is historically one of the reasons why this sector has been underfunded. I think the second thing is really around founder market fit. And I think that there's a fairly myopic point of view of what is a archetypal leading founder from a Silicon Valley point of view. And I don't think that's shared across everyone in these industries.
(10:02):
As we invest in someone in supply chain or trucking versus let's say investing in someone in the insurance sector or energy, those would be three very different founders that would be successful. I think this archetypal nature that people have justified pattern recognition for what is a A-plus founder and said that should apply to all walks of life is frankly wrong. I think it's BS. I think it has a lot of bias and prejudice built into it, which I think as we've looked at these sectors really diagnosing and saying, "This is what founder market fit is and for this particular company, for this particular sector." And I think having some nuance to that is something that is really, really important and frankly something really hard to do, unless you're embedded and native to that industry.
Jason Jacobs (10:46):
In your view, what does it mean to have a prepared mind in the way that you're describing? And it'd be helpful maybe to have an example too of how that was actually applied to inform your investment decisions?
Rick Zullo (11:02):
I think a lot of VCs spend most of their time meeting new companies, and frankly for me saying no to founders is the least favorite part of my job. I actually try to take as few founder meetings as possible and really focus my time on answering three questions of like, "Will this be an opportunity that changes my life? Is this opportunity that I would be excited to work on, even if it was failing? Is this a founder that I feel is so compelling that I need to learn that?" As I think of that scope, I really try to limit the time that I spent on new companies and really focus a lot of my time on developing the deepest connections that I can to industry and researching where I think the biggest ideas of the world are going to come from.
(11:45):
As we looked into clean energy business in a box, for example, we noted a shrine that most of the development that happens for clean energy development happens in lockdown. That small regional development firms, we've largely seen that there's decreasing returns to scale on the developer's eye as people largely have a lot of localized expertise. And that those folks, as we surveyed dozens and dozens of developers have very low wellness to pay for software for a host of reasons, cash flow, not untrust of IT, they just didn't have a lot of IT stuff.
(12:17):
And with that, as we started to pull that thesis out and survey and speak with a lot of industry partners, we could introduce business models that we had seen work in other places that are Silicon Valley best in class things, like counter positioning. We started to bring along to that group of developers, "Hey, what if we gave you the software for free and made money via X, Y, Z?" And with that, and we developed hypothesis on basically a freemium clean energy business in a box solution for developers.
(12:46):
Over the course of the next year we published that thesis with Climate Tech VC. Kim and Sophie have been great fans to the firm and that presentation's been viewed tens and tens of thousands of times. We met with 40 plus companies in that space, trying to pivot folks who are giving their SaaS solution away, explaining our thesis and seeing if they'll give it away for free to develop that. In a long way we happened to meet Emily from Odyssey Energy Solutions. We had not initially looked at that from an emerging markets' perspective, but fortunately I spent a good portion of my career focused on emerging markets energy infrastructure, and it was just like an absolute click that she could see her business model and what we are proposing.
(13:26):
And you would have that alignment of, "All right, we are as passionate." It's not possible for anyone to be as passionate about our business as Emily. As you know, she's dynamo, but she could see that we actually had a prepared mind on that industry opportunity and weren't trying to push her down some path of being a SaaS company or something like that. Understood that free was a great strategy at captivity over the developers and we couldn't be more excited about the growth of that company since and helping Emily flick a few of those levers to really start increasing monetization on the platform. And it's turned out that it's made the platform grow even faster, because it created more power to them.
(14:02):
I think that's roughly 90% of the deals that we do as a fund follow that trajectory of us coming up with an idea that we think is one of the biggest ideas in the world. Something that I would be the most excited to work on, that if I were a founder myself, I would go start that company. And then going and finding as many founders that are built something in or adjacent to that and hopefully arriving at the conclusion of picking the best founder in the world for that company. And unquestionably, I think when we talk about founder market fit, there are a few people that I've met in my lifetime that have better founder market fit for what they're building than Emily.
Jason Jacobs (14:37):
And at any given point in time as a firm, how many different problem spaces and potential solutions would you say that you try to have a prepared mind about? And what's the batting average, if you will, of areas you have a prepared mind about of actually ultimately pulling the trigger and making an investment in that area?
Rick Zullo (14:59):
I think there's various different stages that we would say we have conviction on an idea. We do biweekly research briefings as a team, and that's usually where we start ideating an idea and then someone might say, "All right, I'm going to pull the thread on this a little bit. I'll come back to the team with a couple of thoughts in our next session." And so we'll start, that's at the basis lowest level of conviction, but as we go and then we perform a deep dive, which may take a month or so of research to really get it under the hood, and we'll try to come back with an answer on whether this is something that we're going to press forward on and potentially add to our big board. And there'll be plenty of times that we do spend a month doing research and decide, "Hey, this idea is just not going to cut it." And with that we'll go pull that idea and doesn't pass go and go to the next stage.
(15:44):
But if it does, it goes to the big board and we're probably tracking somewhere between 15 and 20 ideas at a given time. And look, we do three or four investments a year. We did three investments last year. Without the conversion rate, it's ultimately going to be fairly low on them, but we try to have three or four or five ideas across each one of our core sectors that we operate of, "All right, these are the biggest ideas that we could be pursuing in each one of these markets." And we staff ourself as a firm so that our product owners, our product owners and Suri for climate, that she's exclusively focused on researching, developing the networks and hunting down deals in those categories so that if those are the best ideas on the planet that we believe in, we want to be involved with the best companies.
(16:30):
And that's not to say that if an incredible founder showed us something different from that, a 100% we would certainly pursue. We've done that. That's the 10 to 20% of deals that are outside of our core strategy. And there's great examples of us doing that across all our sectors. That said, we do think that's a really great way to make sure that we're being efficient with our time to constantly be learning more around the industry and being productive, as well as hopefully getting the chance to get the best shot on that that we can for the ideas that we're most passionate about.
(17:00):
So, it's hard for me to give it a batting average. There's some ideas that have been on our big board for three years. I think we've published our thesis on Universal Energy API or creating the platform energy maybe two, three years ago. We haven't invested in the category since, I'm still very much looking to invest in a company in that category and we've probably met a couple of dozen companies that are doing some form of that service. So, hopefully the batting rate goes up over time in getting those done. But we do find that it creates a really healthy partnership with those founders, because we can go and bring some perspective as well as a bunch of customers that we did across the course of our research to those companies that are insanely early stage.
Jason Jacobs (17:40):
And I forgot to ask, which fund are you investing out of and how big is the fund?
Rick Zullo (17:42):
We're investing out of our first fund. I can't publicly speak to any funds after that, but we'll have some more news on that front coming in the near future.
Jason Jacobs (17:53):
And how big is Fund 1?
Rick Zullo (17:54):
That first one with $56 million and I'll have about 14, 15 investments in it, so highly concentrated for an early stage fund strategy. But we've been fortunate to see about 90% of the investments that we make it invest made it to series A stage with some great partners in that mix for series A, series B and series C.
Jason Jacobs (18:13):
How do you think about reserves?
Rick Zullo (18:14):
That's a evolving question. Over the last couple years, I was very much of the belief that we should get as much ownership up upfront given the steep price escalation that you see between C to series A, series B. I mean, we had one company in our portfolio that we invested in the company at a single digit valuation and it raised at a billion dollar valuation within two years. And that is all the more reason why I felt the reason that we should get as much ownership upfront as we could into those opportunities given if you're plowing into the med later stages, your dollar cost average goes up pretty extensively.
(18:49):
Now, I think the market's changing. Some recent data came out yesterday on I think the top four series C investors of 2022 have done a combined four deals thus far this year. It is a very tough environment for growth right now, and certainly that's pressing down valuations for growth stage companies. Meanwhile, as I'm sure you've seen C-stage valuations, especially in hot sectors like climate, they're still pretty [inaudible 00:19:13]. As I look at that curve, it makes me rethink our reserve theory a little bit and I'm probably willing to or want to reserve a little bit more capital for companies on the backend to make sure that we can participate in some of those more attractively priced rounds.
(19:27):
In general, we do believe in this kind of equal position sizing structure, which when you're investing so early in companies, I want to make sure that it's not that I have $25 million in one company and 250,000 in the next, we'd like to make sure that all our portfolio companies are getting the same product, which is $3 million in our first fund. And that number of comes up a little bit in our second fund based on the size of that fund. But we think that creates a healthy alignment, as well as healthy level of effort that we're putting to each company. As well as making sure that if we get something wrong, which we all will as investors, that we have consistent ownership across those companies.
Jason Jacobs (20:05):
And when you set out to pull this first fund together, given that as you've articulated it is, I mean essentially to some degree zigging when others were zagging, how differentiated did you feel it was when you went to market in terms of the story and positioning, and what are the pros and cons of being differentiated?
Rick Zullo (20:27):
Yeah, I think everyone when they're pitching feels like they're differentiated. And then we entered a [inaudible 00:20:32] and it was such a painful process for us to raise. I mean, brazing our first fund was one of the most painful experiences of my life, which-
Jason Jacobs (20:40):
What year did this occur?
Rick Zullo (20:42):
I left Lightbank in 2018 and we did first close our fund in 2019 and final close in 2020, literally just before COVID, so call it 18 months plus to get the fund done, somewhere in that range. I didn't take a salary for any bit of that, so walked away from my job. I think the month that I left my job was also the month that my wife and I got pregnant with our first child, so a perfect time to start a fund. I had just moved back from Chicago to New York, so major life changes all happening at the same time. And our first close was anemic. It was extremely, extremely hard. I have a few friends in the LP world who shared their notes with me from CRMs, some of these big fun funds. The notes were not good, people did not understand what we're doing, didn't understand kind of why this was different.
(21:28):
I don't think I am the most concise person at pitching an idea and really articulating what we're doing. It was tough, to the point that Equal very much almost did not exist. And I remember my daughter had just been born and I was out for the investment committee of major university endowment and my partner and I were both pretty broke at that point, staying in a hostel where our feet were literally touching the bed against each other, $25 a night we're paying for before pitching an endowment to anchor our fund a week after my daughter was born. And fortunately that worked out and if that didn't, unclear whether Equal would exist as a product today. And that definitely got the ball rolling.
(22:11):
But I think the best way that you can have differentiation is proofpoints not in your pitch. And I'm never going to be someone who wins or dies by my pitch. I actually fundamentally don't believe in pitching. I haven't taken a pitch from the founder in probably six, seven years. But I do think the more that you differentiate yourself in the market from your performance and the product that you have, which our biggest thing in going from fund one to pure future vehicles has been the founders and investors that we've worked with and saying what we do is different than a traditional generalist firm and we're really proud of that, but we think they're probably better at pitching than we are. I think the differentiated story is something that helps, but if it's just a story, it's going to fall pretty flat in the pitch.
Yin Lu (22:54):
Hey everyone, I'm Yin, a partner at MCJ Collective. Here to take a quick minute to tell you about our MCJ membership community, which was born out of a collective thirst for peer-to-peer learning and doing that goes beyond just listening to the podcast. We started in 2019 and have grown to thousands of members globally. Each week we're inspired by people who join with different backgrounds and points of view. What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change.
(23:20):
Some awesome initiatives have come out of the community. A number of founding teams have met, several nonprofits have been established, and a bunch of hiring has been done. Many early-stage investments have been made, as well as ongoing events and programming, like monthly women and climate meetups, idea jam sessions for early stage founders, climate book club, our workshops, and more. Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to mcjcollective.com and click on the members tab at the top. Thanks, and enjoy the rest of the show.
Jason Jacobs (23:54):
Well, I'm definitely hearing some parallels, and I mean, obviously you're further along than we are at MCJ, but we think the way that we engage post-investment for example is pretty different than a typical firm. But the easiest way to understand it is to experience it trying to explain it to people, especially capital allocators that didn't know us before we walked in the room. It's challenging. And I'm curious, you mentioned the prepared mind before the investment. I mean, maybe attempt to describe how engaging with you is different, what's different about it, and how is it different?
Rick Zullo (24:28):
Yeah, so it's never with a pitch and it's usually with us outbound reaching to an entrepreneur at CCH that's frankly not an entrepreneur that's used to being outreached too by a ton of different VCs.
Jason Jacobs (24:40):
Because the prayer mind is enabling you to reach the ones that aren't the hot thing being chased by 10 [inaudible 00:24:46] firms.
Rick Zullo (24:47):
And we're generally not meeting people while they're in a process. So it's, "Hey, we found out that you're working on this because X, Y, and Z. We'd love to have a conversation with you. Here's a ton of research that we've done and how we think that we can be really helpful." I think a lot of leader stage firms have come around to that practice and done it for series A, series B, series Cs. I think we're one of the very few firms that do that at the seed stage, which has been differentiated. But with our process, it's no founder comes in and pitches our partnership. It is truly like we'll go and have long brainstorming discussions where the whiteboard is where we live and that's the reason why I couldn't be happier to be back in the office since those moments brainstorming where I think we can really assess an entrepreneur, as well as have them get a better understanding of us.
(25:32):
But it's always them getting to meet three, four, five, six, seven industry experts that we're very, very tight with, which I'll say those folks have been really valued partners to us, many of which are helping our fund. But we're trying to make sure that we're introducing customers, introducing partners, introducing people are super strategic and relevant to founders for anything that we're looking at. And regardless of whether we invest or not, we hope that leaves founders with a really favorable impression of our firm going through that process. Now, all that's part of the kind of pre-deal fashion, but I think where we really try to differentiate it is post-investment, which I think there's a lot of promise that VCs make. On average we try to dedicate 250 hours of GP time per company per year. Told you that I'm on eight boards. That basically means that I spend almost all my time with the portfolio, which is true.
(26:20):
I think we found some ways to scale that to a certain degree by having product owners who can do other things for the portfolio and definitely help us on top of funnel. But I probably spend about 90% of my time on the portfolio. And that's really being, talking to our founders almost on, there's probably talked to most founders on a near daily basis, if not every single day, who are involved in everything from recruiting, fundraising, strategy, customer development, so forth. I'll get on a plane and help them build a financial model that what we've really tried to do is have a concentrated point of view of what the old school venture capital approach was. Which I think back in the day, it used to be that if you're an important member of a company and something happened to CEO, you could jump in and be the interim CEO of that company, because you were so intimately involved. You knew the employees, the employees knew you.
(27:08):
And I think that was a really, for me, as I read books like eBoys about benchmark in the early days, I never wanted to be a deal guy. I wanted to be a really, really great consultant, and that's how I started my career and that's what the work I really, really enjoyed, which I love being embedded and being really close to everyone in the companies on our team. And being able to have really, really thoughtful conversations to help those founders bring them something that they don't have on their team. And that's ultimately our goal.
(27:35):
And I think we've scaled that up a little bit with having dedicated co-pilots. On every deal we have a pilot and a co-pilot, generally the pilots are, the GPs the firm, the co-pilots are the product owners, but we really want to be a full service end-to-end firm, which is difficult as a firm of five people, but I think that's led to lower deal velocity and slower pacing than most firms. We did 14 deals in four years, but it's led to what we think is a really great product for founders and hopefully a great product for LPs. And I believe they're happy with our returns, but we'll see how all things net out in 10 years.
Jason Jacobs (28:07):
How sensitive are you at entry point to price?
Rick Zullo (28:12):
Extremely. I've never paid north of $20 million post for an asset. And I think we will never win a deal on price alone, that's not to say that we aim to be cheap. It's not to say that we don't want founders to be fairly paid, but what we try to align with founders on is that we are not a commodity problem. We are not the cheapest source of capital, and that's guts, it comes with so much of our time. I think I also try to make sure that they understand that's my point of view on every stage of capital. That if a great firm, Union Square Ventures is going to lead your series A, they warrant a discount versus some of their firms, because I think Union Square Ventures is one of the best venture firms now.
(28:54):
I think the second a venture capital started to migrate to capital B commodity, it's starting to move away from what I think makes it great, which for us, we love to be at the early stages. We love to be there where we can get meaningful ownership and we really feel it's important for our fund size to stay small. We're a capacity constrained fund. We turn down money in fund one and we'll always hopefully be in a position where we're capacity constrained. Now, money's supply constrained and that's because we want to make sure our fund size is properly aligned with our founders. The second that our fund size gets way too big, it means that early stage doesn't matter. And I think that's where founders need us the most. I think that's where a lot of firms get too big to really focus on those earliest moments and do that.
(29:38):
So, our point of view is that we need to be disciplined on price that's alignment with our founders will happen there. And then yeah, it means that we will lose deals, and we have. We've certainly lost deals on price, but I think that's doing right by our LPs to make sure that we're consistent with our ownership. It's doing right by the other founders in our portfolio to make sure that we don't have 3% in one thing and 15% in off. We have fiduciary responsibility, we need to make sure that's consistent, but we also tend to find that the best founders and the ones that we enjoy working with the most, the ones that value partnership, we can have a very straightforward negotiation and discussion with them about, "Here's our pricing parameters up upfront. Can we find a way to make something work?"
(30:20):
And we're very transparent with folks about where our prices begin and end and what our check sizes are. And I'm sure there'll be a time and place that, especially with inflation that I pay north of $20 million post. But the reality is we think being there at the early stage is really important, and this model seems to be working for us right now.
Jason Jacobs (30:38):
I don't need any hard numbers or anything, but just percentage wise, do the investments that you tend to make, do you tend to be the only suitor, or are these processes often competitive?
Rick Zullo (30:49):
It's a mix. Sometimes we'll meet a founder and they've never spoken to a VC, or other VCs don't get it. Well, certainly we've lost deals to funds like Founders Fund and so forth. I think we've lost a couple to them, which certainly it will pay higher price, but also an incredible brand that a lot of founders are going to go with, regardless. I think we're not going to be able to be all thanks to all people and we're not going to be able to beat everyone on everything. So, humility is something that we're certainly very comfortable with, but sometimes we're going to be the only one in the mix. In plenty of times that third cases where founders have gotten term sheets at $40, $50 million valuations and nestled with us at 20. And I think that's where we find folks who want to take a discount, because they recognize that shaving couple points of dilution here and there is not going to make as much of a difference in the long run as having the right partner for their business.
(31:38):
And I think those who have taken absurdly high valuations at seed stage over the last year or two are now realizing how problematic that is in terms of actual company building. I think there'll be some continued fallout from that. But all this comes down to working with people that you're going to be really aligned with. And sometimes that's competitive and people choose you and sometimes it's not competitive and we're never going to try to screw over a founder because it's a non-competitive process. I just think that sets up the back context for relationship where the range of valuations that we've invested in is extremely tight. We try to make sure that we're taking the valuation out of entry as much out of our equation as possible so we can really focus on, is this a great company, is this a great founder? And we'll worry about the valuation dynamics. So upon further rounds and exits not upon entry, which our range in check sets is remarkably consistent and limited upon entry point.
Jason Jacobs (32:33):
And I understand the answer to these next few areas might just be, it depends, but how do you think about, and I've got three of them, one is, repeat founder versus a first timer? One is the number of founders on a founding team? And one is insiders versus outsiders in the categories in which these companies are attempting to bring about change?
Rick Zullo (32:55):
Well, that last one is a pretty consistent one for us, which I think we value domain expertise and domain relationships extremely, extremely high. I think for us, we very much prefer people who are insiders to their industries, and we're perfectly fine with them being outsiders to the startup ecosystem where a lot of the founders we backed are indeed first time entrepreneurs. They're folks who have been in their industry for many, many, many years, often highly respected in their industry and represent tremendous founder market fit. One of our most successful companies, a company called ThreeFlow, both the founders of that company worked at Sun Life Financial for seven, eight, nine, 10 years, great insurance carrier, but not exactly a hotbed of startup activity. And that's been one of our most successful companies. Emergence led the series A, Excel led the series B, and we think that's a public company someday.
(33:45):
And we think that's really emblematic of the type of founders that we work with by and large. That's not to say that we don't love the experience of a second [inaudible 00:33:53] founder. We look at Ghost, a company that we have a sustainable supply chain space. It's a B2B marketplace for excess inventory. Josh and Dee, the two co-founders of that company, both of them are experienced founders, both of them have built really exciting businesses in the past, and that's certainly given them a lot of advantages in knowing how to raise capital and knowing how to scale a team. And all that makes life a lot easier as a board member, working with those companies enables them to move fast. That company has moved incredibly quickly over the last 15, 16 months. But there's still always a lot of things that need to learn going to every, which I think a lot of VCs overemphasize repeat founder experience, that gets baked in the price.
(34:36):
And there's certainly plenty examples that we've seen of very high profile second, third, fourth time serial founders playing on, as well as folks who may have had a lukewarm first time founder experience end up being highly successful in their second or third. So, it depends is probably the right way to put it, because you really got to look at, is that founder the right fit for that experience and are they ... Do all those other dynamics come together to make this a very magical opportunity?
Jason Jacobs (35:05):
It sounds like, I would imagine, and I'm far from a portfolio modeling and construction expert and my partner David who does most of that for us would be chuckling right now because that is definitely not my skillset, but I would imagine that when you're doing the modeling, you are modeling more ownership at the early stage given the sensitivity on price? I'm curious, when you model how you think about power law relative to typical venture construction? Is there a higher on base percentage and you're open to lower exits, or how do you think about that?
Rick Zullo (35:38):
Yeah, I mean, power law is something that's inevitably going to happen, but it's not something that you should steer into, in my opinion. I think one of the early folks that I worked with in venture, when I told him that I was going to start a firm, he said, "You should invest in a 100 companies, figure out which one's working the best, and buy into that one." And I told him that sounds like a really shitty deal for the other 99. And the reality of the situation is, I don't think that's a great experience for founders. I want to ignore power law as much as I can from the way that we service companies, the way that we invest in companies, and recognize that it's going to take hold.
(36:11):
Because what we have some companies in our fund that are early value drivers that definitely pump up our numbers. And who's to say that those companies, I hope for them and for us financially that they don't find out. But it could be that the biggest value driver in our fund is Odyssey or David or a company that is still early on in its life cycle. The reality is I think a lot of investors let power law be the tail that wax the dog and lean in on companies very, very early, which I've been investing since 2012 now, and I realize that these are extremely long roller coasters. And you need to be able to ride them up and down and get enough high-quality positions, shots on net with enough ownership and ride those 'till the journey's over. And I think by having a smaller fund, if a founder sell for $500 million, that lose the needle, that returns are [inaudible 00:37:05]. If a founder sell for $10 billion, that's a tremendous, tremendous outcome. That's a 20 X done for us.
(37:12):
I think we've tried to position ourself by being disciplined in fund size, that yes, outcomes that are great for the entrepreneur, which I was fortunate to have two really early nine figure exits in my career where the combined paid in capital of those companies was 10 million bucks. And each of those founders has been helping our fund and they've made tremendous wealth in those opportunities and I was glad that we could be aligned with them. It wouldn't have been aligned. And I had a case with another founder that the company didn't work out where they declined a nine figure by a very early on in the life of the company that would have made the founder a lot of money but wasn't really aligned with the fund size.
(37:47):
So yeah, I think all that's to say is, if you construct your fund with discipline and both fund size as well as valuation and align yourself with the founders, it leads to greater optionality and a lot of opportunities for the founder to win and for you as a firm to win. Whereas your fund size becomes so much bigger that it really can only be driven by $10 billion outcomes, I've just seen the incentives really, really push people to only focus on the company that's capable of delivering a $10 billion outcome, which if you look at the universe of companies that have had $10 billion outcomes over for the last 20 years, it's a pretty small cadre of companies.
Jason Jacobs (38:29):
Given your sector focus and your prepared mind approach, how do you think about strategics as LPs? Are you a proponent, or does that raise red flags for you?
Rick Zullo (38:40):
I think we don't have strategics as corporates, as LPs in refined. That's not to say that we would be opposed to it. We've generally found partnering with executives for smaller level checks as personal LPs in the fund has been a more collaborative posturing for us, especially given that they may change organizations. But in general our LP base is large institutions, endowments, foundations, fund to funds that are investing in early state venture purely as an asset class. I think in the climate world it's certainly very different and I think that there's a lot of strategic mandate, both yes, in large pensions and the Dallas Foundations, but on the corporate perspective to really move fit to the clean energy transition.
(39:24):
And I think that's a great thing. I think the more that a lot of these large strategics, especially that ones that are cash rich can go and connect themselves to the startup ecosystem. And I think this is an amazing thing, but I think everyone needs to think about, what is the product that they're building. And to a certain extent, the LPs that you take on really inform the product that you have. Making sure you're really thoughtful about the LPs that you bring on, there are a few things more difficult to change than your LP base.
Jason Jacobs (39:52):
Given your pension for leading and board seats and all the time you mentioned, I think you said, what is it, 250 hours that you budget per year per company from each partner?
Rick Zullo (40:04):
We train you on that first year, it's about 250 hours from a GP to that company. We think that's really the time that's required to have that company scale its team, build on a team. We do a lot on the strategy and 360 side for the companies. And then as that company races series A starts to scale down maybe 150 hours and then when it's series B or beyond, that's a much lighter time requirement. That's frankly the company is at a stage of maturity that at that point it may have a 100 plus employees. They have a lot of people who make us redundant. There's also a lot of investors around the table that can certainly shoulder a lot of load, but we think we really try to make sure that we're heavily concentrated in that kind of seeded series A stage, which is the reason why no partner in a firm does more than two or three deals per year.
Jason Jacobs (40:53):
And I know you're only investing out of Fund 1 and you can't talk that much about the future, but directionally, do you worry about bandwidth constraints as future vehicles might kick in, if for example maybe some companies in your existing portfolio either stayed in the muck for longer, or stayed private, or there wasn't a natural exit point for you from that board?
Rick Zullo (41:17):
Yeah, a 1,000%. I mean, I'd be kidding myself, time is our scarcest resource. I think that's always going to be case for anyone. I think it's Peter Thiel even said, "Time is the most valuable resource on the planet." As I think about that, that's always the number one thing that I'm thinking about in terms of how do we scale equal and how do I make sure that I'm thoughtful in what we take on from a capital perspective, from a company perspective, no, which is the reason why we've had such a concentrated portfolio. It's the reason why we've really thought about the progression of the portfolio and making sure we're bandwidth aligned with our entrepreneurs at the various different stages that we think that they're going to need them. It's a big part of the reason why we've put so much emphasis on this product owner philosophy, which I'll say the maturation of our employees, Chelsea, Adam, and Simran.
(42:04):
It's just been phenomenal over the course last few years. That if I think of probably the thing that I'm single products of the last 12 months, it's been the development and maturation of those three that seeing the way that they work with entrepreneurs, seeing things that they've done in market, seeing the deals that they've pulled in and the way that they're really representing our firm that I tell our LPs that I have three bosses, and our bosses are those three folks and how I can support men in scaling our products in each one of those. And I think that's been working extremely effectively. But to pretend that as an entrepreneur and firm owner that I'm not going to be bandwidth constrained is just an impossibility. I'm sure you're the same way that we all work 'till one o'clock in the morning and wake up to our kids kicking and screaming at whatever hour that is.
(42:53):
And I think that's what we sign up for, and that's the reason why I say, this has got to be something that feels like play. Because it feels like work you're not going to be able to do that, which we love working with entrepreneurs here. We love doing things that we do and it really forces you to be extremely scrupulous with your time, which is the reason why I try to tell co-investors, "Don't be offended if I won't take an intro from a founder. It's because we're really spending our time in the portfolio and trying doing the things that you think drive the most value for those companies and for our LPs." And it's the reason why hopefully we spend a lot less time raising capital and a lot more time focused on how can we help these companies return capital to the fund.
Jason Jacobs (43:29):
And I might be mishearing this, so if I am, just let me know. But what I think I'm hearing is that essentially you've chosen an equal to substitute what would typically be called an associate, or principle, or a vice president for these product owners. If I heard that right, what is the charter of these product owners, and is it uniform across the three, or is it a different charter for different skillsets?
Rick Zullo (43:56):
Same charter for each. And I've never really liked titles candidly of associates [inaudible 00:44:02]. Every firm has a different way to do it. I think people who are called partners, people who are two years out of school and YC said that you had to be a partner to attend YC. Yeah, look, everyone in our firm has a vote as we're voting [inaudible 00:44:14]. That started when Simran was fresh out of college when she joined us and she's a total superstar and she had a vote. And the buck stops with Rich and I, and we're the ones that have to make the decision on this deal. But we try to make sure that we have an extremely flat firm point of view in how we're making decisions, that everyone's input gets put into the calculus. And I think that's something that leads to both the encouraging and the development of those employees, but also making sure that there aren't gaps in our own thinking and our own logic, which I think open debate is a really important part of that.
(44:44):
But the product of our philosophy is something that we came up with earlier this year. And that's to say, as I started thinking about macro level planning for the firm and doing that across four different sectors, realizing the playbook to win in climate, as I'm sure you've seen, is extremely, extremely different from, let's say insurance. Insurance Twitter does not exist, Jason. If you think of the culture, the way you win, the round dynamics, insurance is high school right now. Which the way that you got to play that sector is very, very different than the way that you got to play to win in climate. And I think you've seen some of that of being one of the early folks to see the impact of media as folks get really excited about learning this world. And that is a very, very different playbook than what we'd see in some of our other sectors.
(45:35):
As that label went off, we said, "Okay, all right, how can we each of you develop your roadmap for the year of how we can be the best lead seed stage product for this?" And each one of our folks is directing who we need to develop relationships with, who are our upstream and downstream investors? What are the areas that we should be researching? I mean, we literally have spider graphs that we do of our competitive positioning across all these and how we think other folks are ... These are 30 slide presentations that each one of our folks where it's the same thing. It's all part of equal, but it's how do we win in that? And we have our own uniquely specific strategy. And this is probably just, I've spent too much time consulting and I'm over engineering something that's very basically simple, but seeing that I was blown away by the product owner presentations that we had, just like, "Wow, the way that we win here is so different than the way that we win here. The firms that we partner with, the experts that we need to do, the way that we're researching."
(46:34):
And it comes down to little things like even content and research strategy that the content that we publish and retail and commerce enablement is extremely, extremely different than what we published in insurance or climate and so forth, which I love that. And I think our employees really love it because they're saying, "Wow, this feels like I'm running a fund inside of a fund." And we work extremely collaboratively on coming up with that plan, with the ideas and so forth. And they're not doing 20, 30 investments. We may do one, two, or three deals in each one of our sectors per year. So with them, it's really, how do we go and manufacture the best company in this space this year? How can we go and manufacture one or two deals, which is an incredibly daunting but exciting thing. I mean, imagine if someone threw down the gauntlet and said, "Simran, you need to go and find the best climate tech company in the face of the planet and make sure we're in it. That's your job this year."
(47:30):
And that's a lot of pressure. But when you start from that first principle standpoint and say, "Okay, how do I work myself back from there? I know that that's going to be a hotly competed deal. How can I make sure that we have the best offering for that? How can I make sure that the ideas that we think are going to be coming down the pipe are going to be the best ones that we have prepared mine on? How can I position myself with other investors so that the upstream, downstream partners send me that deal first?"
(47:55):
And I think that's how we think about that prepared mind in product pieces. So if we bring a prepared mind to those industries, know what we think is going to be most exciting, and then we have the best product to meet those opportunities, we're going to have a shop and that's all that we can ask for is that out of those top 1% of opportunities in each one of our sectors that we're going to be one of the first calls to get that done. And hopefully we are. And hopefully we'll be, and hopefully we'll win some of those deals and hopefully the founders and LPs are happy with that result. But in the meantime, it's been great letting our employees really have creativity and empowering them to go and build the best product to get that one or two deals done in those, and hopefully we'll see how it turns out.
Jason Jacobs (48:40):
And I know you can't talk about any future funds specifically, but if you just look at the firm level, I mean there's many different approaches to scaling, including intentionally not scaling, and then if you were to scale, there's so many different directions that you could scale. How are you thinking about the future and how are you thinking about scale at equal, if at all?
Rick Zullo (49:02):
Yeah, I think our early stage product is not something that will scale, and I love that. I don't think what we do should be a billion dollar fund. And I think that would break a lot of the alignment. It would break a lot of the other things and maybe look, will we get a little bit bigger over time? Maybe, we'll see how the market environment evolves. But we think that there's value in bringing other partners into rounds with us. But if you get too big then you can't invite founders along, or sorry, other investors alongside for those rounds so that there's downside to that. I think if you get too big, you have to do too many companies and you have to add a bunch of other partners to the team and that can lead to a bunch of incongruities.
(49:42):
I think we try to reserve scaling and really think about what is the best product that we can provide for founders, and if that's the best product for founders, it would be the best product for LPs. And I look to firms like USV and our Emergence and IA Ventures for inspiration on that, which like USV launch of their return to public. They could obviously raise as much money as they wanted to. And I had the chance to host Fred from Fireside Chat, and I think he's just been incredibly disciplined in making sure that he built, him and the rest of his partners, the team at USV built a product that was really exceptional for their founders and in turn was exceptional for their LPs.
(50:23):
And he did that through discipline and that includes competitive dynamics and collaborating with other firms on deals by sacrificing some ownership and not having to raise a fund that was so big that he needed 25, 30% on everyone. And being able to be really thoughtful. I think there were deals over years that Fred Wilson and [inaudible 00:50:43] and Brad didn't do deals and I think they set their fund up to be something really, really special. And I think it is one of the most special products that has ever existed in venture capital. And we looked at that as a source of inspiration for how we want to scale, or lack thereof, our own product.
Jason Jacobs (51:01):
Now, I'll finally ask you, in that climate bucket, how are you thinking about it and what are you excited about?
Rick Zullo (51:07):
Yeah, so I think we continue to be extremely excited about the data infrastructure layer of what's happening in the energy industry. And we call this, we think more appropriately the project44 supply chain API company that I'm involved in for the energy industry is extremely exciting. But I think there'll just be a lot of digitization that needs to happen at the infrastructure layer that one of the things that we think will happen is as all these DERs come online that we start to see the grid looks much less like the assembly line, the industrial assembly line that it is today, and much more like the internet.
(51:41):
And we think that is going to be one of the biggest value creation opportunities out there is that kind of, and if you look at the growth of DERs, it has very much mirrored the growth of users on the internet in its first 10 years. We think it's going to keep on humming along on that trajectory path, but I think that internet infrastructure layer for Grid 2.0 is one of the areas that we are most excited about. I think we'll continue to be really excited about counter position in freemium business models that sell to long tail users.
(52:12):
If someone brought us a business in a box for clean energy developers in the U.S., that was business that we fall in love with, I fall in love back with them since that's a thesis that we still think it's really exciting that there's a lot of existing opportunity on. Obviously, we're excited to be part of executing that thesis abroad in our company Odyssey Energy Solutions, but we think counter positioning philosophies like that can be really, really exciting. And I'll say, we're a little hesitant on some companies that I'll say are tech-enabled services, but we do see that there's fits and patches of companies that can be monopolistic, but really want to figure out business models that establish captivity over one-sided market or can have monopolistic pricing.
(52:55):
I think tackling Sunrun is much more easier said than done. Sunrun is a great company, has a lot of embedded competitive advantages that it needs a really thoughtful strategy to take on, but we do think that there'll be a lot of plays to be made in electrification. And lastly, I do think that we seem the combative dynamics abroad. That's pretty exciting. We think that there's a lot of room to run there. We think returns on projects are generally higher. We think that the energy markets are moving faster and changing faster. We think that some of the barriers to getting infrastructure deployed are lower and more business friendly, that we could see ourselves making some very interesting emerging market stats in the years to come.
(53:38):
Because I think a lot of the new energy development companies or ideas have been executed here in the U.S. over the course of the last 5, 10, 15 years they've had some success. I think that there's a lot of opportunity for those to run in emerging markets. So, we've definitely poked around at a lot of things like eCommerce and tax equity and carbon marketplaces too, which I do find each of those opportunities to be exciting and interesting in their own right, particularly the tax equity and eCommerce. But got to save a couple of the research papers for future endeavors so that we can get some folks on our sub stack.
Jason Jacobs (54:13):
And Rick, who do you want to hear from, if anybody, what message do you want to leave with listeners?
Rick Zullo (54:17):
I think for us what's really important is partnering with transformation. You'll never hear us say disrupt. I think disrupt is a word that alludes to value destruction. And I think the thing that we really appreciate is the opportunity to partner with other folks in the industry that really want to engage in thoughtful transformation and thoughtful or responsible transformation. So, you're an info fund and that is looking to take a tech forward approach. That's great. If you're large scale buildings developer owner and you want to think about building electrification and how you can be a part of that, that's great. If you're a developer of Clean Energy projects and you're looking for new technology solutions, like we love speaking to customers, I speak to more customers than founders and I love that, and maybe it's the old salesman in me, but we love meeting with founders as well. And certainly that's something that we always want to do.
(55:08):
But I'd love to hear more of folks from the infra world and private equity world and folks that we feel like if you can bring these asset classes and different sides of the table together, which we're always consistently meeting with founders and we're meeting with a lot of IVCs, but we find that if we can bridge that divide, that kind of old world or the asset-based world of this industry and bring it together with some of the folks that we know on the technology and innovation side, we find that that's where really magical things can happen. And we'd love to find as many new opportunities to meet those type of folks as possible.
Jason Jacobs (55:40):
Awesome. Well, I think that's a great point to end on, but Rick, I can't thank you enough for making the time. I learned a lot, which means that I think listeners will learn a lot as well, and looking forward to following your progress into future collaboration as well.
Rick Zullo (55:53):
Well, thank you so much for having me, Jason. Always feel like I'm learning a lot from you.
Jason Jacobs (55:57):
Thanks again for joining us on the My Climate Journey podcast.
Cody Simms (56:01):
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem-solving capacity.
Jason Jacobs (56:11):
If you'd like to learn more about MCJ Collective, visit us at mcjcollective.com. And if you have a guest suggestion, let us know that via Twitter, @mcjpod.
Yin Lu (56:24):
For weekly climate op-eds, jobs, community events, and investment announcements from our MCJ venture funds, be sure to subscribe to our newsletter on our website.
Cody Simms (56:33):
Thanks, and see you next episode.
