Brad Svrluga is a co-founder and General Partner at High Peaks Venture Partners, a firm that invests in seed and early stage software, internet, and digital media companies, with a focus on New York City. Just recently, High Peaks had a big win by selling TxVia to Google. TxVia is a mobile payments technology company they seeded over four and a half years. Anyways, Brad and I got on the phone together and covered a lot of ground. Want more from Brad directly? You can follow him on Twitter at @bradsvrluga and at his blog, appropriately named Can I Buy a Vowel?
Image via CrunchBase
You personally manage an exciting portfolio that includes WhoSay, Savored, Kohort, Flat World Knowledge, and Ticketfly amongst others. What’s the biggest challenge facing one of your portfolio companies right now?
I’ll make a general statement first. The challenge we talk about a lot across the portfolio as a whole is for the last year or two, we’ve been the beneficiaries of a really frothy early stage capital market. Good companies, even moderately good companies, haven’t had trouble raising cash. Whenever that’s the case, we always err a little on the side of paranoia and wonder when it’s going to end. Many of the companies in our portfolio will need to raise capital again before they get themselves to profitability. Our question becomes what are the price and terms for that financing? If this market turns at the wrong time, that could present a challenge. Fortunately, I think the vast majority of our companies are solid and should be able to raise money. It’s just a question of optimizing pricing and terms. We worry about that a lot and for the past year we’ve been encouraging all of our companies to take capital now while it’s available just to make sure they don’t get caught in the crossfire if the markets do turn.
On the individual company level, there are a handful of specific challenges. One common to a couple of them, WhoSay and Savored in particular, is that both of those companies have done a fantastic job in the early days building up very valuable networks. In the case of WhoSay, it’s really an unparalleled aggregated network of celebrity talent who are using the WhoSay platform as the starting point for all of their social networking interactions. That’s an incredibly unique and valuable thing. In Savored’s case, they’ve built a fantastic network both of restaurants and consumers. But the real asset is on the restaurant side, and the restaurants are big fans of the service that Savored provides them. The big challenge and opportunity for both of those companies is, how do they optimize their business model to maintain the strength of their network while also building the most valuable enterprise they can. In each case, it’s not one of those “Boy, we can’t think of any good ideas for how to monetize this network.” It’s more that we have a lot of different opportunities. For each company there are at least 3-4 “obvious” opportunities or solutions, but when you’re in the early stages of a company, you can’t run several at a time. You have to take one or two and execute relentlessly against them. So the choices those guys make as to how they winnow down the opportunities and make smart bets on the very best will be key to determining how successful they will be.
On the other hand, what do you think is the biggest opportunity one of your portfolio companies has right now?
The single biggest opportunity is the flipside of WhoSay’s challenge. That business has an incredible amount of potential and we really think it could completely reinvent the celebrity media content business. Certainly when you have authentic, personally produced content coming straight from these people and their lives, it’s a lot more appealing to the average consumer than a grainy paparazzi picture. I think there’s a multi-billion dollar potential media opportunity with their business. It’s hard to imagine anybody else replicating the network they’ve built.
What’s your thoughts on investing in me-too companies?
The easy answer is we don’t do it. But at the same time, that doesn’t mean that if company X is leading a market doing a particular thing that you should stay away from anything remotely similar. It’s not always the first guy in who wins; it’s frequently the fastest followers. However if there are two, three, four, or five companies, and sometimes now it’s fifteen or twenty-five, going after the same opportunity, and maybe with different geographical slices on it or slight tweaks to the model, I think that’s a bad idea.
You need to be careful though, because sometimes the baby gets thrown out with the bathwater. People focused on avoiding me-too’s tend to stay away from companies that may appear at a glance to be copycats, but are in fact something different. The real key is to think about when there has been large macro level paradigm shifts in the way markets operate driven by market leaders. That creates the opportunity for other businesses to leverage those trends and disrupt those markets or other sections.
As an example, I got asked by a bunch of people when we invested in Savored, does the world need another daily deals business, a restaurant oriented deals business? But that’s not what Savored is, it’s a yield optimization platform for the restaurant industry. It’s far more like Hotels.com (a large and very profitable business) than it is like Groupon. But importantly, Savored’s success has been in no small way a result of the work that Groupon and Living Social have done in educating the marketplace about the value of small local businesses doing direct marketing to consumers for discounts and other special promotions. While Living Social and Groupon proved to restaurants that you could reach consumers and drive a lot of traffic, they also proved that their particular model didn’t work very well for fine dining. Savored came along and said hey, we’ve got a better answer. It’s something that solves your problem every day of the week, instead of every six months with a Groupon deal, and we can give you far more control and flexibility on how that platform works. Both the restaurant and consumer side of Savored’s business took advantage of some macro-level tailwinds that Groupon created in the marketplace. Savored has worked out by disrupting an industry as a derivative of their work, but it’s obviously not the same thing.
What typical characteristics do your portfolio companies display and what do you look for?
It’s going to sound simple. At the end of the day, it’s about great people and teams solving very real problems. For the most part in our work, it means doing that at the application level not at the infrastructure level. We’re also not trying to say we’re going able to look around the corner and spot the next Twitter or Tumblr twenty miles away. So while we love companies that build large networks of connected users or customers, we don’t tend to make big, completely speculative bets on businesses that aren’t attacking an existing, understandable market opportunity. For that reason, I’ll unfortunately probably never have a Twitter or an Instagram in my portfolio. But that’s OK. I want to talk to entrepreneurs who are looking at real pain in the market place and addressing that directly by showing a nuanced understanding of the market and customer dynamics. At the end of the day, it’s really about the people. That’s a lesson I’ve had to learn and relearn again and again in this business.
What are the most common mistakes entrepreneurs make when they pitch ideas to you?
I consistently find entrepreneurs diving into the weeds too quickly on exactly what their product is and how it works and, as a result, skipping the opportunity to talk about the most important thing. I think every pitch should start with the back story on the business, where the idea came from, why the team is excited about it, and why they were compelled to quit their prior gigs because they had a burning need to build this business. I want to hear what I call the genesis story. Great entrepreneurs always have good genesis stories, and I always learn a ton of valuable context from hearing them.
One of the things about today’s frothy market is, unfortunately, there are too many people kicking around ideas just for the sake of starting something. Those businesses don’t tend to be as powerful or important, because they didn’t evolve from people’s organic understanding of a market problem that needs a solution. They evolved from four guys sitting around throwing an idea against the wall and then finally finding something that seems good enough to give it a shot. That’s not a great back story. The great back story is I was working in this market and I saw customers consistently feeling pain and I knew we could make money if we went out and built something to address that pain. That’s the kind of story you hear behind great companies like Dropbox and AirBnB, or in our portfolio, behind Ticketfly or TxVia.
What do you do if an investment in a portfolio company starts going bad, what actions do you take?
Well, we do roll up our sleeves and jump in and try very hard to be helpful. One way is that we force management to take dispassionate and honest looks at the data in a business. When things feel like they’re going off the rails, it’s not uncommon, when you dig in and really understand the data, to find out you’ve been chasing the wrong path. If you look differently at the data your business is generating, you can often see there’s a better way.
What’s the hardest lesson you’ve learned in venture capital?
It relates to the last question. It’s the challenge of balancing a desire to really dig in and be helpful with the realization that ultimately, portfolio returns are driven almost entirely by the degree of success of your best companies, not the degrees of relative success or failure for your underperforming ones. So when you have struggling companies, every fiber of my instinct says I should help these guys as much as I can. But you have to understand that you’re playing a zero sum portfolio management game, and so an hour spent helping a struggling company is an hour spent not helping a flourishing one. Your ultimate returns are going to be driven more by, can you help your winners turn from 6x deals to 8x or 12x deals, not if you can help your struggling companies change their outcomes from fifty cents on the dollar to eighty. It’s a really hard reality and it’s a tough thing to internalize. To be clear, that doesn’t mean just abandoning tough situations – but it does mean being careful not to get sucked too far into them. It’s an essential part of decision-making on a day-to-day and hour-to-hour basis, and if you lose sight of that, you’re not doing a good job of managing your portfolio.
What’s the best advice you’ve received in the industry?
Again, related to the last point, very early in my career a real veteran of the business said, “It’s important to remember that you can never lose more than 1x your money.” We talk about deal outcomes in multiples and the point is you can make five, ten, or twenty times your money. I mean Accel’s probably going to make a thousand times their money on their Facebook investment, and Andreessen Horowitz just made like 250x on Instagram. But you can never lose more than 1x. If you don’t put another dollar into a bad situation, you won’t lose it. If you invest a million dollars in a company, the worst that can happen is you can lose a million. So how do you balance your energies? Helping a company that’s doing well, and where you invested a million, do things that will make your million worth fifteen million instead of ten is probably a better use of time. It’s “don’t put good money after bad,” but also don’t spend your time and energy in the wrong places. If you fail to help a struggling company, the situation won’t necessarily get a lot worse. If you fail to lean into your winners, you’ll almost certainly leave money on the table.
What do you think an entrepreneur should be looking for in an investor?
There are a couple of things, some of which are obvious ones that everyone points to and some are ones that people don’t. The obvious ones are what’s the direct experience of the investor in my industry or what companies do they work with that are like mine, and what are the networks or relationships that investor might bring to my business? Those are valuable, for sure, but one that is under emphasized is what’s my true fit with this investor? What’s the cultural style of the person? How genuinely helpful do I feel these people will be? Will their style and approach mesh well with mine and can I learn from it? I’m always amazed at the willingness of entrepreneurs to take money from investors without doing diligence, without calling other portfolio companies and finding out if the investors put their money where their mouth is. What were they like to work with? Did they deliver on relationships? Were they responsive and consistently trying to be helpful? Did they help you when times got tough? You’ve got to get that, you’ve got to develop a holistic picture of what working with these people is going to be like. Those relationships are going to be as important as any senior management hire you can make. You’re going to be in bed with these people for a long time. Don’t make a decision based on the firm brand and partner’s bio alone, make it based on fit.
We’re almost home, what’s the best or most exciting startup you know besides your own companies?
Probably my favorite venture backed company right now, as a consumer for sure and I suspect as an investor as well, is Uber. They’re a brilliantly executed mobile-driven black car service. They’ve created a network of black car operators and a simple consumer service where you go into an app, and it shows you on a map where all the cars in the network are. Go play around with it, it’s a freaking brilliantly designed service. It’s a market that’s desperately been in need of disruption and some improvements on the distribution end. I had looked pretty hard at a business in the black car industry that was trying to consolidate it about four years ago, but I didn’t think they had the model quite right, and they certainly didn’t have the distribution piece well executed. Uber has made it happen. It’s consolidated that industry incredibly effectively with a consumer service that I think is unmatched by anybody in the web or mobile app world. It’s so simple to use and elegantly designed, it’s such a beautiful experience. Literally every time I use it, I’m like, “was that really that easy?” It almost makes my heart skip a beat. I’d love to find businesses that make my heart skip a beat like that as a user.
Two more… so what’s your advice for people who want to become Venture Capitalists?
Work at a successful startup, make it as successful as you can, get to know the venture backers, and when you come out the other end of that success story, work those relationships and try to find a gig. It’s a hard business to get into and it’s getting harder because it’s shrinking, not growing. I think you need to find ways to get in front of VCs and get to know them professionally rather than hope you get lucky. It will take luck no matter how good you are to rise to the top of the list of the dozens of Harvard, Wharton, Stanford and other MBA grads who are trying to apply through the front door.
Ok, last question. How do you pronounce you last name?
Spelled phonetically, it’s SVER-LOO-GA.