Season 1 Episode 2
December 10, 2019

[Step by Step] What is Venture Capital, Anyways?

Welcome to Step by Step, a 5-part series from Future Commerce to help walk you through how to launch and grow a successful business. This season, we're talking about funding. Today is episode 2. Phillip & Brian are joined by Brian O'Malley of Forerunner Ventures to discuss venture capital.

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Welcome to Step by Step, a 5-part series from Future Commerce to help walk you through how to launch and grow a successful business. This season, we're talking about funding. Today is episode 2. Phillip & Brian are joined by Brian O'Malley of Forerunner Ventures to discuss venture capital.

Listen now!

Show notes

Main Takeaways:

  • Brian O'Malley from Forerunner Ventures joins Phillip and our own Brian in the second part of the Future Commerce Step by Step Series.
  • There are many choices when it comes to venture capital, but where do you start the decision process?
  • How can you make your brand stick out to venture capitalist firms?
  • Founders are driving the evolution of the economy and are continuing to drive innovation.

Background and Introductions: Meet Brian O'Malley and Forerunner Ventures:

  • Forerunner is one of the only firms that is dedicated to the journey of the consumer and understanding what is going on in peoples' lives.
  • By partnering with companies early in their investing journey, Forerunner works with them over the years to build strong businesses that stand the test of time.
  • Third-party research is available to everyone, and Forerunner does their research to get the exact data that they are looking for that goes beyond reactionary researching.
  • Brian joined Forerunner about a year ago but has been in the investment field for fifteen years and has worked to translate offline retail experiences to online businesses.

Back to Basics: What is Venture Capital?:

  • Venture Capital firms tend to provide early round capital to businesses that traditionally wouldn't be getting any outside money.
  • The Seed Round is the first institutional round of investing where larger firms get involved outside of friends and family putting money into the business.
  • Series A is when you first establish a board and start to think of your business from a corporate governance perspective. (This is when Venture Capitalists typically get involved.)
  • While they do put some money into the fund, the majority of the money that Venture Capitalists put into business comes from limited partners.
  • At the end of the day, you want to make more money for the limited partners than what they initially contributed, so VC firms are beholden to live up to growth promises and owe the money back to the partners.

More Than Just Money: What Else Do VCs Offer?:

  • At Forerunner, they respect the entrepreneurial process and understand that it's hard to get something off the ground, so empathy is important.
  • A lot of time is spent understanding the consumer so that the firm can advise the companies in their portfolio how best to reach that consumer.
  • Strategic guidance is also issued to help do the right thing faster or to avoid doing the wrong thing and saving months of setbacks altogether.
  • Trying to assemble the right people to accomplish goals is also a unique perspective that VC firms can provide to their portfolios.

Content is King: Brands that Want to Tell Stories:

  • Some of the well-known brands that are in Forerunner's portfolio are Bonobos, Cotopaxi, Glossier, Outdoor Voices, Stadium Goods, and many more.
  • Convincing consumers to spend their hard-earned money relies heavily on a brand's ability to tell its story and reach consumers on deeper levels.
  • Forerunner's portfolio has done an amazing job at content creation, which is why you have probably heard about a lot of the brands contained within it.
  • How are these companies getting their growth and is their growth something that more capital would accelerate?

A Variety of Reasons: Why Do People Need Capital?:

  • Are brands seeking capital because they cannot financially compete with the rising customer acquisition costs in social media?
  • At the most basic level, raising capital is validation for entrepreneurs of the business that they set out to build.
  • At Forerunner, they want to work with brands that are confident in their ability to grow even without capital but provide good reasoning behind how the capital will accelerate that growth.
  • Ultimately, raising venture capital isn't for everyone, so firms are looking for the right type of alignment that will make their portfolio grow into household names.

What Are Firms Looking For?: A Desirable Business Model:

  • Figure out what is going on and how to get your costs in line before you seek capital and don't use capital to "fix things."
  • Firms have the luxury of looking at businesses that are doing well and are looking for a match where they could have a positive effect on the business.
  • What are some ways you can demonstrate your business plan to a potential investor in a way that shows how the capital would accelerate your growth?
  • Different levels of involvement and criteria can highlight where firms can help your brand.

Connecting with a Firm: Some Ins and Outs:

  • What are some ways that VC firms can connect with founders?
  • One of the main indications that Forerunner looks for is if a brand has insight into the particular consumer that they are serving.
  • Founders also have a choice in who they choose to go with when it comes to receiving capital if they have enough interest from investors.
  • What are some qualities that you would want in an investment firm if you were raising capital for your brand?

Key Factors: The Dos and Don'ts of Due Diligence:

  • Forerunner looks at many things when it comes to choosing brands to give capital to such as who are the people, what is their vision, what is the state of the stage of the business, and what's the deal?
  • A lot of the times when an investment firm decides on a company to invest in, that company has other options of investors.
  • Founders are doing more and more due diligence around firms to make sure that the deal is a good fit.
  • How do VC firms appeal to prospective investments?

What Type of Investment Do I Want?: Breaking Down the Options:

  • Founders need to be more wary of who they are working with as well as where the money is coming from.
  • What are the different types of venture capitalist firms and partnerships?
  • A lot of the differences in firms stem from where the money comes from thus dictating the results that the investors want to see from their investment in a company.
  • Be wary of perspectives and keep an eye out for investors who don't just want a quick turnaround for their money.

From Start to Finish: The Time It Takes:

  • There are always exceptions to the rule, but the timeframes range from a couple of weeks to years of a deeper relationship building for an investment to occur.
  • From an ownership standpoint, Forerunner wants to own enough of a company for it to matter, so anywhere from 5%-30% ownership.
  • At the end of the day, investment firms want to own a material part of the company that they helped to build.
  • Oftentimes, ownership is accumulated over time depending on the success of the company.

Projections and Premonitions: Where is Retail Headed?:

  • Retail isn't dying, it's just changing and adapting with new customer expectations and technology.
  • Traditional brands will slowly take a back seat to younger and innovative brands that are embracing change and optimizing of the local experience.
  • New waves of founders will take their passion and translate that to their companies and change the face of retail.
  • In 5-10 years, Brian predicts that there will be a bigger emphasis on where things are coming from and convenience in addition to more options on the labor side.

Brands Mentioned In This Episode:

As always: We want to hear what our listeners think! What are some qualities that you as a brand owner would like to align with an investment firm?

Have any questions or comments about the show? Let us know on, or reach out to us on Twitter, Facebook, Instagram, or LinkedIn. We love hearing from our listeners!

Retail Tech is moving fast, but Future Commerce is moving faster.

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Phillip: [00:00:01] Welcome to Step by Step, a five part series from Future Commerce. In this series, we walk you through everything that you need to know to launch and grow a successful retail business. In Step by Step Season 1, we're talking about funding. You got to get paid, son. {laughter} If you happened to be jumping in midway through, we suggest that you go back and listen from the very beginning. This is episode two of a five part series. Brian, who do we have today?

Brian L: [00:00:26] Today we have Brian OMalley, partner at Forerunner Ventures. He's going to talk to us about venture capital and how a retailer can leverage venture capital, and learn more about venture capital, prepare to take on venture capital, and really have a step by step guide for what to do about venture capital in your business.

Phillip: [00:00:48] I think we're even going to learn what venture capital is and how it works and what makes it tick. And yeah, it was really insightful having this interview. And I know you're going to learn a whole lot from it, right?

Brian L: [00:00:59] Oh, my goodness. So much. And it's so exciting to have Brian O'Malley next...

Phillip: [00:01:05] Oh, my gosh. Yeah.

Brian L: [00:01:06] ...when we have Robin Lee from GGV, Jeremy Muras from Lion Capital, and Michelle Cordeiro Grant from Lively up ahead. Listen to this episode with Brian and then go listen to the next episodes because it's a great first step as you get into the rest of our content.

Phillip: [00:01:22] Yeah, it's going to be awesome. Well, we're so excited. Let's go into the interview with Brian O'Malley.

Phillip: [00:01:26] For our audience. I guess I would ask, first of all, talk to us about Forerunner and the basics there, and talk to us a little bit about you and your role and your background.

Brian O'Malley: [00:01:38] Sure. Okay, great. So, yeah, quickly at Forerunner... So we're one of the only firms that's really dedicated to the journey of the consumer. And so what we mean by that is we spend a lot of time getting into backgrounds around demographics, really understanding what's going on in people's lives, doing the primary research that's required to understand that. And then we take that insight and then roll forward to try to understand what's most important in people's lives and how are they changing. Because there's just so much noise out there right now that if you're not addressing a relatively top need, or if you're not cutting through the noise, it's hard to be successful. And we partner with companies during their seed rounds or their series a round, so relatively early on in their journey. And then work with them over many years to try to help build durable businesses that withstand the test of time. And so Forerunner has been fortunate to work with some really amazing companies. We were involved early with companies like Dollar Shave and Jet that have sold. And then a fair amount of newer ones like Glossier, Chime, Away Travel that are just getting going. And then some behind the scenes that maybe people haven't heard of, but are ultimately service providers that power these next generation merchants... Companies like a Navar or on the logistics side, robotics businesses like ATTAbotics. So there's some interesting things behind the scenes, but those don't typically get talked about as much because they're not the shiny consumer products everyone loves to play around with and see.

Brian L: [00:03:05] Interesting. Interesting. So you're saying that you actually personally go do the research on what people need and what's happening in the market right now. You're not relying on like third party research as much. It's all sort of one P research, if you will?

Brian O'Malley: [00:03:23] Yeah, exactly. I think the reality of third party research is that it's available to everyone. And you'll also see a lot of venture firms, while they'll spend time looking at apps or rankings, or they'll spend time looking at traffic going to particular sites, or they'll buy credit card data to understand where people are spending their money. And the reality is that those variables are all important, but by definition, they're available to everyone. And by definition, they're also looking at the past. So they're somewhat reactionary. And so we try to go one step further, which is doing interviews with potential users, running our own surveys and using that insight to try to understand what's next and then reach out to those founders in those companies, maybe before they even thought about raising venture capital, and helping them decide how they want to grow their companies and what success ultimately looks like.

Brian L: [00:04:18] I love this. We actually encouraged our merchant listeners to do this for their own businesses and get out there, talk with their actual customers, gather that one P data, build a relationship. You know those are things that we think merchants should be doing right now. I love that this is a big emphasis for you and for Forerunner. How did you get involved in Forerunner? What's your background? Who is Brian O'Malley?

Brian O'Malley: [00:04:43] Who is Brian? Yeah. So besides long walks on the beach, let me tell you a little bit about myself. So I'm relatively new here at Forerunner. I joined about a year ago, which in venture years is a relatively short time period, but I've known the team here for over a decade. I've been on the investing side for the last 15 years. And when I was at a firm called Battery Ventures, I started working with Kirsten and Eurie and the team here where we were coming to similar types of companies, but from a different perspective. And so at Battery, I was spending a lot of time looking at online commerce and realized that as a lot of these companies got bigger, their businesses actually started to deteriorate. And when I dove in deeper, a lot of the consumers really thought they were buying something on Google. They didn't realize that they had clicked through to another website and actually bought it from a different merchant.

Phillip: [00:05:32] Hmm

Brian O'Malley: [00:05:32] And so the insight I took away from that was that online businesses needed to do a lot of the same things that offline retailers needed to do historically. And that was build a brand that resonated and build a differentiated customer service experience that kept people coming back for more. And so I wanted to learn as best I could about what worked in offline retail and try to understand how to translate that to online businesses. And I was introduced to Kirsten, and she had a background as an equity analyst covering retail stocks. And she had a really good understanding of how things worked in the offline world. But she was investing now and she was facing a different challenge than I was, which was that a lot of the merchants she was looking at, which were largely mall based, were suffering from a lot of the challenges of decreasing store traffic and some of these malls that were shutting down. She was looking to spend more time online and wanted to understand how businesses grew audiences online and ultimately built businesses. And so she wanted to learn from me. And so we ended up getting together, looking at about 50 companies and then initially investing in some businesses like a Serena & Lily, Dollar Shave Club, Skullcandy together. And that's where their relationship started. And then when I moved from Battery Ventures over to lead the early stage consumer group at Excel, we continued to work together. That's what I first worked with Eurie. We split the seed round at Away, and every time I came over to Forerunner, it really was like fun. Whereas the rest of my career felt more like work. And so as Forerunner was stepping up and moving out of the seed stage, moving into more core series A businesses, expanded the aperture of the kinds of things we're looking at, it was really a unique opportunity for me to come over and help grow a firm versus maintain two larger firms that I had been involved with before and really try to apply some of those lessons that we learned along the way to this business here that had so much great trajectory, amazing feedback from founders, and a really tight focus around an area that was changing. That opportunity for me to come and help out and help build this business was just really compelling. And that's what me over here about a year ago.

Phillip: [00:07:46] If I may ask you, there might be... I don't want to take for granted people in our audience that aren't familiar with some of the terminology there. So I would ask, what is the role of a VC or of a venture capital firm? I assume most people know that it, in some way, provides funding. You said seed stage or early stage. I'm guessing by context that that's giving you capital to start a business. Could you differentiate some of that for us just quickly?

Brian O'Malley: [00:08:16] Yes, sure. So besides being like a venture capitalist from Vermont, maple syrup conglomerates or, you know, some evil villain on a TV show. What we actually do is we provide capital to businesses that on any rational basis shouldn't really be getting outside money. These are companies that historically would have gone to a bank and would have been laughed out of the room because they're either just an idea, or they're losing money, or they've only been around for a little bit of time. Or maybe the founder has never started a business before. Those are the kinds of companies we want to get involved with, and we're typically the seed or series A. Those nomenclature is really mean the first institutional round where there are larger investors getting involved, outside of friends and family that might help to get something off the ground. That's typically the seed round. The series A round is when you first establish a board and start thinking about something from more of a corporate governance perspective. And that's the time period when we're getting involved. And at the end of the day, a lot of people don't realize this, but the money's not ours. We put some money into the fund, but a lot of the capital is coming from what we call our limited partners, which is typically a collection of large academic institutions, endowments, foundations, pension funds. And so we're taking, you know, like a teacher's association pension fund, and we're helping invest that money and trying to give them more money back at the end of the day. We're taking money from, you know, academic endowments and trying to invest that money and give them more back at the end of the day. And so a lot of people don't realize that at the end of the day, first of all, it's not our money. So we are beholden to do what we told our investors we would do. And we also owe them the money back at the end of the day. And so an important thing for founders to think about before seeking venture capital is realizing that, hey, this money is not free. At the end of the day, they're going to want it back, and they're going to want more back than they gave in originally.

Phillip: [00:10:18] Right.

Brian O'Malley: [00:10:18] And so we're happy to take higher risk profile companies, but we're hoping that those businesses can grow dramatically and really grow at a rate that's unnatural in order to reach some sort of velocity that either helps build a public company or helps get someone to acquire or to a rationally want to buy the business and bring that on with their platform.

Brian L: [00:10:40] You said that, you know, you're bringing money to the table. Some of it's your money. Some of it's other people's money. There is so much to unpack there. I'd be curious, though, are you also bringing other things to the table besides just money? You mentioned sort of seed versus series A? I mean, you've got series B, C, D and so on.

Phillip: [00:10:59] Governance and...

Brian L: [00:11:00] Governance. Exactly. So what rule does a VC play? Maybe it's different from each VC to VC, but what role does Forerunner play? Or maybe a traditional VC play outside of just bringing cash to the table?

Brian O'Malley: [00:11:17] Sure. So I think everyone thinks that they're helping out the company. I think the actual delivery on that value prop varies from situation a situation. What we think we bring to the table is a couple of things. I think, you know, first and foremost, we respect the entrepreneurial process and the fact that it's hard to get something off the ground. There is a lot of sacrifices that are made and sometimes bad things happen to good companies where you don't hate your numbers, you hire the wrong person. And so we try to build a level of empathy that things happen, and the objective is to learn from that and then move on. So to try to keep that relationship positive. The other things we bring to the table is we spent a lot of time, as I said before, understanding the consumer. We've got exposure to a lot of really amazing commerce businesses, marketplace businesses, software businesses. And so we try to bring that longitudinal view where we see best practices across the board in order to help companies either do the right thing three months faster or avoid the wrong thing which would it cost them three months. And so there's that strategic guidance along the way, which is really a lot of pattern matching and trying to put the right people in the room together. So we have Slack channels and forums where the heads of marketing from our different companies, the CTOs from different companies can chat amongst each other. And there is a post actually earlier today, which was a company that's looking to go deeper into TV spending, and they're trying to understand who they should work with, what a typical budget looks like, and how they measure success. And that's something that for them, it's a new area they're exploring. But there's probably a dozen companies within the portfolio that have already done that, and they can lend that expertise. And so because they're all in the family, they tend to help each other out more. And that's a great way for us to get out the way and have the companies work together. And then the third thing we do is a lot of times the businesses, once we get involved, we're not the last round of financing. They're eventually looking to raise more money, and they're eventually looking to get someone excited enough to buy the business. And so we provide a fair amount of both guidance and relationships in order to understand what companies need to accomplish to get to that next round and what they need to accomplish to build relationships that can actually make something more strategic happen with a larger company.

[00:13:36] I look at the portfolio that you have, which has a lot of known names. I mean, Bonobos, which I think is the premier DNVB, the digitally native vertical brand, that everyone sort of thinks of as at the forefront. But there're others. There's Cotopaxi... The list is is incredible. Glossier. Outdoor Voices. Stadium Goods. They're brands that are excelling at creating content. And it looks like you have a penchant at Forerunner for helping brands that want to tell stories. Could you talk a little bit about that? Maybe there's some things that you're looking for specifically from brands today that aren't just like tactical need-based sort of strategy and creating products that meet needs. But like you said before, brands that have something interesting to say that couldn't exist otherwise.

Brian O'Malley: [00:14:38] Sure. So we tend to think that great entrepreneurs need to be great storytellers. And that's important, not just from the standpoint of convincing someone to leave a steady, well-paying job to join the journey, convincing other investors to give capital to a business, that again on several traditional financial metrics looks relatively unstable, and really convincing consumers to take their hard earned money, where they've got plenty of options as to how to spend it, and to take a risk and take a bet on a new brand that they maybe haven't worked with before, haven't heard from before. So that storytelling arc is incredibly important for founders because it gets people to believe, and it gets people to buy in. And so we see companies that have done an amazing job at content creation. So you look at Glossier and how that got started. It was really Emily's blog, Into the Gloss, that kicked that business off. And it was insight and trust from the consumer that enabled them to launch their first products and then grow as a brand because they got that trust and buy in from consumers, which is not something that you can just do overnight. It takes time. And so when we're looking at companies today, we're very focused on how they're getting their growth. Is this growth coming from just an increased spend on social media or an increased spend on paid search? Or are they building the moat around the business, whether that's with great content, whether that's by getting involved with the right people who really buy into their product on a platform like Instagram, or that it's just having an amazing product experience where people tell others about it and they get that old word of mouth going, which is still really the best way for people to learn about something new and something that's maybe a little bit different. So we care a lot about companies where if all of a sudden the price to buy new users on Facebook quadruples, it's not a fatal flaw in the business. And where they've got multiple avenues to reach people and where they've got a story that starts out with something very narrow and very specific. If you think about where Away started, it started with a carry on bag that was beautifully designed, was at the right price point, and had a battery charger built into it. But people bought that not just because of the bag, but because they loved the story arc of the brand. They loved the idea of it being more about travel and where you're going in this new experience driven economy. And that's given them the latitude to move into several different types of bags, move into other travel accessories. They even have a magazine, called Here, which is really about the experience of travel and experience going new places. And now if you started out with all of those things, people would kind of look at you funny and not really know what to make of it. But we want to work with founders where they start out narrow. They do an amazing job in the execution there, but they've always had the vision to go out and do something much broader over time.

Brian L: [00:17:36] You mentioned something that caught my ears. You mentioned the rising costs of CAC, effectively. Are you finding that's why a lot of founders are coming and looking for venture capital money right now? Are they seeing it diminishing ROI? And it's just too expensive to compete on Facebook and on Pinterest and Instagram. The rising cost of social is just out of control right now. And so I wonder... I guess my question is, are they coming to you because they can't compete to acquire new customers?

Brian O'Malley: [00:18:18] Sure. Some certainly do, and those are probably not the ones that we're as excited about working with. But people come looking to venture capital for a variety of reasons. I mean, some of it is at the most simplest level. It's a validation for the business they're trying to build. They told their parents that they were going to build a company and not take the nice job at Deloitte that pays well and has benefits. And raising venture capital is seen by many as a level of validation for the business because it's this third party that's investing dollars into the company, and especially if it's coming from a third party that has a lot of credibility at picking winners in a particular category. The kinds of folks that we want to work with are the ones where they come to us and say, look, I'm building a successful business, and I'm going to do that with or without you. But hey, if we can raise some capital to accelerate a few things, if we can raise some capital to help hire some great people, and if we could raise capital to run experiments to better understand the growth that's in front of us, those are the kinds of folks we want to work with. Because ultimately, you know, raising venture capital isn't for everyone. As I mentioned before, we're looking for outsize winners that can build multibillion dollar companies. And that's not the right path for every founder. And so we want to make sure we have the right level of alignment, and we want to make sure that we're not a crutch which enables them to just spend more money on social media ads because it got more expensive. We want people to say, look, I can see this channel is going to get more expensive. I want to experiment other things now before it hits me and be much more proactive.

Brian L: [00:20:01] So when I hear you saying is don't come looking for capital if you're in trouble. Look for capital... Oh, no, seriously.

Phillip: [00:20:09] Yeah. Yeah, yeah.

Brian L: [00:20:09] Don't look for capital, you're in trouble. Look for capital if you want to accelerate your growth because you're already on that path.

Brian O'Malley: [00:20:17] Yeah, I think it's right. Look, if you're in trouble, which which happens to lots of great companies, the first thing to do is stop the bleeding. Right? So figure out what's really going on. Figure out how to get your costs in line. Figure out how to get your metrics in line. Because the reality is that we're not a stop gap solution for people when things are not going well. We have the luxury of looking at, you know, hundreds of businesses a year that are doing amazingly well already. And then we maybe invest in two dozen. So we're going to miss businesses that are already doing well. And a lot of that comes back to just having limited bandwidth because we want to be very involved with the companies we back. If we spread ourselves too thin, we're not going to deliver on that promise. And so we already see lots of businesses that are doing well. The ones that we're trying to work with are the ones where we've got great chemistry with the founders, the ones where we think we can make an impact on the business. And the ones where we think the right steps today can build something that ultimately has a deeper moat and is a more sustainable business over time.

Phillip: [00:21:23] I'm curious, when you talked about sort of very involved what you mean by "very involved." If you're a founder and you have somewhat of a successful business that you've started already and you're trying to grow, you might think to yourself, really the only thing I need is access to a network or access to strategies or, you know, like you mentioned before.... I'd like a little clarification there on what a "very involved" means.

Brian O'Malley: [00:21:55] Sure. And I think the reality is that this varies from founder to founder and company to a company. So some founders have started companies before, understand what it takes to recruit, have a great network already. And so those cases we don't need to be as involved. You know, other founders have already built products and understand the manufacturer relationship. So we don't need to be as involved. You know, other founders have already raised multiple rounds of funding. They know what they want to talk to in future rounds, so we don't need to be as involved. And so what we're trying to help out is in areas that are some of the weaknesses or blind spots for a founder. And initially, we want to help out directly. And then our job is to, as quickly as we can, get the right people on the team and effectively put ourselves out of a job on that front, because ultimately, if we're doing something that's operationally important to the business, that's a failure on our side for not hiring the right people and making the company self-sufficient. And so sometimes that means that we're talking to the founders... I have some companies where I get together with the founder once a month, and we grab breakfast, and we catch up on everything that's been going on. I've got other founders where we have a standing half hour call every two weeks, and sometimes we don't need it. Sometimes we take longer. But there's just that time. And then other people, it's we text back and forth at 10:30 at night, and that's how we communicate. And so it really varies on the company. And a lot of that relationship is established in the first couple months, post investment for how you guys are going to interact over time. And the reality is there are some companies where we just never had that chemistry. And, you know, I probably wasn't able to help out as much as I wanted to. The founder probably didn't get as much out of me as they had hoped to. And a lot of that came back to not establishing that relationship either before the investment or right after we invested. That's something that I personally work actively on now, which is how to set up the right cadence and the right communication for the founders to understand what we can do and what we can't do. Because at the end of the day, there are a lot of things that we shouldn't be doing. And I want to make sure that they don't think that we are doing those things. So I think, you know, one of the questions is how much are we involved in building the brand? Well, you know, that's not our job. We're there to react, and we're there to provide feedback. But ultimately, that's the founder of the team they assemble to go out and do that themselves.

Phillip: [00:24:24] Let's assume that the founder is listening, and they've realized that this is exactly what they need. How does Forerunner go about performing diligence to make sure it's the right type of investment to identify whether you are having that two way value add?

Brian O'Malley: [00:24:45] Sure. So maybe we could start first and talk about how do we get touch with people or how do they get touch with us, because...

Phillip: [00:24:51] Yeah. That's even better.

Brian O'Malley: [00:24:51] Because that happens before we jump into dilligence. So let's see... So sometimes we're introduced to founders. We have people that have worked with us historically. They understand the kinds of companies that we excel at. And they put us in touch with those people. Sometimes we're introduced from other founders within the portfolio and that tends to be the best source. Sometimes people send us a cold email. And I think while there's certainly a natural desire to work with people who have experience, a lot of the founders we back it's their first time starting a company. And so we really look at that point into how much insight they have around a particular consumer they're serving. And you'll find that people that sometimes have very limited actual practical experience have amazing insights that are proprietary and unique to them around a consumer. And we can help them go bring in people to have more experience with the company, whereas sometimes we have founders that have a ton of experience, but they kind of got bored, didn't want to retire, and now want to start a company and don't actually have a ton of insight around that particular consumer. And we're more wary of working with those founders. And then sometimes we send cold emails, we call people, we track folks down. This is just as... Even though, at the end the day, we are on the buy side, and we're giving people capital, we spend a fair amount of time selling ourselves and selling what we bring to the table to founders that have plenty of options for how they go about capitalizing the business. And so we get in touch with people a variety of ways. And a lot of times that has to do with this desire where we have an active interest around health and wellness type companies, we have an active interest around companies serving maybe the Baby Boomer market or Millennials that are just moving to the burbs and buying their first home... So we have these little areas that we're excited about. And then we try to try to find folks that are building companies in those spaces and have a unique insight. So that's... Let me pause there, and see if that makes sense. But that's really how we get in touch with people initially. And it's not a particularly glamorous or sexy thing, but we get in touch, and then we take the conversation from there.

Phillip: [00:27:07] Yeah, I think that makes a lot of sense. That makes a lot of sense. I think it's an interesting... As we were sort of moving down the funnel of how you entertain and attract interest from founders and from companies, it's an interesting... I sense that Forerunner is a known name, or at least in our industry you have a lot of known brands. So do you feel like that helps your prospects in getting in touch with those rising stars?

Brian O'Malley: [00:27:40] Yeah, absolutely. I mean, I think we're very fortunate to have worked with some companies that have achieved some success and are on even better trajectories from here. And so that does help when you're getting involved with the next merchant, because there is a certain level of credibility there that not only were we investors in something like a Warby Parker or something like a Dollar Shave, but we were there from the beginning. And so we weren't just piling on to companies that were already working. We maybe made a call before others when that company was not obvious. And I think that's something that's appreciated by founders. But then also we're moving into areas where we maybe don't have as much credibility. And in those cases, it's really important to talk to the founders and explain to them why this is core to our thesis. And I mentioned earlier around health and wellness... That's a category that historically used to be much more enterprise driven. It was largely sold through health care plans, largely sold through employers. But as people have higher deductible insurance plans, as there're more offerings, we're involved with companies like Hims, Modern Fertility, Curology.. As people are starting to seek out health and wellness options themselves, they're frequently making those decisions the same way they would around other consumer products where brand differentiated service experience and a better pricing structure start to come into play. Whereas 10, 15 years ago that was maybe not as important as insurance companies covered more and as more of that conversation went through the employer.

Brian L: [00:29:13] As the health care evolves, so do people's purchasing habits. We've talked about that a little bit on the show. So we know how you're getting connected with people, so then how do you pick who you actually invest in? What's sort of due diligence aspects are there? Are there specific metrics you're looking for? We've kind of heard some of them come out. You're looking for brands that are on a trajectory already. You're looking for people that are passionate and knowledgeable about their area. You're looking for brands that have a good story. So there're some clues there. But what else are you really looking at to make your decisions? Or... I think that there's something interesting phenomenon happening right now, and maybe you can shed some light on this, as well... I think that certain brands are getting a lot more attention from VCs than others. Are you having to compete with other VCs to sort of have someone pick you as as their VC? You know, it seems like some brands maybe are getting a lot of attention and then other ones you don't have to compete for it all. You just you find them and invest in them and it seems a little easier. But maybe you could shed some light around that competition that's happening right now and then how you ultimately pick who you want to invest in.

Brian O'Malley: [00:30:33] Yeah, for sure. All right. So let me talk about the picking side. Then I'll talk about the winning side, which is definitely relevant. So on the other picking side, we're trying to understand a few things about the business. First and foremost is who are the people and what is their vision? And is that something that we find compelling? Is that something where there's alignment between us and them in terms of there being a big opportunity in front of the company? The second thing we look at is really the state of the state, right? So what is the maturity of the business? What is working within the company? What's not working within the company? And that's less about having things be perfect and more about understanding what's going on and really seeing whether the team understands what's going on. And so that might be looking at not just, you know, how many millions in revenue do you have or how many thousands of customers do you have? But it's looking at individual cohorts of customers and really understanding of repeat purchase behavior. If someone showed up and bought something once, what is their propensity to come back and buy something again? It's understanding the gross margin structure. What does that look like today? What is that going to look like over time? Understanding the cash flow structure. A lot of companies don't spend enough time understanding cash flow, which ultimately impacts how much capital they need to raise over time. So we want to understand the state of the state of the business with the understanding that a lot of companies we get involved with have never shipped the product. They don't have any customers. And so that's just the reality for some companies. When we got involved with Away, it was six months before they ever shipped their first product. And so in that case, again, you're relying more heavily on the team, their background and their insight into a particular market. And the third thing, which is ultimately important, is what's the deal? Right? So how much money are we investing? What percent of the company are we going to own? We're ultimately the equity investors, so we're buying a percent of the business with our capital. And what are the milestones that the company is hoping to achieve with that capital? So we'll look at those. Those are the three main things we're trying to understand along the way. And then when it comes time to say, look, we're thumbs up, we're excited about this company, the reality is, is a lot of those companies have options. They have other investors that are excited about their business. And in many cases, they have other investors that are excited enough to give them a deal that's frankly better than the deal we're offering. And so that really comes back to trying to understand that fit and trying to explain to them why working with us, even though on paper it might not look as good today, is ultimately in the best interest of their business. And so founders will do references on us. They'll call our founders. They'll ask us questions about how we look at the business, and they'll spend a lot of time with us personally to understand who we are as people and whether they want to spend the next 5, 10 years working with us. Because once you get an investor on board, they're really hard to get rid of.

Phillip: [00:33:35] Right.

Brian O'Malley: [00:33:36] So, you know, founders are, not universally, but hopefully do more diligence on their investors these days because great founders tend to have lots of options and some of them short change that process and just want to get it done and want to get back to building the company. And they don't realize that actually a core part of building the company is getting the right people around the table. And that if you do that poorly, that can ultimately limit a lot of your options over time. So it's better to spend a time now and do it right.

Brian L: [00:34:05] Speaking of right people versus wrong people, there are a lot of different types of VCs out there. I see, you know, LinkedIn ads even for like the craziest VC type offers. You've been at three different VCs, at least three different VCs that I know of, and so I'm sure you've seen different VCs do things different ways, and I'm sure that you know your way around the valley, maybe give us a few different examples or like sort of typical profiles of VCs, so that our listeners can get an idea of the different types of options that they have when they go looking for money.

Brian O'Malley: [00:34:48] Sure, yeah. It's interesting because when I first got into the business in the 2003, 2004 timeframe, it was much more of a cottage industry. There were maybe a few dozen firms that mattered, maybe a few hundred people that were ultimately making decisions on these companies. And the industry has really, I don't know if blossomed is the right word, but it's certainly expanded since then. And so I think founders need to be more wary of who they're working with and also be more wary of where that money is coming from. This is something that has come up recently where it's not just what firm are you working with, but where did they get their capital? Is that money that is coming from sources that align with the values of the business? And so we're starting to have founders ask more questions not just about us as individuals, but behind the scenes, our LPs, because they're thoughtful about not just who are they working with, but also thoughtful about who are they making money for. Right? We're gonna own a percent of the business and hopefully that's going to turn into a lot of money over time. And founders care about the cap table, and they care about who ultimately they're helping make successful. And so we see more of those kinds of questions. But if I were a largely bucket it there's a couple groups. So there's traditional venture capital firms. These are partnerships. We take money and on typically 8 to 10 year timeframes. And sometimes those funds are more sector focused where they're looking at just particular types of companies. Sometimes they're more stage focused where they're just looking at investing in companies, either when they get going or when they're a little bit more mature. And then there's a host of firms which are pretty similar to the ones that I worked at before, where they're doing a little bit of everything under the sun. Where it's different sectors, different stages, and they have a larger amount of money under management. So there's the traditional venture firm model where those companies are hopefully getting 10x plus returns on their successful winners. There's some assumption that not all companies are going to work out. There's some assumption that these are going to take many years to develop, and there's some assumption that we're going to be actively involved in the company. So that's kind of the traditional crowd. There're other buckets, as well. There's a large amount of corporate venture capital that's out there now. These are companies that are large businesses. So anything from a Salesforce, to a Unilever, to an SAP, to a Disney... These companies have sometimes set up funds. Sometimes they're investing off the balance sheet, but they're looking at it not just from a financial return perspective, but looking at it as learning about these companies, potentially creating partnerships with these companies, and in some cases even acquiring these companies. So they have multiple reasons why they might want to get involved. And sometimes that can be a great relationship if it unlocks something special and unique for that founder. But a lot of times there are more strings attached, as well, where because they're not solely financially motivated, there's more those corporate groups are trying to accomplish. And so it's just important to understand both their decision making process as well as who actually makes what decision, because typically the person who's writing the check is not the same person who's deciding whether or not to sign a partnership with you as a company. So it's important to flesh out all of those things along the way. That's another bucket. And then you're also seeing groups that might be, you know, sovereign wealth funds where the money is coming from a particular government. You might be seeing more high net worth individual funds, groups that are maybe less focused. There're crossover investors. These guys get involved right before IPOs and then look to invest post IPO. And so these folks might not have the same time period involved in their investment. They might not have the same return hurdle that they're hoping to get, but they have a particular niche. And that can be the right investor for the right type of company. So all this comes back to is the founder taking the time, understanding the motivations, not just of the firm, but the motivations of that individual, and understanding whether that lines up. Because you do have a greater number of funds these days where either the partner at the fund or the fund itself is really focused on raising another fund, raising money at a higher valuation, doing things that are on the short term, look good for that individual, look good for that fund, but may not be 100% aligned with that founder. And so finding folks that have a longer term perspective where if the right thing to do maybe looks bad in the near term, but is the right thing to do for the long term of the company, you want to make sure that your investors have that same frame of mind and that you're not kind of a pawn in a broader game where they're trying to do more for their firm or trying to do more for their own personal career. So it's complicated, and that's why it takes time to flesh out where you're working with the way it's the right fit.

Phillip: [00:39:53] When you were talking about the you know, it takes time. And you also talked about it sort of taking the cap table, which I think we hear a lot about, you know, which I think constitutes a percentage of ownership in a company. How much time typically does it take for a deal to complete and how much percentage are you taking of business in the long run?

Brian O'Malley: [00:40:20] We've had some deals move very quickly. This is the exception to the rule. But sometimes, you know, it'll get done in a couple weeks from start to finish. And in those cases, we maybe even already know the team. We maybe have a very particular thesis that we've been looking for something who's doing something similar. And then the other extreme is sometimes we spend years getting to know people where maybe we don't invest in one company or the company's not the right fit, but then it changes and evolves, and we end up investing over time. And so in a lot of cases, though, we've known the founders for a year plus before we formally get involved. That's not always the case. Sometimes you meet someone on a Tuesday and think it's exciting and try to have them meet the rest your partners on a Wednesday. So we react to timeframes, and we like having more time, but the reality is it's a competitive market, and we don't always have that luxury. And then from an ownership perspective, look, we want to own enough where it matters. So it's a range. But let's say it's anywhere from 5% to 30% of the business. But we're very clearly minority investors. And so we don't have control of the business. We think that control should remain in the hands of the founder. But we want to take a material chunk of the company, because at the end of the day, if you help build a billion dollar company and you own 1% of it, that's not particular material. You're better to own 10% of a company that's worth 100 million, because it's a lot easier to sell something for 100 million than sell something for a billion. And so we want to take material ownership positions. Frequently will buy up ownership over time where we have conviction around the company, and we want to continue to sponsor what they're doing. And we want to own it as much as we can. Right? This is not a charity. We're in the business of giving our LPs back as much money as we can. But we also understand the incentive structure, and we want to make sure that the employees are very well compensated with equity. We want to make sure the founders continue to retain a large chunk of the company, and we want to make sure there's room to bring in other amazing investors that have different skill sets that will contribute to the business over time. And so that's where you end up with that balance, where sometimes we end up owning a little bit less, but it's in the best interest of the company. Sometimes we own a little bit more because we continue to be the right source of capital for the business, and we keep it simple and keep giving them more capital over time.

Phillip: [00:42:56] So, if I were to simplify it just for my sake. At the end of the day, there's an exit that you're going to make. The business sells or there's an IPO or something happens. And there's an event where everybody along the way who helped make it possible should get a piece of the pie. Who do you believe...Is it often that the founder or the founding team can wind up with a smaller piece of the pie? Or is there an incentive to making sure they're well rewarded along the way? How does the founder ensure that they have a large enough piece of the pie to make it have been worth the 10 year journey in the first place?

Brian O'Malley: [00:43:44] Sure. I think this is something we're very mindful of both from a founder perspective as well as the employees. We're in a time period right now where I think people are pretty thoughtful about founders, and we'll talk about that in a minute, but where I think the employees in a lot of cases are getting shortchanged. And so we want to make sure that there is ample equity for employees. And we have a belief that anyone that is helping build the business should share in the upside of the business. But from a founder perspective... Look, the best way to continue to own a large chunk of the business is to raise less money. So that's where we think that cash flow come into play. And so a lot of folks wake up and they raise one round. They want to raise next round. They want to raise the next round because, look, that's external validation. People high five them for raising a hundred million dollars of equity. And then they look and they own 8% of the business they started. And they're like, "Well, how'd that happen?" It's like, "Well, look, it happened because you raised a ton of money over time." And we'll see that founders can be pretty sensitive around, "Well, this one deal is 26% dilution. This other deal is 23% dilution. Therefore, I should do the 23% dilution deal..." That really doesn't matter that much. That ends up being the noise. It's really how many rounds of financing do you take. Do you do a 23% dilution round and then another 23% dilution round. That's a lot worse than just one round that's 26%. So we try to help folks be mindful about the need to raise and how can they get more cash from customers and more cash from better agreements with their suppliers and the way they actually get paid. And there have been deals.... I had a company recently where I didn't think the founders owned enough for this stage of the business. They've raised money from other people in the past. And I was concerned that the founders didn't own enough, and so I wanted to give them more equity as part of our deal because the beginning of our journey should not be setup in a way where someone is already at a disadvantage. So we're very mindful of how much founders own. We make sure the founders are always vesting more equity over time, because we want to make sure that they can quantify not just what they've done to date, but the impact of their continued involvement in the business and that there is a way to do that from an equity standpoint as opposed to just the pure cash compensation perspective.

Brian L: [00:46:16] Wow, it's amazing. It reminds me of something we talked to our merchants about all the time, which is clienteling, but just really just building relationships. And I feel like this is a theme in business right now. It's not all just about the money. The money is important. But the relationships that you build and the way that you do business is super, super important, as well. And I think that I admire that approach to fUnding, that you want to make sure that both the founder and the employees are stepping away with with something that they've built. So I love that.

Brian O'Malley: [00:46:54] Yeah.

Brian L: [00:46:55] We're hitting the end of our time here. So I'd like to ask you a question that we kind of ask all of the people that we interview at the end of our show. And so what I'd like to know from you is where do you see retail going? Clearly, you were in a state of change right now, or maybe we've just come through one, although it still feels like maybe we're in the middle of it. Where do you think retail is headed in the next 12 months? And then maybe give us a view of like five years out. And then maybe name a company or two, a brand or two, that you think is interesting maybe that you're not involved with yet?

Phillip: [00:47:31] Did we even prepare him for that?

Brian O'Malley: [00:47:35] I need a minute.

Phillip: [00:47:36] Oh. Goodness me. OK.

Brian O'Malley: [00:47:38] So I was about to pitch one of my new companies.

Phillip: [00:47:40] Oh do that.

Brian L: [00:47:40] Yeah. Pitch one of your new companies. Yeah do that.

Brian O'Malley: [00:47:43] All right. OK. So let's see. So retail... So I think a lot of the trends that we've seen over the last 10 years, there's been these large statements about how retail is dying, about how there will be no stores in the future. I think those are largely overblown and ill informed statements. I think the reality of what you have, is just that it's changing and the bar is going up. So it used to be if you had a store that had the item that I want to buy close to me, that was good enough. Right? So you had things like Sports Authority, which I don't know if you guys ever went in to like try on something at Sports Authority, but you needed to be like a ninja to get the key to go in the actual dressing room and try something on. You know, it was an incredibly painful experience, but it worked because, you know, if I wanted to buy a bat for my kid or if I wanted to buy a new golf club, it was kind of a place that you can do that in your environment. The reality of Amazon is that just having inventory for something is not good enough anymore. Amazon can get something to me in two days, sometimes less. The price might not be the best, but I trust that it's good enough and it's very convenient, it's very easy. So I think you look at stores that were largely just inventory in the local zip code, the Borders, the Toys R US, the Sports Authority... I think a lot of those businesses have struggled. But in the meantime, they're being replaced by, I think, a new wave of company that's really exciting. So with Sports Authority going away, there is now an amazing soccer store down the street from us where they have a much wider variety of cleats, they understand for different foot types what types of shoes are best, they have jerseys that you can only find, you know, maybe in Italy otherwise, and they go and they cut special deals with the local youth soccer programs to drive people to come in and do things. You see that in other sports, like baseball, lacrosse, these kind of specialty stores re-emerging. We have a company called Fair that we invested in, which is really a wholesale marketplace that powers local retail. And what they saw was that the actual amount of specialty bookstores has increased since Borders went out of business. It's actually doubled since then. And that's because it's one thing to just get access to a book on Amazon, but sometimes you want to go in and browse something. Sometimes you want to meet the author, sometimes you want to talk to the guy at the checkout register and ask him what mystery he just read and why did he like it. And so there's this re-emergence of local retail, but it's different and it's more about specialization and it's more about a new experience. And so we're big believers in the experience economy. We think that product companies can ultimately create great experiences. There's going to be more service revenue over time as opposed to just selling products. So we're getting more interested in companies that are ultimately services businesses, and we think that there's a ton of opportunity to continue to make new products. There's been a lot of focus on the Millennial consumer, but the reality is that the Gen X demographic actually spends more online than Millennials. Baby Boomers spend 20% more per person online than Millennials do. And there's the whole Gen Z group coming up. You have a point at which where the majority of Americans are going to be minorities. And so we think that there's going to continue to be new waves of founders who come along with unique insights about the product categories or particular demographics and who take their passion and turn that into new products and new companies. And we're incredibly excited to find those folks and help them realize their visions. So we're really excited about that. We think there's a ton of opportunity. Retail's changing. It's not dying. And for the right set of founders, they're going to continue to be able to build some great businesses. When we think about things, we tend to look at businesses that could be successful today, because at the end of day, you see companies where they're talking about drones, and they're talking about everyone wearing VR goggles around. And sometimes that's a little bit too far out to really be able to project. So when I think 5, 10 years out, I think that the current waves continue on. There's maybe more focus on where items are coming from. So the sustainability trend is increasing. Who knows where will be from a trade war perspective five years out. So understanding your supply chain will be important. And people continue to like things what they want, when they want it, where they want it. So continued convenience will be important. When we think 5, 10 years out, some of it is less about products and more about how they're delivered. So we're spending a lot of time thinking about labor. We think about how labor has changed. It's largely been about opening up the option for people to drive for Uber or DoorDash or get items like on Instacart. That's a very V-1 version of what that model should look like. There's lots of people out there that are looking for flexible work. Maybe they've recently retired that it doesn't make sense for them to go drive an Uber. And so we think there's gonna be a lot more options on the labor side that will ultimately power these sorts of experiences. And we think there's a lot of marketplaces that can be built in categories that have historically been offline. And so if you think about it, we went through our checkbooks and looked and said, look, what are the last 30 checks that we've all written? Because odds are we won't be writing checks for those businesses in 5, 10 years. So how can the payment flow move online? A lot of times the first step is having the payment flow move online. How can we enable these local vendors, local merchants to be able to streamline their payments, get better visibility into their business, and then ultimately have better insight as to who their customers are, which provides a better experience for those customers?

Brian L: [00:53:52] I want to do a whole episode on just that last bit. That was amazing. I'm super excited about some of those ideas.

Brian O'Malley: [00:54:00] And you want me to pitch my company or are we good?

Phillip: [00:54:02] Yes, please. Yeah. How can people get in touch with you?

Brian O'Malley: [00:54:05] we recently invest in it coming out Sunday, which I think is pretty exciting. What they're doing. So you think about a lot of these products and services... They took like the crappy aisle in some old school store, and they've reinvented it in a way that's magical and special and different. And so there was this business called Sunday. And what they're trying to do is they're trying to take that home and garden center you think about at Home Depot, where there's like mulched spilled all over the place, you can't find anyone to help you, and where half the products there are like ultimately poison's, and reinvent that in a way that's much more thoughtful and mindful for what people want. So they're starting out with a kitted pet friendly fertilizer. They have a weedkiller. And this is in the backdrop of the Roundup lawsuit where people are starting to be much more mindful about what they put in the yards, both because their family lives on their yards, as well as that ultimately gets into the water system. So they're starting with a new wave of products which go after that home and garden center. But ultimately, that is really the kind of the gateway or the Trojan horse to helping people with all the exterior home services that are challenging, where a lot of those merchants spent a lot of money and effort trying to acquire new customers, we think we can bring a higher level experience to people where it's this combination of both products that are tailored for your house, tailored for your family, as well as services that are local. And we're really excited about the potential there, because no one's really built the you know, that Amazon of exterior home services. And we think this company Sunday can go do it.

Brian L: [00:55:43] Oh, my gosh, this hits on so many things again that Phillip and I have talked about, and actually personally, as well. I've stopped killing weeds. I only pull them. I haven't really killed weeds.

Brian O'Malley: [00:55:53] Yeah, when you're killing weeds, you're kind of killing, you know, yourself at the same time. So...

Brian L: [00:55:59] That's terrible. Yeah. No, I love that. Phillip, do you have anything else do you want to hit on before we wrap?

Phillip: [00:56:03] No. This has been phenomenal. Thank you, Brian, for your time. This has been incredibly insightful. I'm really excited to see how the series develops. And I really appreciate all of your insight.

Brian O'Malley: [00:56:13] Absolutely, guys, I really appreciate you including me. And thanks for the time. It was a good conversation. Let me know if we can be helpful sometime down the road, okay? Appreciate it.

Phillip: [00:56:21] Well, thank you so much, Brian. And thank you for all of your insights. That was really valuable. And I want to hear insights from the people who are listening to this show. If you're listening and you want to get in touch, you can drop us a line at Or you can visit us online at for every episode of Future Commerce and Step by Step. This is going to be an amazing series and we want to make sure that you never miss it. You can subscribe wherever podcasts were found. Thanks to Shopify for helping us bring this content to you today. Remember, the future of commerce is what you make of it...

Brian L: [00:56:53] We want to help you shape that future. Thanks for listening.

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