🎧🍌 Building bolstart Ventures from $1m to $850m with Ed Sim
🎧🍌 Building bolstart Ventures from $1m to $850m with Ed Sim
Investing before the market map, "intuitive TAM", inside the grind of raising boldstart's early funds, a masterclass on enterprise sales, and how to invest in AI startups incumbents won't crush
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Ed Sim is the Founder of boldstart ventures, backing bold founders reinventing the enterprise stack at the inception stage.
Our 100+ minute conversation covers key moments from building boldstart, from its first $1m fund in 2010 to investing over $850m in AUM today. Ed takes us inside the grind of raising their first four funds, and being the first investor in companies like Snyk, Superhuman, Kustomer, BigID, Blockdaemon, and ProtectAI.
Ed also gives us his playbook for building customer relationships, the 5 P’s of inception stage investing, the 3 Ch’s of a good board member, thinking through winners and losers in AI, and why he likes investing before there’s a market map.
Timestamps to jump in:
3:48 Evolution of early stage investing
5:11 Inception stage investing
10:32 Backing bold founders reinventing the enterprise stack
11:20 Repeatable ways to build enterprise businesses
12:04 The 5 P’s of early stage investing
14:12 Backing Guy Podjarny and Snyk
18:18 Knowing when to follow-on
19:18 The 3 Ch's of a good board member
22:01 How Ed’s board role changes over time
24:20 Balancing founder friendly with returns
27:20 How to build customer relationships
30:24 Advice for closing customers
33:47 Creating the Seed category in 2009/10
37:31 boldstart’s $1m Fund 1
39:00 Why Ed didn’t join a large firm in 2012
39:55 boldstart’s $16.5m Fund 2
40:26 Why LPs passed on the first funds
43:11 Leading rounds in Kustomer, Snyk, BigID, and Blockdaemon in Fund 3
47:09 Why $112m Fund 4 was the hardest to raise
50:52 Ed’s approach to LP fundraising
55:12 Inside Meta’s acquisition of Kustomer and sale back to the founders
59:52 Backing Rahul from Superhuman a 2nd time
1:00:52 The different GTM playbooks
1:02:20 Importance of contract size and time to close
1:05:07 Why AI makes security more important
1:06:11 When to switch from founder-led sales
1:07:46 Backing ProtectAI after a conference
1:08:28 Balancing between inbound and outbound sales
1:09:55 Winners and losers in AI
1:15:26 Building the boldstart team
1:19:33 Lessons being an interim CEO
1:22:18 How ZIRP pulled revenue forward
1:29:08 The death of high growth software
1:32:58 Identifying startup opportunities incumbents won’t crush
1:35:00 Second order effects of AI
1:36:46 Using "Intuitive TAM" to size new markets
1:38:04 Investing before there’s a market map
1:38:57 Balancing family, fitness, and career
Referenced:
Find Ed on Twitter, LinkedIn, and check out his Newsletter
Transcript
Find transcripts of all prior episodes here.
Turner Novak:
Ed, welcome to the show.
Ed Sim:
Turner, thanks for having me.
Turner Novak:
So boldstart ventures, you do this thing called inception-stage investing. That's been your big thing lately. Can you just describe what that is and why it's important?
Ed Sim:
Yeah. I felt that founders have gotten very confused. I mean, there's been lots of names for what being first means.
Starting in 2010 there was a category called seed. And then seed wasn't early enough, someone created the category of pre-seed. And then someone created the category seed plus.
And frankly, what's been really difficult for founders is, "Who do I go to when I have an idea, a unique idea, and I need a check?" It can be anything from 500 K to five to $10 million. It's very hard for them to figure out who to go to.
If you look at the data from PitchBook, PitchBook basically says that the average age or the median age of a company that raises the pre-seed round is now 1.2 years old. Now that was the round that was supposed to be two people with an idea.
Turner Novak:
Yeah, the first check.
Ed Sim:
So what's up with that? I think because pre-seed became institutionalized, these pre-seed firms wanted to see more product and more traction before they invested.
The median age of a seed round, guess what that is now? 2.7 years old. Once again, if you're a founder, where do you go?
And then, finally, you have this new era of multi-stage firms coming into the market. They're writing option checks. When you have a $2 billion fund, or a $5 billion fund, or a billion dollar fund, writing a $1 million or $5 million check, you're not going to spend as much time with the founder as they may tell you. Once again, it's confusing.
So I kind of came up with this idea of inception investing. It doesn't matter how much you raise, but if you are a founder or a couple founders with an idea, you need a firm that's going to help you iterate and battle test those ideas before you incorporate, before you write your first line of code, to help you vet and hire maybe those first six to eight hires to de-risk the idea.
And then upon incorporation and filing your 83(b), you have a deal already worked out, where you're going to lead that round so the founder doesn't waste another six months raising capital. So you can get speed out of the gate to really build your company quickly.
That's kind of what inception investing is. I've laid out all these different frameworks in terms of discovery rounds, which are less than $2 million, or classic rounds, which are three to five, or even jumbo rounds, which are six to eight, but can be up to 20 or 30. So it's really ...
Turner Novak:
Yeah. It's like the first round they raised was $30 million. That might look like a Series B in some cases, traditionally.
Ed Sim:
Yeah. Yeah. Is it actually seed? Is that seed? Is it ... You know?
By the way, if you're a really great founder, if you're on your third company, do you want me to come to you and say, "Hey man, I want to raise a pre-seed round"?
Turner Novak:
Yeah, $500 grand. They've already exited. Their personal balance sheet is seven, eight, nine figures. Just fund it themselves if they really want to do that. Why would they sell that much of the business?
Ed Sim:
Yeah. So, just raise in the inception round and that's it.
Turner Novak:
So then, what is the sweet spot of a boldstart inception round check? What does that even mean or look like for you guys, today?
Ed Sim:
I'd say that, traditionally, the whole idea would be that we have discovery rounds which are less than $2 million. It's usually a first-time founder, maybe a new category. And because of the AI tailwinds, we can talk about that later, I'm seeing some founders who say, "Man, I saw what happened during the ZIRP era. I'm going to raise as little as possible."
Turner Novak:
I mean, why wouldn't you want to raise a bunch of money? $30 million sounds awesome.
Ed Sim:
Yeah. Some founders are like, "Look, I want to raise as little as possible to figure out what I can discover." Let's just say they raise less than two million. So we can write a check, $500k, a million, a million and a half, whatever it is to work with a founder and be flexible and work with angels.
If they succeed, then they may graduate to a classic round, which is $3 to $5 million. That round could also be the founder coming in, who's pretty experienced. Maybe led product and engineering at a high-growth company. Has a pretty good idea. The market seems to be kind of maturing a little bit. They may just raise a traditional $3 to $5 million round. That used to be that seed round. So we can lead those rounds too.
Then what happens is if this is a founder who wants to raise three to five and they've already been successful, and maybe already have had an exit or two, and the multi-stage firms get one of them, guess what they want to do? Supersize me, baby! They go, "Hey, you know what? Don't take three to five, take six, eight, $10 million."
Turner Novak:
Yeah.
Ed Sim:
You don't want to do a lot of those as a quote, unquote, inception firm, but you still have to have the flexibility. If it's a founder that we've backed twice and it's the third time they're going around, say, "Hey, look, guys, I really want to work with you, but I'm getting $10 million thrown at me and I'm not going to take three or four. Maybe we do eight." So boldstart can lead those rounds, too.
In fact we've actually led a around that's completely stealth right now, and a third time founder, that he raised initial million dollars out of the gate, which we did half of that, that converted right into a $24.5 million dollar round. So $12.5 million dollars right out of the gate.
I believe that in this world, there's this game to be first. Because if you believe in the world of first, it means that you have pull position for future rounds, you build the best relationship with founders, and, perhaps, it would be the lowest entry price of any winning company.
Turner Novak:
Yeah. I think a lot of people forget that the point of venture capital, it's an asset class. People are giving you money to make money.
Ed Sim:
Yeah.
Turner Novak:
It's not just a fun we ... You got to actually make sure that when you plan your portfolio, you follow all the rules, to say, "If things work out, we will return the right kind of capital for what everyone's underwriting." I feel like some people forget that.
Ed Sim:
That's absolutely the point. That would ideally be the lowest entry point of any company. Even if you end up paying and leading a $25 million round, still, if that's what the founder deserves and what the market opportunity is, then sometimes you've got to do it. So as an inception firm, you've got to be able to play in all three to win.
Turner Novak:
And then I think a lot of people forget, too, that it doesn't matter how low the valuation of a company is, if it doesn't ever become a real business that realizes value in some case. Your whole portfolio, you paid $1 million post money valuation, but you never realize anything. So sometimes you do pay a little bit more for a real quality asset that eventually is return cash at the end of the day.
Ed Sim:
I think that is a really good lesson, is that buyer beware sometimes. Because if sometimes you get the best deal, may not be kind of the best company, right?
Turner Novak:
Yeah. If it's a really good founder, they might be like, "Hey, I really like you, but my company's not worth this much. It's worth more than that," and sometimes you have to realize that as an investor.
Ed Sim:
Yeah. No, that's a really good point.
Turner Novak:
A question that I will get a lot from friends who, they're like public market investors, they have a hedge fund or whatever, they're really good at investing. They got their spreadsheet. They know all the numbers. And they're like, "Man, how do you invest in these companies when there's no product yet?"
So at boldstart, when you guys are meeting a founder pre product, how do you approach that and decide what you're investing in?
Ed Sim:
Yeah, I'll preface it by saying that, first of all, all we do is enterprise. Primarily, I'd say our past has been about two-thirds infrastructure stack, which includes data infra, cyber, dev tooling, and then one-third app stack. I'd say now it's probably 50/50. And then with-
Turner Novak:
More apps now? Okay.
Ed Sim:
Yeah, the layer that touches a human being. I'd say because of the fact that AI infra is a very hard place to invest in. We do believe that the value is going to start accruing with what people build on top.
Anyway, that'd be point one. I'm saying that because it's different than consumer investing because consumer investing, you have no idea what's going to happen. But with enterprise investing, I believe there are only a few things that you can do forever.
That is you can actually build infrastructure faster, cheaper, quicker, and you can monitor that infra, you can secure that infra, you can store the data around that infra.
And then on the upside, you make either employees more productive, or you allow customers to have better relationships with them. That's it. That's pretty much it. And then things just keep getting reinvented over and over again.
So when we look at this lens, it's easier, in our opinions, to discern whether a founder is worth investing in or not. Because typically, they'll have come from a past experience where they've built something. They had this new genius idea saying, "Gee, I think there's a better way to do it."
So if I want align frameworks, because I think in frameworks, I'd probably call it the five Ps.
P number one would be problem and pain, "What problem are you solving and is it a massive, massive pain that people have, or is just kind of a nice to have idea?"
Second I'd say is product, "What is the unique insight that you're bringing? What's the unique technical insight that you're bringing that's going to make an end-user's life 10 to 100 times better with your proactive solution than without?" And you need to have the ability to zoom in into that user's life, to understand what their workflow is, what they're doing. So you have to have that user empathy, but you also have to have the ability to zoom out and tell a story.
Sometimes people can dive in and they get lost in this tiny, tiny little market and they never are able to escape that. And other times people wave their hands and say, "Hey, I got this big idea and here's the market," but they don't really know who their customer is or what problem they're solving. That'd be number two.
Third is people. That is kind of, "If those two align, give me a reason to believe why you are the one or you and your team are the ones to solve this problem? What is it in your background that allows you to do it? Who are you going to bring on board with you?" Usually, I think of founder as Pied Pipers. No matter what you are, you may not be a prior founder, but you may have some engineers that worked for you as a head of engineering. You may have a product person. You may recruit some coworkers. Show me who those first 10 hires may be. You may not get all of them, but maybe we can help you get four or five. That's number three.
Number four would be passion. When you hear the story from people, you can see it. You can feel it when you're with them. They're just so excited about solving this problem. I call it, passion meets obsession. It meets obsession. "You're so obsessed with solving this problem." Because this journey is going to be very long. I mean, you and I talked earlier, it's going to take 10, 12, 15 years to see this thing work out and you have some hard times, so you better be really excited about the problem you're solving. So that's passion.
The fifth is, "What's the possibility? What's the art of possible? What's the potential? How big can this be?" Usually whenever you make an investment in backing people, there are a thousand things that can go wrong. Always. It's easy to say no to everything, but you have to ask yourself, "If the one thing goes right, if this all goes right, how big can this be?" Sometimes it may start with just a little product.
A good example, Guy at Snyk. When I first met Guy at Snyk ... We backed his prior company. It was called Blaze. He was speeding up the delivery of webpages to devices. He sold it to Akamai. He went to Akamai for a few years, eventually became CTO of Akamai. I kept bothering him every quarter and I was like, "When are you going to start your next company?" He was like, "Ed, I'm learning. I'm being here. This is great." And finally-
Turner Novak:
Because they're a public company now, right?
Ed Sim:
Snyk?
Turner Novak:
No, Akamai.
Ed Sim:
Yeah. Yeah. Yeah.
Turner Novak:
Yeah, so he's learning, "What is it like to be a public company?"
Ed Sim:
Yes, exactly. Yeah. I call it, it's like his executive MBA. He did that for a couple of years. I'm like, "When are you starting something, man?" So finally he's like, "Ed, I got three ideas."
Idea number one, I won't name it, but I just said, "Oh, that's not a great idea."
Turner Novak:
Wait, you said that?
Ed Sim:
Yeah.
Turner Novak:
Haha Okay.
Ed Sim:
Idea number two, I was like you, "You know, I'll give you a couple hundred grand."
And then idea number three was Snyk, "I have this concept for developer-friendly security." We're like, "What the hell is developer-friendly security?"
Turner Novak:
Yeah, sounds like a made up thing. I've never heard that buzzword before.
Ed Sim:
This is in 2015. The idea was that there are companies like Veracode that were already existing out there that was scanning code, but developers hated it. It slowed them down. It wasn't a great experience.
He's like, "Look, it's going to make ... I'm going to help developers as they start writing code to scan all the vulnerabilities in the open source they're using, while it's happening. But not only am I going to find the problem, I'm going to help fix it with one click." That is what developer friendly is. If you just slow them down, they'd be pissed. And if you actually found these vulnerabilities but didn't help them fix it, you put them down the rabbit hole. They would rather not know.
Turner Novak:
Interesting. Okay.
Ed Sim:
The point is, he started in such a narrow area though. He started not only in open source, he started with Node and JavaScript. People were like, "That's not a big area. That's not a big market." Because the question we asked Guy, of course, was, "No, no, no. Of course I'm not starting there. I needed to work there. It's the easiest entry point or wedge. If this all goes right, every developer can use it." Fast forward, it's a leader in the market now. I mean, I think the last round publicly was done at 7.4 billion, I guess a year and a half ago, but they are on the path to some real liquidity.
Turner Novak:
But that didn't necessarily, immediately quick trajectory, right? It was kind of a journey. What happened?
Ed Sim:
I remember Guy would go out and speak at every small conference. Every small conference, big conference, just really spreading the word. The first couple years it was all about, "How do I get developers to care about security?" We're looking at the download metrics. So the first two years, the metrics were all kind of going in this direction. But two years in we're like, "Okay, how are we going to monetize this?" We knew there was an existential crisis of, "We have to monetize this to start figuring out how to raise the next round of capital."
I remember we were in a board meeting and Guy was like, "Look, Ed, I got this idea. There's a very large company that wants to use us, but I'm not sure ... I don't want to deliver it on-prem, but I can create this little thing called an agent broker that sits between the data on-prem and sits between our system. We can grab the data, scan the vulnerabilities, and I can charge them like $50k to get started. 'Awesome, let's go do that.'" Got it done. He got it done. We ended up doing two rounds after the initial round before he got his A round done.
Turner Novak:
Is that common? Is that uncommon?
Ed Sim:
It's funny. Most people think that it's always up and to the right. If you look at the history of boldstart founders ... Maybe because we are helping founders create new markets, the founders will be back big.
Turner Novak:
Yep.
Ed Sim:
BigID had two to three rounds between their initial round that we led, the inception round, and their Series A. Kustomer, where we kind of co-led that initial round, they exited to Meta for what people say was over a billion. I can't say what it was.
Turner Novak:
Okay.
Ed Sim:
They got a quick A done, and then we did a bridge between the A and the B, as well. I guess what I'm trying to say is that people don't really talk about it that much. It's always just, "Hey, we're up and to the right," but these things take a long, long time.
Turner Novak:
Yeah. I think Guy told me specifically, you just seemed to know when you should follow on. As an investor, when is it a good time? We're still going to make money on this. We all talked about the point of this is you've got to return capital to your investors. How do you know if it's not quite working yet? You're just looking at a spreadsheet and maybe doesn't seem like it's there, so how do you know?
Ed Sim:
Yeah, it's never the spreadsheet, man. I think part of it is, being an inception investor, you build these very close relationships with founders. Close relationships, what I mean is, basically, it doesn't mean that you're a cheerleader all the time. I know that there's a question later about what the three Cs are.
Turner Novak:
Okay. Yeah, what are the three Cs?
Ed Sim:
I do want to bring that up because we at boldstart like to take board seats in the very beginning. We're also cognizant of not layering on board minutia for founders. So usually the first six months might be, "Well, there's not much to talk about." Every couple weeks we check in, but there's no formal board meeting. But over time, we kind of prepare them for that A round, and prepare them for governance and what that looks like.
In my opinion, being a great board member is you've got to think about the three CHs. One is you need to know when to cheer, you need to know when to challenge, and you need to know when to chill.
What I like to say is that you cheer when things are going the worst. When it's like, "Hey, I just lost that big customer," or, "I just lost this employee," or, "I got my ass kicked." You know what? You're like, "Look, I know you're staring at the ledge right now, but let me pull you back and take a look at all the great things that are fucking happening. Let's just step back and have some perspective." Because even the best companies hit multiple, multiple pain points, where sometimes they feel like they can't keep going. But you can, that's when you cheer them on.
When you challenge is when they feel invincible, "I'm growing 10x quarter over quarter. I'm beating my numbers every single quarter. Now I'm going to go and try to build X new product and go into a new market." You're like, "No, no, no, let's wait a second here." Maybe that's when you challenge them a little bit, saying, "You know, maybe you're not so great. There are other companies doing even better." So you got to put the brakes on sometimes. Or at least make them think through, "Is that really what you want to do, take that risk?" That's okay, right?
Other times, you just have to chill. They don't want to hear from you. You just need to let them be, let them go build, let them do their stuff. Because, ultimately, it's their company. They need to build it.
I guess what I'm saying, the lean in moment for Guy, a couple of times, you can just see it. VCs want ... before they want to fund you, they want to make sure that you have signed contracts. They want to see all the momentum.
We could see, by working with Guy at the time ... We actually had introduced him to some customers. He also had some customers as well. But we could see it progressing along even though the deals weren't signed. We're like, "Look, it's moving the right direction." Yeah. Yeah, they don't have a signed piece of paper, that could take another 60 days, but this is the opportunity where he needs the capital.
You look at the founder, like, "Look, Guy, why don't we just get something done quickly?" I'm like, "Pay a higher price from the last round, obviously, and you don't have to go out and fundraise." Probably he'd take a discount to what he would get if he waited 60 days and went on for a proper 60-day process. The speed actually matters, too. So if you're involved, you know.
Turner Novak:
Yeah, and sometimes it can be a distraction. Spending a month, or whatever the process is, to meet 30, 40, 50 funds, run a process, all the FOMO, getting the right price, that can be a distraction sometimes.
Ed Sim:
Yeah, and take you away from the core business of building your business, right?
Turner Novak:
Yeah, of signing the customers. Exactly.
Ed Sim:
Yeah. So if you're giving them a fair price, which means increasing the value over time and they feel good about it, you both feel kind of ... As we like to say, both sides feel equally satisfied but not ecstatic, then it's probably a good route.
Turner Novak:
Yeah. So then you talked about how ... all these different phases of cheer, challenge, chill. How does your role as a board member change? Because I think you are still on the board, right, with Guy?
Ed Sim:
Yeah.
Turner Novak:
You joined pre-inception.
Ed Sim:
Yeah.
Turner Novak:
So how does that evolve over time, being a board member from day zero to day ... I don't know, the company's a decade old at this point in ... almost eight years old. How does it change?
Ed Sim:
Yeah. Actually, it's nine years old now. Yeah.
Turner Novak:
Okay.
Ed Sim:
Look, it changes. The nature and composition of the board changes. Guy actually brought in and recruited one of his friends, Peter McKay, to be CEO. So new CEO as well.
Turner Novak:
Oh, yeah, I saw that.
Ed Sim:
I've known Peter for a long time, as well, because he was an angel investor in Guy's first company.
Turner Novak:
Okay.
Ed Sim:
It changes over time because obviously you want to try to be the most impactful and the most value-added investor as a goal. You just don't want to be on the board for the sake of being on the board, for the sake of governance.
Turner Novak:
Yep.
Ed Sim:
Also, you're also trying to protect the ownership that you have and represent your investors, your fiduciary duties, as well. Yeah, but it changes.
In the early days it's kind of like, "How do we help Guy accelerate his path to product market fit?" A lot of that could be interviewing first hires, bringing hires on board for that early stage, from zero to one, one to five.
I remember even Ethan Schechter who was their initial founding VP of sales, who's still at Snyk and obviously running a different group there, how much time we spent together. He would work out of our office in New York and we would go around to customers together. That was kind of intense hand-to-hand combat.
Over time, then, it becomes, like at this stage, thinking about financing and M&A. We've actually sold two of our portfolio companies to them and they've bought six or seven. So now we've pivoted to the place where they're buying companies as well. They have a very good acquisition machine. So you're helping them and helping different parts of the organization negotiate that.
Or maybe you're talking about AI and you're like, "Hey, I know you're killing it right now, but what are we doing about the AI front?" Kind of thinking more strategically. So I think you start zooming out over time.
In the early days, you're probably a little more involved, if the founder wants you involved. Some founders just don't need your help. And then, over time, it changes. I spent last week interviewing a couple folks for a key executive role last week, as well. So just depends.
Turner Novak:
One point that it was either Scott Yara or Guy that brought up, you seem to have a good sense of this whole founder friendly thing, but then still focusing on you got to make money as an investor. How do you balance those things? Is there a certain framework that you use to know which way to lean in which moments?
Ed Sim:
Well, I think the ultimate balance is treat everyone like a human being, right? First and foremost.
Turner Novak:
Yeah, fair.
Ed Sim:
People are people, right? Understand and respect what they're building and how they're doing it. How you deliver messages, I think is very important. So the EIQ component's really important.
I've always believed that the more value you deliver to a founder, the more that they'll listen to you as well. Or at least listen, meaning that they'll absorb some of what you're saying. Because the best founders aren't going to say, "Gee, hey, Ed, great idea. I'm going to go execute that." I don't want them to. That's horrible.
Turner Novak:
Yeah.
Ed Sim:
At least say, "Okay, let me think about it, Turner. Let me think about it for a few days. Let me think about that," and have a conversation around it. So I think that being founder friendly, in my opinion, also means going back to three CHs, is some of the best founders want to be challenged a little bit, too.
Once again, in a way that is thoughtful, that has some good data or process around it, and then gives them some time to kind of absorb it. You're not trying to take a nail and just hammer it home all the time. I think it's really just general human relations around that.
They know, ultimately, that when you are an inception investor, if you look at the whole cap table, you're probably at the closest and most aligned to the common stock than anyone else. Because by the time you're at Series F, there's a whole different set of interests than if you're the first investor on the cap table.
Turner Novak:
Can you explain that if somebody ... it's a new concept for them, they have no idea what you're talking about when you say that?
Ed Sim:
Yeah. Let's just say if you raised $200 million in your last round and the last investor might not want to exit for, I don't know, let's just say two times the last round. But if you're an early investor where it could be a 30x or 40x, and where, for the founders, it could be an absolutely life-changing moment.
Turner Novak:
They're just looking at, "I have $100 million that I could have in my pocket now. That's amazing."
Ed Sim:
Exactly. You would probably be more aligned with the founders, right? I mean, obviously the founders would have the best return, but in just terms of situations like that.
Turner Novak:
Yeah.
Ed Sim:
Over time, I think it's very important for founders to think about, "Who am I bringing to my cap table? Who am I bringing on my board? What are their interests and what are their goals?"
Clearly, the last round investor, the growth investor, is not going to want a 50x on their initial check, but at the same time, you should at least know what their goals are, and how you can work across the cap table to make everyone happy on very important scenarios like that.
Turner Novak:
So in terms of adding value, you mentioned that it's good to add value. Broad term that a lot of VCs will say. Shomik on your team mentioned, you do a really good job just in terms of navigating customer stuff. You're selling to enterprises, you do a good job of knowing all the buyers, the top of the C-suite across your whole portfolio. Can you just explain how you do that, how do you think about that, how you get to know them so well?
Ed Sim:
Yeah, that's a great question. So I started my career working at JPMorgan in a bank, in their derivatives group. I learned how to code and I automated my job, I got into venture capital in the mid-90’s. Right around the internet boom.
And then in 1998, after I worked at a VC fund in New York for two years, I met this guy named Bob Lesson, and Bob Lesson, at the time, and for those who don't know, Sam Lesson, he's Sam's dad.
Turner Novak:
And you were trying to get a letter of recommendation to get into business school from him, right?
Ed Sim:
Yes, I did. I did get a letter of recommendation to HBS and I got into HBS. I tweeted about it. I remember my mom being, I'm the son of immigrant parents from Korea. She goes, Eddie two Harvard better than one, you must go to business school.
Turner Novak:
Oh, because you went there for undergrad?
Ed Sim:
Yes. Yeah. And Bob's like, "Yeah, forget it. Let's start this thing together." He's like, "I'm going to raise all the money. I want you to run the fund on a day-to-day basis for me," obviously leveraging his name. And he goes, "I have the Rolodex. We're going to speak two languages. You speak the internet and I speak the corporate language."
And so, what Bob exposed me to, he was a very accomplished Wall Street banker. He built the financial services group, he created that infrastructure, was youngest partner at Morgan Stanley. He unfortunately passed away towards the tail end of my Dawntreader experience before I started Boldstart, right around there.
Turner Novak:
That was the name of the fund?
Ed Sim:
Yeah. But I learned a lot from him. But one was relationships. He had CEO relationships across many largest Fortune 500s. He'd walked me in the door, walked me into the IT people. And over time I'm like, "Yeah, I need an advantage. Why are you in New York?" Because everyone thought that you could not build enterprise tech out of New York. And I just kept asking the question, "Why did Willie Sutton rob banks?" Because that's where the money was.
Turner Novak:
That’s amazing.
Ed Sim:
And so, if you look at New York, at the time, no one wanted to come to New York unless you're going public, or unless you're selling IT software. And so I was like, okay, if we can get to know these people.
So I built relationships with these people over time. I met them through Bob, and then I meet the CIOs, and they're saying, "Ed, tell me about the internet." That's a pretty broad topic, but eventually you start networking with all these people. And we had a cadre of people that we got to know that were very forward-thinking in terms of what they might buy, what they might try.
And we'd organize dinners, we'd send founders their way. A lot of them realized that being at a large company to see innovative startups was also part of their lifeblood too. They wanted to make sure that they weren't going to get blindsided by new things. So you kind of put that together and 28 years later, we have a lot of value relationships, I'd say, across not only New York and Wall Street, in terms of IT buyers, but across many other sectors as well.
Turner Novak:
So how do you figure out what they actually want and what they will buy? Especially if you're early stage, maybe you've raised a couple million bucks, you have a product, you have no customers yet, or there's something like how do you convince them to take you seriously and actually pay for your product?
Ed Sim:
So a couple things. One is you're never selling to them.
And so, I'll have a good friend of mine is the CTO of Priceline, Marty Brodbeck. And before that he was at Pfizer, and CIO of Diageo, and a bunch of other places. But he'll be like, "Hey Ed, I'm actually very interested in these three areas where I'm willing to look at some innovative startups." And a lot of them might be new emerging categories. It could have been back in the day microservices, or container security, or whatever that might be. And you're like, okay, and you meet some founders and you say, "Hey, Marty, here you go. I got some folks here kind of looking at solving some of your problems that you've already stated to me."
And I'd tell the founders like, "Look, I want to be very clear with you, I'm not looking for a sale here. You're not going to sell this thing. It's in process. These things could take three months, six months, two years, but at least just sell him on the vision and the story, and then talk about the product." And sometimes they may take a POC or design partnership or whatnot, but you get a lot of good feedback and interactions.
And then you say, "What is in it for Marty?" For Marty, he could shape some of the vision of the product. And then there's a fine balance between are you building custom software for a large enterprise organization, or are you building what it is? Maybe you're accelerating your roadmap, but it's also for a market.
And so, what we try to help founders understand is, first of all, if we don't do anything custom, but at the same time, if maybe it's accelerating one or two features that would solve their problem early that you're going to build anyway, then sure.
Turner Novak:
And they'll pay you for it.
Ed Sim:
Exactly. Exactly. So that's how it works. It's in more of an art than a science.
Turner Novak:
Another thing I've heard is, usually when you have a buyer like that, whether they're super senior or a little more junior in the stack, you want to do something that helps their career. They look good for being an early adopter of AI, or containers, whatever the technology is. That makes them look good and they get promoted from that.
Ed Sim:
Absolutely. How do you make them a hero? How do you get them promoted?
Turner Novak:
You mentioned Dawntreader was the name of this fund, you started Boldstart, I think this was 2010-ish.
Ed Sim:
2010-ish.
Turner Novak:
Why? How did that happen? I guess maybe you alluded to it, but what was that transition like?
Ed Sim:
Yeah, so basically at Dawntreader, we had a lot of corporate investors at the time, and 2008 was obviously the financial crisis where Lehman Brothers cratered. You had the subprime mortgage kind of cratering, and at the same time, let's fast-forward, it was 2008. We knew that corporates weren't coming in and investing in new venture funds. So it wasn't like I can go back to the till and say, "Hey, let's get half the money from you." That didn't exist. So we had to build a brand new asset base.
Two is that we are coming through, I mean the market wasn't great either for tech startups during that time. And then fast-forward in 2010, we had one of our big exits. We sold Green Plum to EMC. That's where Scott Yara is. He was the founder of that. Eventually that became Pivotal Software and went public and helped create the cloud computing software space back in the day.
But I had a lot of founders coming back to me right around 2008, 2009, that had exited before and said, "Hey, Ed, I don't need $5 million to start an enterprise software business. There's this thing called Amazon EC2 to Amazon Elastic Compute, and there's open source software and I just need a million dollars to get started. And I need people that can write me $100k, $200k, $300k check and add value. I don't need to be forced with $5 million bucks."
Turner Novak:
Was that a common thing at the time? Was people given big checks?
Ed Sim:
People didn't want to write small checks in 2009. Seed wasn't really even a category. It was always like enterprise software takes $5 million to nail it, to figure out if you have a thing.
Turner Novak:
And you had to buy, it was like servers.
Ed Sim:
Yeah.
Turner Novak:
Kind of, right?
Ed Sim:
Yeah. Yeah. I can give you a great story. I remember when LivePerson, which was one of the first, they created the hosted chat model. I don't use the word cloud or SaaS, because this was back in, this was pre-cloud computing. It was called the ASP model, Application Service Provider model. But they created hosted chat versus installing software on prem, and we raised $100 million dollars before we went public, and we didn't have a lot of revenue when we went public in 2001, because we had to build data centers. I remember that a large bank came to us and said, "Okay, show me your security."
So we had to go to our co-lo place, show them a security badge, swipe a card in, and show them all the servers, and racks, and the Dell, and the Oracle and everything else we had. People don't realize how easy they have it right now to put in some credentials in AWS and have things up and running.
I'm telling you a hundred million dollars to get infrastructure up and running. So think about it, every single ASP company, which is why Sun Microsystems and Oracle and everything just took off, because everyone had to buy all that stuff. In a way, it reminds me of what's happening now with everyone buying NVIDIA chips. I mean, there's some real parallels with the amount of money being put into that infrastructure side of things. But fast-forward cloud computing, EC2, and even back then VCs were like, no, you can't build a business on EC2 on someone else's stack.
Turner Novak:
You must, way better to own your own infrastructure.
Ed Sim:
Exactly. That was always the case. And so, we had lots of founders saying, I'm going to try this. Let's see where it goes. I started writing personal angel checks into startups myself, small $25k checks here and there, and eventually I ran out of money pretty quickly after a few checks.
Turner Novak:
So was Dawntreader more of series A-ish.
Ed Sim:
We like to be first. But these were leading when I led the green plum round, it was a $10 million initial valuation, and it was $3.3 million between three funds. That was an inception round, back in the day, but it was called a series A round, because the seed didn't exist. And so, these times, I don't need all that money.
Fast-forward, Bob ended up having his health issues and we knew we weren't raising another fund. And I had met Elliot Durbin through a founder I'd previously back named Jim Pitko, who was a Xerox PARC researcher who had built a startup that I backed. And Elliot and I got together, and that's how Boldstart got started.
Turner Novak:
He was really young too, right?
Ed Sim:
He was pretty young. He was working at a hedge fund of funds, called Permal Capital. They had exited for a fair amount of change to I think Leg Mason for over a billion. And one of the key executives started seeing so many tech deals, startup deals, and asked Elliot to evaluate the plan.
So he ended up doing a lot of their early private investing, and that's how I met Elliot. Elliot's like, "Hey, let's get together. I will go out and raise the capital from some of this person's friends, and you help me vet these startups and let's go."
And that was the concept that we started with. And I had already started out on my own thinking I was going to raise an enterprise seed fund, at the time. This was in 2010, in early January. And Elliot's like, "Just partner with me and I'll get the money raised and let's go from there." And that was how we got going, and we're still together now.
Turner Novak:
Okay, so then how big was that very first fund?
Ed Sim:
Oh, it was a hundred thousand dollars checks cobbled here and there, some dinners, a lot of liquid lunches and whatnot. Eventually we got a million dollars.
Turner Novak:
Okay, wow.
Ed Sim:
And we made 10 investments of $100k each.
Turner Novak:
Wow, very tight, small. That's a pretty concentrated fund though.
Ed Sim:
Yeah.
Turner Novak:
You get one 10x on one $100k check and you return the fund.
Ed Sim:
And so the thing is that we thought we were in some good deals. You never know. I mean, it takes a long time to figure out if you're good. And two years later, 2012, we had three exits. So we had gotten into Rapportive, which was Rahul's from Superhumans first company, and he exited to LinkedIn. And we had a good return off of that. I mean, it wasn't like something you write about on the Midas List or something, but it was a very good return. And he did well, and all the early investors did well.
We also funded Guy from Snyk out of that. Blaze was funded, and we had a nice exit to Akamai. And then we also had another company called Go Instant, which was a, lo and behold customer support software where you could take over someone's desktop using a browser without any software-
Turner Novak:
Remote control kind of thing.
Ed Sim:
Exactly. Yeah. Once again in customer support, you hear this theme over and over again. Live person was customer chat. I keep telling you, these things keep getting reinvented.
Turner Novak:
Now we have generative AI customer support.
Ed Sim:
Exactly. Yeah, and it keeps getting reinvented. And so, I just keep writing some checks in the right people. And that's kind of the beauty about enterprise software. We had a nice exit out of that too. And then I was going to join a larger fund, when New York was becoming interesting, but it wasn't a thing for enterprise. This was in 2012. And then Elliot's like, "Let's go out and raise $10 million together." And I was like, "Oh, I don't know. I've got a mortgage. I got two kids in private school. I don't know."
Turner Novak:
I got to pay for this.
Ed Sim:
And on the flip side, I was getting offers to be one of the 10 partners of a West Coast VC Fund, and I'd be the only partner in New York and you get paid very well.
Turner Novak:
A pretty healthy salary, I would assume.
Ed Sim:
Yeah, you got healthy salary and everything else. But then I'm like, do I want to fly back once every month? Do I want politic to try to get deals done?
And I sat down with my wife, and I think it's very important for any founder, whether it's you starting a fund, or me starting a fund, or a founder starting a company. And she goes, "Ed," she goes, "I believe in you. I would rather you start your own thing and strike out trying to make it happen, versus being unhappy about what you're doing and doing something for the money." And she goes, "We'll figure it out." So I was like, all right, this is how much savings I have left. I've got about two years to make this work. Okay, let's do it.
And so, Elliot and I went out and raised fund two. It started out with $5 million and then $10, and we got to $16.5 million dollars. That was in 2013. So it took a long time. This was no institutional investors would talk, I mean, we would talk to institutional investors, but that was kind of my annual no call, because I knew that we were...
Turner Novak:
They'd say, no...
Ed Sim:
But just let me learn. And I just want you to know who I am. So anyway, that's how we got started on fund two.
Turner Novak:
So what was the pushback that you got in some of those calls? Were they just like, I mean, because you had some exits under your belt, right?
Ed Sim:
Yeah, but as I say, there wasn't, and look, we had a nice return and we had realized returns and everything else.
Turner Novak:
That's better than a lot of people could say on their fund two.
Ed Sim:
But you know what the most challenging part, was in fund one is that we would find these founders, and this was inception, true inception investing by the way. And by the way, even YipitData is worth over a billion dollars now too. That was in that initial fund as well. But we didn't have a fund big enough where we could lead rounds.
So I'd have to call up and try to convince all these other VCs to come in and lead the round. I would try to lock it down, landlock down my ownership. You know how hard that is to find them, do it, and then you have to convince the VC to try to sell into the vision that you have? By the way, we also had another company called Divide, which was a enterprise software company that was on the Android device that split it in two, to your personal work, and we sold it to Google for a fair bit as well. So it was a pretty good fund.
But the big pushback was, you're in New York, enterprise software companies aren't built out of New York. Secondly, you guys are investing in companies all over the place. So first of all, I don't understand, I thought early stage investing means you have to drive within 10 minutes of the place and be there all the time.
I'm like, well, it's working for us. We had companies in Canada, we had companies in California, we had companies in London. I mean, Rahul was in London at the time. I don't believe that New York's a thing. I don't think you can build enterprise software here, or Divide was one that we sold to Google for a fair bit.
Turner Novak:
In New York.
Ed Sim:
Yeah. Yeah. Blaze, guy started that in Ottawa Canada.
Turner Novak:
Amazing.
Ed Sim:
Go instant was in Halifax, Canada, of all places, that sold to Salesforce.
So here we are, because I just figured, and I had done some investing in Israel in the past too. I started investing in Israel in '99, once again to try to figure out what my thing was. So all of these reasons people did not want to invest. And we're too small, I don't believe in seed. I mean, everything you can imagine that shouldn't exist. But you know what? We love doing this.
Turner Novak:
And you weren't leading rounds either, right?
Ed Sim:
No. And then in fund two, the check size has moved up to $300k.
Turner Novak:
But you still can't lead rounds.
Ed Sim:
Exactly. Eventually it became $500k, and then $700k towards the end of fund two.
Turner Novak:
And you could kind of, maybe, sort of lead rounds.
Ed Sim:
Kind of, maybe. So we were always at the whims of other investors. And my prior history was leading rounds and joining boards. I was on the boards that GoToMeeting, and LivePerson, and these were inception rounds, even though they weren't called that then. I mean these pre-product, very early.
And so, I was like, "All right, Elliot, if we ever make it, let's, on fund three, let's go back and bring these principles back, because I don't want to have to go out and convince other people, other investors why something's good or not." And so that was the beginnings of fund three, and that was another story if you want to continue down that path.
Turner Novak:
Yeah, that's an interesting story. I know you mentioned fund four was the hardest, so I don't know if we do fund three and then fund four, but-
Ed Sim:
Yeah, I'll hit fund three because fund three was really the genesis of all the other things that we have now in terms of funds four, five, and six.
Turner Novak:
Okay, so that was when you like, the current strategy was kind of the beginning of it.
Ed Sim:
Exactly. And this was where we could actually lead rounds. The first check we wrote was in Brad and Jeremy with Kustomer with a K. I had met them through our venture partner at the time, Jeff Leventhal, who was close to them in Long Island. They had sold their last company Assistly into Salesforce as customer support software in Salesforce. But they were the CTO and chief architect at the time, not the CEO. And so, Brad was like, I want to be CEO, I'm going to run this thing. And Jeremy became CTO, and they're in Long Island.
And I met them and immediately I just kind of knew. I'm like, holy crap, like this, they're going to reinvent customer support software. This would be my fifth customer support software investment. But they knew the space cold and they said, "Look, I'm going to start with a data model."
The biggest problem with customer support is that every time you or I reach out to solve a problem, it's siloed. An email goes into the email person, a chat goes to the chat person, a call goes to the call center, but there was no unique viewpoint of the customer as one customer, and hence. And so the data structure was very important. And if you had that data structure, then you could build workflows on top and do all these other things. That was the vision.
The first time we met them, because of their experience, Elliot and I were like, "We can't let them out of the room." We're like, "Here's a term sheet. Here you go. Here you go. We're ready to go." And they're like, "Oh, wait a second. We're not even incorporated yet." So they're like, "All right, let's wait a couple of weeks." And a lot of nerve wracking situations and whatnot and blah, blah, blah.
Turner Novak:
Nerve wracking, like they might go somewhere else?
Ed Sim:
Exactly, who's Boldstart? Who the hell are these two jokers? I’ve never heard of these guys.
Turner Novak:
They're not in Sand Hill.
Ed Sim:
Nothing. Nothing. Yeah. So eventually we ended up - oh by the way, we were like, we'll do a million dollars out of the $2 million round. We ended up splitting that with my good friend Howard Lindzon at Social Leverage. Because Howard's partner, Gary, was one of the co-founders of Assistly as well. So he knew Brad and Jay, so it was basically trying to slot for that other slot.
So we ended up splitting it with those guys. And at the time, we had only raised $10 million of our $40 million. Well, we were targeting a $20 million at first close and a $30 million second close. And we had only raised $10 at the time, but we committed a million dollars. We committed 10% out of the gate with Kustomer.
Turner Novak:
But I'm thinking your first capital call, you probably called 25% of the fund or something.
Ed Sim:
Pretty much the whole thing.
Turner Novak:
It was like all the money you had to invest at the time.
Ed Sim:
We literally made a 10% bet right there, and we're like, who knew if we were going to end up raising more than $10 million? But we did it anyway.
So that was the beginning of Kustomer. And then Guy came back from Snyk to start his next, and I told that story earlier, but we ended up putting a million dollars in that round, in his initial founding round. And then we also got BigID as well.
Turner Novak:
And this was like 2015-ish.
Ed Sim:
Yeah, 2015. All three were 2015. Kustomer, Snyk and BigID, which also just announced their last round at a billion. And then we did Blockdaemon, which is a crypto infra company, not selling tokens, but really pure infrastructure selling into financial institutions.
Turner Novak:
You told me there's a long journey with that one too. I remember when we first met, you were telling me about that one. What happened there?
Ed Sim:
Oh, it almost ran out of business three times. I mean the crypto winters and everything else, but we funded, I think at $3 million pre, we put $300k in at $3 pre, and I'm still on the board there. And the last round was raised at the height of crypto was at over $3 billion evaluation. But let's just say it's not $3 billion and it's not $3 million, but the company's doing very well, quietly. And the founder is fantastic.
But those all came out of fund three, because we did not have to wait for someone else to say, "Hey, Ed and Elliot," not only like the founder, but I also believe your thesis too. It was just us. We were going to sink or swim on our own. And that was the beginning. That's what I call inception investing. And it wasn't called inception investing then either, but that's what we were doing. These were people with ideas, with unique insights. And that set the standard for later.
Turner Novak:
And then fund four, you said that was the hardest to raise. I hear that from a lot of people actually, fund four is really hard.
Ed Sim:
That fund four was so hard for us, because fund one was 2010. It was almost like a friends and family kind of group at a million dollars, or maybe you could say maybe that wasn't a fund. Fund two was $16.5 vintage 2013, fund three was vintage 2015. And in 2018 we were like, okay, we need to raise more money to keep investing, because I feel like this is starting to work. And we always wanted to step up a little bit higher. We wanted to almost have our first close be the size of the last fund. So we put $75 in the cover, $40 million first close, so past halfway. And man, that was brutal.
I'll tell you why it's brutal, because people don't realize how long it takes to figure out if a company's good or not. I mean, when you're investing in inception where there's no lines of code written, I mean, so you're talking about companies are two to three years old, I told you earlier how Kustomer-
Turner Novak:
Seeds like three years old.
Ed Sim:
All those companies Blockdaemon had seven seed rounds. So Blockdaemon, Sneak, Customer, BigID, our best companies had no other A round investors sitting behind validating what we're doing. And yet we're pounding the table saying, "These companies are awesome. Check this out. It's moving in the right direction."
Turner Novak:
But on the flip side, you were able to invest a little bit more in the companies and own more for your investors.
Ed Sim:
We owned a lot more. Yeah. And so think about that challenge. So we didn't have outside validation. And frankly, if you want to get real institutional LPs, they like to call their brother and up that they've backed before and say, "Who are the ones that you're following? Who are the ones that you want to get deal flow from?" And we didn't have enough of those at the time.
And so that fund took us, I don't know, two years to raise probably. I mean, I think we didn't get it closed fully until end of 2019 or somewhere around there. And seven closes we almost had, didn't even get our first close done.
So yeah, and I tweeted about it in the past. I'll have to go find it at some point in time, send you a link, but it was probably one of the most painful experiences where I didn't even know if Boldstart was going to keep going on at some point in time.
Turner Novak:
Wow.
Ed Sim:
Because We had a hard time raising capital, because people didn't believe in enterprise infrastructure. We had wins, but not enough proof points. The world centered around Silicon Valley.
Turner Novak:
So it was kind of the same, it was story?
Ed Sim:
It was, it was, but we were leaning around, we're in the boards, but yet these companies didn't inflect enough at the time to prove it out. And then fund five was a different story, because by then a lot of the companies just hit inflection and they all raised a bunch of capital, but it was the value of death, man.
Turner Novak:
So what did you do right? You obviously had people that came in. What did the total fund size end up being, and then what actually worked to convince people you guys were doing a good job?
Ed Sim:
We eventually got it to, we got a first close of $40 million, and then we got to $75, then we got to our cap of $100 million. And finally after we had gotten to the hundred, and this was kind of much further down the line, some of the companies, like Kustomer, had raised a big B round, or Snyk had raised a big A round, I mean from Accel London. And so, a bunch of these companies started proving out - BigID had won the RSA Innovation Sandbox. And so, they were kind of moving and they closed a big A round.
So all the things we were saying, we're starting to get outside validation, which was important for institutional investors to see if we were kind of decent. And so, that all changed. And then finally at the end, we got in two more institutional investors into the final close of fund four and expanded to $112 million.
And then we added an opportunity fund of $45 million as well to continue. Because we're on these boards, remember, all the way through from inception to scale. And we figured with the amount of time we're spending with these founders, and we do have unique insights, we should continue investing our pro rata through IPO. And so that's kind of what we did.
Turner Novak:
So just in terms of, at this point, it sounds like you've kind of figured out what works for you with fundraising, just how do you approach it, just relationships with your LPs, what works, what doesn't work?
Ed Sim:
Yeah. I'd say that fundraising, first of all, there's no fun in fundraising.
Turner Novak:
That's fair.
Ed Sim:
That's a misnomer. We were very bad at fundraising. I mean, honestly, I told you even fund four, we had seven closes until we weren't. I think it's a practice, it's a skill that you need to build. And there are a certain class of LPs that I knew would not fund us, even when I was out raising in my million dollar fund back in the day, that I would talk to every year. It would be the annual no call.
But it would be also one of those things where I wanted to learn how we fit into their process, or how they thought about the world. And also wanted to show them that every year here we are, we're making progress.
Eventually a lot of those dots aligned by fund five. We were like, oh man, actually you've been doing exactly what you said you're going to do for a very long time. And actually it's starting to show results, because of those firms that we back already that we believe are the best firms out there are now backing your companies.
Turner Novak:
You're cost base is lower than theirs.
Ed Sim:
Exactly.
Turner Novak:
So you must be doing something.
Ed Sim:
So it took a very long time. So I think you need to structure it like any sales process, and you have to think about who are my long hauls? Who are the ones that are going to take me one, two, three years, who are my big enterprise deals, my JPMorgan's, my Goldman's, but always have those on the table. You want have those whales always out there just to keep them informed, but that might take five years. But have those calls and learn from it.
Then you have your middle bucket where you're kind of like, maybe I can close a third of these, and maybe two thirds I can't, but they can write bigger checks for me. And then you have your bottom bucket, which would be your easier, faster closes. Those would be your smaller checks.
And always as you are out in the world, after you close your last fund, you know what the best time is to raise your next fund? It's the day after, right? Because it's like you just closed and you have scarcity now, and just-
Turner Novak:
There's no pressure.
Ed Sim:
And then what someone told me, I remember Sunil from Amplify who had gone out and raised some bigger funds ahead of us. He was like, "Look Ed, on every trip, just always make room and find that whenever you get on the West Coast, just meet an LP." So that was the one thing that he had told me.
And the second thing that I learned was that as you get and build relationships with some of the firms that come in after you, you should always ask them like, "Hey, do you have any LPs looking to come in on the earlier stage? Can you make an introduction or two?"
So it's really leveraging that whole community around you of people that you work with and do business with that know you really well, and that, plus it's just some good old elbow grease and just not-
Turner Novak:
You have to work it.
Ed Sim:
Yeah. And so it's a process.
And then my best LPs, I just was telling you, one of my LPs was just texting me right now about something. We text each other, like my LPAC, text communication. We'll share stuff with them. I'll ask them for ideas, because look, they have seen many more funds than I have. Just like when a founder talks to you and asks you about pattern matching about things.
So I try to say, "Hey, how would you think about this?" Or, "What do you think about fund size?" Or, "Should I take this full pro rata from my series B and put the whole thing into the current fund? Or should have put something in the opp fund, this is how I'm thinking about it.
But those are some of the LPs that you would hope that you have honest relationships with, that you can have those direct questions or who might even tell you, "What are you guys doing?" But in a way that you're like, "Yeah, let me think about that."
Turner Novak:
Yeah. And you trust them too to give you just the right kind of advice or well thought through just feedback and things.
Ed Sim:
Yeah. And my running thought process is, we weren't at a place for the first four funds where we could actually think carefully about who we were making money for every single day. Because ultimately it comes back to people give us money, we need to return money to pay for things, whether it's scholarships or foundations or charity grants or things like that.
But as we've moved along, we're now in a position where we can think about, gee, what's the causes we wake up with every morning? And that's kind of a nice place to be, but whatever you do, do not get into a place where you will look back and say, "I shouldn't have taken this money." Even though it was money that you needed, don't ever be in a place to cross over any lines or do anything like that. That would be the other piece of advice I'd give.
Turner Novak:
Yeah, you would just say just smaller fund.
Ed Sim:
Yes, exactly.
Turner Novak:
Makes sense.
So you mentioned this company, Kustomer, a couple times. People who are students of the game, they might recognize this name. There's kind of an interesting story that happened to them. They got acquired by a company. Who acquired them and then what happened next?
Ed Sim:
Kustomer, Brad and Jeremy had built a pretty amazing company and Meta bought them. And basically it was quite interesting because they had the next generation customer support software based on this data infrastructure with kind of the person at the core.
And Facebook or Meta at the time was thinking about, gee, how do I tie together all my messaging platforms from WhatsApp to Facebook Messenger to a bunch of the other things so I can offer my small businesses? Remember they're creating pages for small businesses and people are doing commerce on Instagram.
Turner Novak:
That's been a big thing too. Even WhatsApp, I know there's tons of business in WhatsApp.
Ed Sim:
So we're integrated with all those things. And so it made sense. And the interesting thing is I think it took 18 or 19 months for us to go from signed term sheet to venture closing and it almost didn't close a few times. And I'll just say because Mr. Zuckerberg was in the crosshairs of the DOJ and Ireland and the EU. So this is a very lengthy process.
Quite fascinating living through that or watching the founders live through that because you are supposedly exited and you're supposed to continue building your business, but how do you keep hiring people when you look at someone and say, are you joining Kustomer or Meta or where does this fit?
Turner Novak:
Do you have a couple tens of millions on the balance sheet or a couple tens of billions or $100 billion?
Ed Sim:
Who am I working for and what's the structure? And we didn't even know those things.
So fast-forward, it closes. They integrate into all those different platforms over 18 months. Then the financial austerity program began at Meta where they had to sadly shed a lot of workers.
Turner Novak:
This was like the end of '22, kind of?
Ed Sim:
I think so. I forget what the date is, but it ended up, I think there was a RIF of about 10,000 people and then they announced that they're going to let 11,000 more go. I'm talking about letting go 21,000 people.
And along those lines, I think they went to Brad and said, "Hey, I don't know if this was a good idea to have Kustomer." And so let's just fast-forward and say Brad and Jeremy are like, "I think there's a lot of potential here.
We're sitting on a data gold mine. We have a lot of great customers. There's this new thing called AI coming back again and I think we can leverage our data platform." Because remember I said it's all about the data. "Leverage our data platform to launch something pretty innovative." So we just launched KIQ just recently, but we have something even bigger going to be launched out at the end of this year.
So they basically picked up the phone and called three of us. So Battery and Redpoint who were in the B and the C rounds and us. So the three of us went back along with the founders and we were able to buy back Kustomer from Meta, which I've never seen that in my history of having the opportunity of doing this for 28 years is have the opportunity to buy a very nice business back. We'll just call it at a different price.
Turner Novak:
Yeah, interesting. Okay.
Ed Sim:
That's how I'll leave it at that. At a different price. That was a financially responsible price in which we could build off of.
Turner Novak:
Interesting. So I'm just curious then-
Ed Sim:
And Meta will be fine by the way too, because they still own a chunk of the business.
Turner Novak:
Nice.
Ed Sim:
And if we succeed, they'll do fine. So I think it'll work out for everyone.
Turner Novak:
So the way you structure that deal is you have three new kind of equity partners coming in. Meta still gets their share. Did the founders grant them some new shares, something? What all can you share about how to structure something like that?
Ed Sim:
I would say because the founders are the most important piece and their employees are the... Founders and employees, the people who are doing the work are the most important piece to make sure that they get rewarded for everything that's happening. And we were just there to help structure everything along and move along. But it's kind of weird being a startup in which it's a scaled startup again.
Turner Novak:
Yeah, it's fascinating.
Ed Sim:
Yeah, it's been a fun process kind of working with the founders and they're as hungry as ever. I mean, as I said, they had done a couple other customer support startups before that. Kusty 2.0 is kind of what we call it right now is kind the new journey we're on. But yeah, that's been fun.
But I think what's interesting though is that you've probably heard founders that you've backed previously coming back. In my mind, an NPS score. And you talked about being founder friendly earlier. As I said, founder friendly doesn't mean just saying yes to everything. It'd be like being a father and saying yes to everything that your kid does. That's not being a good parent, because what you want to really do is help them eventually be on their own and have good values and everything like that.
And so I think the best NPS score is when founders can go anywhere, especially after they're successful with an exit and they come back and say, "Hey, I really enjoyed working with you. I'd love to do it again." And that to us means the world to us.
So we had the chance to back Rahul again from fund one. We had a nothing fund man, and we had a million dollar fund putting a $100k check in Rahul. But I remember when he was going through the acquisition process, we're there for him helping him think through it all. And this goes back to the theory of founders saying, "Hey Ed, I don't need $5 million to start an enterprise software company, even a couple hundred grand check, I want someone that can add some value around it." And who's willing to do that? No one.
And so fast-forward, backed to Rahul again, we backed Brad and Jay again, we backed Guy again. And we have a whole list of others that we've had the chance to. But I think it's important. This stuff takes a long time and maybe the first time, even the first time might not even work out. But you learn so much together that maybe the next time that a founder starts a new company together, you're like, "Oh yeah, take all those learnings and let's go. Let's do this again."
Turner Novak:
One thing I really wanted to talk about was you have seen a lot of companies try a broad variety of go-to-market, top-down, bottoms-up, everything in between. How do you usually just advise a founder to think through that?
Ed Sim:
Yeah. Well I guess a couple of things.
First, I like to think about there's no one right answer and one right playbook because it really depends back to my five P's about what pain, what problem you're solving and for who? And how are these folks going to discover you? How are they going to use you?
And a lot of times too, you need to think about who the user is versus who the budget owner is. Who's going to pay for it. because It could be two different people.
So let me give you an example. The first thing I think about is when you're building product you should think hand in hand with is who's my ICP, my ideal customer profile? What other software are they using right now? How do they get that software? And sometimes what you're competing with is custom-built, like how are they building the product themselves? And so that's part one. But I think how you build your product has to align with how you think about your initial go-to-market.
Turner Novak:
So they should be hand in hand. The product and go-to-market should be the same thing almost.
Ed Sim:
Exactly. And for me, no matter what you do, whether you go top-down enterprise sales, like a BigID, which also has varied motion or you go bottoms up like a Superhuman, the friction and time to value are going to really matter no matter what.
So if you always build for the idea that I want to create the least friction possible for someone to interact with my software and get to the aha moment, and by the way, there'll be varying degrees. It could be seconds, it could be minutes. But if you can deliver that relative to who your competition set is, your competitive set is whether you're selling top-down or bottom-up, I think that'll give you a leg up, number one. Make it really easy to use.
Turner Novak:
So you're saying you should have the fastest, most valuable product for the customer compared to the other things that might be not-
Ed Sim:
Or getting the aha moment the fastest. Getting the aha moment the fastest and then eventually over time you think about what moats to build and how much value you bring. But that is very, very important. And once again, it's going to vary depending on how big a ticket.
Second thing is, you should also think about ticket size. Once again, it goes back to who you're selling to because if you're going to sell into very expensive long sales cycles that take six months or nine months, you better have a ticket size that matters. And if the ticket size is not $100K, $200K, then maybe you're going to start with a $50K entry point in which it's easier to use, but over time there's an ability to expand it over time to make that worthwhile. So you need to think about that.
Turner Novak:
So basically the larger the contract, the longer it'll probably take you just generally speaking.
Ed Sim:
Yep, yep. And so a lot of times you might do is just maybe you start with a smaller kind of land and then you figure out, can I expand this over time, over two years?
Turner Novak:
So we want to get these guys paying us a million bucks, but we're cool with $10K, just a couple credit cards, start using it and we'll get you later basically.
Ed Sim:
Exactly, exactly. Yeah, exactly. Or I'll give you an example of Snyk. We just knew right now, we knew we weren't going to try to monetize it initially and we didn't know where the budget would come from. The bet was would it come from the developer budget or would it come from the security budget?
Turner Novak:
What's the difference between those two things?
Ed Sim:
The developer budget is the budget for tooling like GitHub and Atlassian and all those tools that developers use.
Turner Novak:
And that's an individual can just basically say, I want to try this out?
Ed Sim:
They can swipe a credit card. But eventually what happened with after ZIRP was every one of the credit card swipes got eliminated, because people wanted to rein in kind of all the different software people were using. But let's just say that the lowest common denominator was add value for developers.
And then once three, five, 10 people were using it, this would be more of a bombs up motion. You go do a team model and the team model costs more. And then eventually if you expand between over 10, 15, 20 people, you go to the enterprise model, it's the call me model in which we start figuring out how do I figure out pricing?
And so what we learned was that, obviously now the business is, it's mostly the security budget. And that's a very, very big budget right now and that's where a lot of pain is.
Turner Novak:
Why is that?
Ed Sim:
I mean, look, the security vulnerabilities every day, I mean, how many credit cards do you see getting swiped every day? The velocity of software being developed right now is absolutely off the charts.
And now you have this new thing called AI generated code. So now you can have even more code being generated.
But think about this, if you're using the same data model to run your LLM over to create new code, and if you're running it over code that is suspect in terms of vulnerabilities there, you're probably going to have more less secure code being generated.
Turner Novak:
Oh, so you're training your new code on the sus code that makes all the code kind of... Yeah, okay.
Ed Sim:
So our thing at Snyk would be, hey, you might need an AI guardian to keep up with the speed of software being developed. Meaning that first thing you should do is scan your code for vulnerabilities before you run the model over it to generate code. So it's going to be more secure code.
And then secondly is with all the other code that you have, is that you want a security guardian that's going to use different data models, and it's something that we've built over nine years to help you secure that stuff.
But the point is is that that area, it continues to grow, but I think we're diverging. The point that then I think about is that the sales don't hire a head of sales right now. The founder needs to close those first 10 deals. They need to experience, because what happens is maybe the first two deals are you close it a certain way, the next three, you close it another way, and the last three, you close it another way.
But if you're going to hire someone after the model of the first two deals you close, that may not be the right person by the time you figure out what it is that you're really selling, how to sell it and everything else.
So we are always really keen on riding shotgun with the founders saying, hey, get those first 10 closed yourself. Figure out how it works, figure out what doesn't work, figure out how you can improve the delivery time to value for someone, and then what dollar you can extract. In fact, no really great salesperson is going to want to join because the best salesperson is the founders, but no great salesperson is want to join unless there's some customers on board.
Turner Novak:
So then how do you know is the 10 customers that's the magic moment or is there other things that tell you now’s time?
Ed Sim:
Yeah, that's a great question. Once again, I think it's kind of more art than science. There's no magic number. I just kind of throw out the number 10, but I think it's enough learnings that you have in terms of what you have to ask yourself is if I bring on one or two reps, do they know exactly the person that the ICP that we're selling to, what the value proposition is and how to reach them?
Turner Novak:
So do you almost want to have a playbook that there's enough plays in the book to cover all the use cases? Is that a way to think about it?
Ed Sim:
Yeah. And by the way, a lot of times the companies that do really, really well have an inbound mechanism from the content they're generating and everything else.
I mean, I'll give you a good example, Protect AI right now, we helped get that company started. We led a round with the Acrew Capital.
Turner Novak:
Yeah, you basically backed them at a conference. He was given a speech and everyone was like, "What is this crazy guy?"
Ed Sim:
Well, we knew Ian. The funny thing is that story, we knew Ian for 10, 15 years and I only sold a company to him. And he also had started another company that he sold to Oracle in the data science space. It was a long history and we just hadn't seen each other in a while.
And then I was like, "Okay, I know who he is, I know where he's going." And he happened to be in this conference and we're kind of in this small group together talking about AI security. And everything he's saying was resonating with me, reminded me of the early days of Snyk. And I texted him, I'm like, "Yo, let's go chat." And so we literally went out and I'm like, "Let's go do this thing together." And we iterated together with three months.
But the point is all their leads are coming inbound. And so they're vetting it in and they're doing all their sales together. So you kind of know from that perspective as well. You're getting so inundated that you need help after you figure out how to close deals.
Turner Novak:
So how do you know when you should do a content driven strategy versus it's just not going to help you, it's not worth it. You should be doing just going to the CSO, signing a deal that way. How do you know in the beginning, should I do this or should I just take a completely different approach?
Ed Sim:
I think they both go kind of hand in hand. I mean, usually if you're creating a new category, you're going to have to get out front and talk about it.
Turner Novak:
So you need educational content out there.
Ed Sim:
Exactly, yeah. And so that's to be part of your story. And usually it's a story of a company too. Companies that can do it really well can create a nice community around all that.
And of course, underneath it all, you have to do some direct reach outs as well. If you're selling bigger ticket items and you do reach the CSOs and the other people that you know who are willing who might have this problem.
And typically, by the way, a lot of the founders that we back, I got to be honest with you, they already know the first five or 10 customers they may go after. Because once again, it goes back to they know the pain, there's no solution that they're happy with about it, and they actually go about automating that process or building it, and then it's about what the next 10 look like after that.
Turner Novak:
So you mentioned, I know we want to get into this, just how AI is changing enterprise software. I mean, everyone knows about AI at this point. How are you thinking about it and how would you just advise founders? They're like, oh, they're exploring, they're building in the space, high level, what should we think about?
Ed Sim:
I've been around long enough to see kind of the internet boom, I saw the mobile boom. Are there internet or mobile companies anymore?
Turner Novak:
No, I mean-
Ed Sim:
It's a technology and AI is a technology and it's an amazing technology. And frankly, I feel like the first wave was probably back in 2017 or something, 2018 when people were laying the groundwork for data infrastructure in order to run and create their own custom ML models.
Turner Novak:
I was going to say it was a lot of machine learning stuff.
Ed Sim:
Exactly. So it was machine learning. It's even a rules driven stuff. I mean, if you look at Amazon Alexa, it's all rules driven natural language processes. If this, then that, that was the kind of what AI was, state-of-the-art, more machine learning.
And I remember back in the day, Ginni Rometty, who was CEO of IBM, had issued out this creed called Watson's Law. Anything that can have AI in it will have AI in it. So that was that. And so fast-forward, it was kind a prescient thing because the idea was that there'd be ambient AI. As we walk around, it's telling us like, oh yeah, here's the weather, or try this. You're near this or whatever. It thinks for you.
Turner Novak:
Maybe the microphone that we're talking to might have AI, and be like, "Ed, you should lean in" so it picks up the sound better or something.
Ed Sim:
Exactly. Because you keep telling me that haha. It's a Turner AI.
But the point is that I think we're kind of here now, and I remember Satya when ChatGPT came out, he was in his earnings call. He said, "Look, AI is a technology that we're going to embed in every single software application." That was maybe 18 months ago. Guess what? He's done it.
So I think about AI, it's going to be absolutely game changing. I think it's going to be as big as the internet and mobile. There are going to be some iconic companies built where there's going to be more money made than kind of lost. However, the number of companies that make the money versus the number of companies lose, I think it's be you're going to have so many more loser companies-
Turner Novak:
Really?
Ed Sim:
Versus the winners.
Turner Novak:
So is it similar to what it was like in cloud or mobile or internet? Or is it like-
Ed Sim:
Oh yeah, I think there's going to be some massive winners that take a lion's share of the earnings and that there'll be thousands of companies, as Elliot says, on the road to Baghdad just to get killed on the way trying to build an AI thing.
And the only thing I'd advise founders is this, is that I don't think of ourselves as AI investors. I think AI once again is just embedded in all the software. If I look at our existing portfolio, I think 80% of the companies already have some AI offering, whether it's more significant than others, it just depends. But everyone's got some AI thing.
And in fact, any new founder that we see, first, they're going to start with, "Hey, this is the pain I'm going after. This is the problem I'm solving. Here's my unique insight." And usually they don't even bring up AI until 10 or 15 minutes into it, because they're so enamored with the problem and how they're solving it, and AI happens to be the right way to do it.
And so that's kind of what I like versus, "Hey, Turner, I've got an AI for this, or an AI for this." Or, "Hey, I've been thinking man, vertical markets are the thing. Let me create an AI for veterinarian clinics. I need to know when my dog walks in the door." It's like, yeah, I could see that, but I don't know. I mean, is that overthinking things? Yeah, so it's just going to be everywhere we go.
Turner Novak:
Yeah, it's kind of like if you were to describe Uber to someone, you wouldn't say it's a cloud-based mobile-based taxi or whatever. You'd just be like, you press a button and a car shows up and you get in it.
Ed Sim:
Exactly.
Turner Novak:
But I mean, I guess at the time you could say it's cloud, it's mobile. Uber wouldn't exist without mobile to have drivers in the car with their phones knowing where to go, connecting us. And if the cloud doesn't exist, I'm sure Uber probably wouldn't have even gotten started.
Ed Sim:
And by the way, do I need an AI enabled Uber or maybe my phone's listening and the second I walk out the door that Uber would already show up?
Turner Novak:
Yeah, that's right.
Ed Sim:
Uber's going to do that. Versus me creating the, I'm going to create the new AI for Uber, the new next gen, I don't know, what does that mean?
Turner Novak:
So you kind of think about it in terms of-
Ed Sim:
First principles.
Turner Novak:
There's a problem that can be solved and just what does the product end up looking like, or what does the form function or form factor of this new thing that's solving a problem? And it just AI enabled this to happen finally.
Ed Sim:
And everything usually has AI in it.
But look, I mean, Protect AI, we're kind of leading right now at the moment, it's very early, but we think of ourselves as one of the whole product solutions for securing all the AI you use. Clearly that wouldn't exist if AI wasn't a thing right now and people aren't deploying it. So I guess that would be an AI enabled thing.
But once again, it's very similar to, it's a security company. It's, what problem are you solving? It's pretty clear that anytime there's a new technology that comes out, that creates a new attack factor for hackers, and you're going to have to secure that.
Cloud security right now is still a very big thing. You see Wiz, I mean, that came out of nowhere over three or four years because cloud became so dominant in terms of how people architect things. And the hackers kind of go after that. Now it's DSPM which is data security posture management, it's a derivative of cloud.
And now you have AI security. Well, thankfully we're able to partner with Ian who saw this back at the end of 2021 before ChatGPT even came out.
Turner Novak:
So I can't remember who told me to ask this question. Oh, it was Guy. He was like, "You just have done a really good job building a great team, great culture at Boldstart."
How do you guys think about that and why do you think you've done so well as just building such a diverse, broad team? You're all kind of remote I think at this point. How do you think about that?
Ed Sim:
Yeah, I'd like to think about, some of it was just kind of organic in terms of how we thought about it. And the first principle I think about is that a lot of people don't think about a venture investor as a operator. I kind of think about “what is it that we do?” Our job is to find founders and serve founders and do the best we can at that. And then the question is where are we doing it in inception stage?
So the third part is, how do we find people that understand that, that love it, that live it, and then also can add the value that we want over time for those founders?
And so when you think about it from that lens, the next question is, what do you want to be as a firm? How big do you want to eventually get?
And the thing for us, when we sat down and thought about it, we're like, we don't want to get too big. We always want to be in this inception stage swim lane. I don't want to get into A rounds. I don't want to get into B rounds. We're just going to stay, we want to try to be the best at what we do in the lane that we have. I'm not going to deviate. So when you think about it that way, then you think about, okay, what do we need to do? We see lots of great deal flow, I think we need to add some more partners.
Turner Novak:
Just to see more or service the founders?
Ed Sim:
To service the founders more and better. And so how do we go about that process? Well, you could either hire someone from outside, you can hire some established people from the outside that have a great track record in building enterprise software. Which could have been just fine for us, who brought their new ways of doing things, and probably would've made it easier for us to raise capital too. They probably would've brought in institutional asset base, because none of the four of us have come from your traditional institutional places where people are like, oh, I'm just going to blank check that VC fund. Everything was done from the... So we brought in Shomik Ghosh.
Turner Novak:
Yeah, it was working in LP, right?
Ed Sim:
So he was doing direct investing for one of our LPs at Top Tier. And what I found about Shomik, once again, it's about the passion for serving founders. And every time I get together with Shomik in San Francisco, he'd be like, "Hey, Ed, I love these three startups. And he like would love to meet these founders."
And every time I showed up in San Francisco over a period of few years, I'd invite him out to hang out with founders. Pankaj from FortressIQ or Rahul from Superhuman or whoever it was out there. And then eventually I'd get a note two weeks later that say, "I love that guy, Shomik." I'm like, "What do you mean? I love him too." He's like, "Oh, he introduced me to these three potential hires in his network." And it kept happening over and over again.
And eventually Shomik was like, "Hey, Ed, I'm thinking about wanting to do earlier stage stuff." And I'm like, "Man, this is really tricky here, because I don't want my..." at the time, they were my only institutional investor at another massive family office called Knollwood in there as well, who was my first key one.
But I was like, "All right, let me talk to them first." Because I had to ask them, get their blessing. I said, "You talk to them first, we'll get their blessing. Let's work this out." And we knew clearly that Shomik knew markets. We knew clearly that he was a great later stage investor. He had great frameworks. He had a great interface with founders and he loved-
Turner Novak:
I feel like he has good intuition, I feel like.
Ed Sim:
Yeah, and he was super passionate about it. We're like, okay, so are you willing to come join us? Move to New York for a couple years and just learn kind of the real art of it, because Elliot had served next to me. I feel bad for the guy, he served next to me from 2010 on. We sat in a little desk this big together for two years in an office. So I think about it as an apprenticeship business.
And so Shomik came out, he moved. He moved out, we got the blessing. So then that was Shomik, and we're like, how fast can he learn how to look at a founder in the eye and learn what makes a great founder or not?
Turner Novak:
Because he was used to series B, C.
Ed Sim:
And seeing some more data and things, but he had that intuition. I knew he did. He's killing it. And then Ellen, they're like, okay. So then eventually we're like, okay, we need a founder perspective here.
Turner Novak:
Because none of you had ever actually started tech companies.
Ed Sim:
Exactly. Yeah. I was like interim CEO of a company for a couple months that went bust in the early 2000s, which was a painful experience. And I have empathy because of that for founders and what they need to do.
Turner Novak:
I'm going to ask you about that next.
Ed Sim:
Okay. And Ellen, we had backed previously in fund three, Ellen Chisa, and she was a product person, founder and CEO of a company called Darklang, which was rebuilding DevTool infra and raised a bunch of capital.
And she was kind of looking for her next thing. And we said, "Hey, Ellen, why don't you come join us as Founder in Residence?" "Well, what does that mean?" "I don't know what it means. You can create whatever you want." But we knew that she had deal flow. We knew that she was plugged in. We loved her.
Turner Novak:
Even if she didn't ever really want to join, it would be not good.
Ed Sim:
"Come in for a year. Let's figure it out." So she came and joined us and a year into her journey, she brought in angel deals. She helped us with content marketing. She helped us with, she would advise on product, because she's a product person by background, and she's super technical and she added tons of value. And eventually she starts writing angel checks. I'm like, "This is great, write checks." And eventually she's writing bigger checks.
Turner Novak:
Personally?
Ed Sim:
No, through the fund. Through the fund. All through the fund.
And eventually we're like, Ellen, I think we're coming up on 18 months. Just curious, what do you want to do?" She's like, "Oh, I thought you already knew." She's like, "Because I'm writing these bigger checks, and when you join these boards, I thought I was basically expressing my interest in becoming an investor." We're like, "Oh my God. Great."
So now we have the founder product person, and we have Shomik. And it's funny because the two of them learn from each other too, because they have completely different perspectives, because she's very much ... she can go dive as deep as you want into the technical weeds. And Shomik came from the zoom out perspective, zooming in, and she's learning to zoom out.
Turner Novak:
Yeah, I feel like Shomik has a lot of public market background. When I first met him, that's what we connected on, he was talking about public companies. And that's actually how I first got into investing. I didn't even know startups was a thing so that you could even invest in, it was just like, "Oh, there's a stock that you can buy and you just understand how the companies work and what makes the stock price go up basically, based on the underlying fundamentals, the product."
So I feel like he has a really interesting perspective there too. As an early stage investor, he understands what do the public markets want to see, which is an interesting thing to have.
Ed Sim:
I think that's really important sometimes because as I said, you have to have the ability to zoom in, to understand how are you making the end user's life better, like 10x better. But you also have to zoom out and say, "How does this become really, really big?"
So he has that, and he's learning the zooming in, and he's been learning the zoom out. So together it's been really interesting and they're killing it. I can't wait for people to know some of the new deals that they've led. So really excited about that.
And then we're like, "Okay, what else can we do?" So we had a head of people for a while, Natalie Ledbetter, who was fantastic for about two years.
Turner Novak:
Head of People. Is that internally, external?
Ed Sim:
Internally to work with the portfolio companies. Once again, we realized that during the ZIRP era that people were hiring and just having guidance around hiring and how to do it, best practices, all that stuff, Natalie was killer at it. And then she decided she wanted to go back more into an operating role for a company.
And then we started adding more operating partners because, once again, we realized the founders needed help. Our job we figured is what are all the things that we can help technical founders do to remove the friction so they can focus on what they do best, which is building product, talking to customers. If we can help them shave off three to five, four or five months in their journey to get their next round done, to hit milestones faster, that would create more value for everyone and there'll be less dilution over time, etc.
So then we start bringing operating partners from existing portfolio companies.So first person we brought on was a guy named AB Gupta who stuck with us for a year and then he went off to do his own thing. But he came from Kustomer, with a K, he was VP of Office and Strategy. So he came and brought some of that experience, and he would work with companies at a time.
And then fortunately, Guy had introduced us to, and we got to know this woman, Anna Debenham out of London. She was employee four or five at Snyk and worked with Guy early on the product side. So she knew what it was like and all the learnings going from a company that was very cool to a company that became a real business. And she went from employee four to employee 1,100. And she joined us as a Product Operating Partner Design. She does way more than that, and so she's been helpful to portfolio company.
And then we found Earnest. And Earnest, we did an open search from an associate position. We didn't want to hire from our own network. And so if you look at our team, if you look at the emoji colors that show up in our Slack, it's like the United Nations emoji colors. We have a very diverse team-
Turner Novak:
Because you're Korean?
Ed Sim:
I'm Korean by background. My father's from the north. My mom's from the south.
Turner Novak:
Okay. And Ellen
Ed Sim:
She's white.
Turner Novak:
Yeah, and Shomik’s from India?
Ed Sim:
Yeah. Indian by background. Elliot's white. Charlotte, who is our Head of Marketing, I think has a Latino background, which she's from Long Island, and then Earnest is black.
So we just hired the best people that we wanted. It just happens to look like that. I'm like, "Oh, this is kind of cool." It wasn't like we did it because ... We just did it. We hired the best people that fit the job. And I love this team and proud of who we are. And I don't know if it makes a statement or not, it's just who we are and when we get a lot done together.
Turner Novak:
Yeah, well, Guy at Snyk, one of your best portfolio companies, he said I think that's important about what they do, about their team.
Ed Sim:
And I'll say the only other thing that's different about us is that most founders know every person on our team. They've interacted with them. We have our active Slack channel where all the folks will chime in. So it's not like one person and you will never interact with anyone else. We're not one of those siloed models where everyone has a checkbook and just does their own thing. It's really a very team oriented thing, which is I think ... I love that about us.
Turner Novak:
Yeah. So you mentioned something that I want to hit on. You said you were interim CEO for a couple of months. It sounds like it didn't go that well. What happened there and what'd you learn?
Ed Sim:
I don't want to make any names, but I can tell you this. During the 2001 to 2004 time period, it was probably one of the darkest periods in venture capital in a long time because the public markets cratered and everyone was burning too much cash.
So basically, we had to go in and figure out what companies should live or shut down. And I spent a lot of time working with founders trying to work through their models of how do we keep this going? How do you pay the rent?
So we had actually one issue with a portfolio company where they were struggling and we had to go in and work on some cuts and there was a personnel issue. Let's just put it this way with someone. And I basically had to go in as interim CEO because I was the closest to the company at the time, and I spent two months flying back and forth to the West Coast doing some stuff, until I found my replacement, which is one of my friends, Jim Pitco, who had introduced Elliot and I back in the day.
Turner Novak:
Oh, amazing.
Ed Sim:
So he came in and ran it. He was a technical guy wanting to show his CEO chop. So he ran it and he got a nice exit for us.
But man, that was quite an experience where you actually have to let people go and people talk about how to pay my mortgage or how to pay my private school tuition. So it really gives you some empathy in terms of reminding founders that the goal is not to hire as many people as possible. The goal is to have people be as efficient as possible because you don't want to be in a place where you overextend yourself and then you've got to go cut people back, and cut people back and cut. It's just not a fun experience.
So having seen the worst of it, I think helps me understand and talk to founders about this is all the things that could happen. And then I know like, "Hey, we're growing. Let's go do this, but let's just walk through what the counterbalance points could be and just think about it." That's all.
Turner Novak:
In terms of then it sounds like that's also ZIRP basically what happened in last couple of years.
Ed Sim:
Back in the day, past couple of years that was, yeah.
Turner Novak:
Did you learn anything maybe different this second go round of too much capital, or is it the same lessons?
Ed Sim:
It's kind of funny. It's similar lessons with a different experience. Because during the ZIRP days, the public market, and everything starts at the public market and goes down. It was rewarding growth at all costs. It was rewarding 100%, 150% growth. The multiplse, the forward multiples, if you look at the indexes, I think it was 37.5x forward for the highest growing companies, forward multiples. And people didn't care about burning cash.
And so if your goal was to create a very big business, and eventually go public, then over time as you scale, you're going to model that. And the difference between the ZIRP era versus the Internet era was that there were real customers with real revenue.
What we didn't realize at the time was how much pull forward revenue there was from people buying extra seats. I just remember, for example, I sell you a contract and it's like, "Hey, it's a million dollars, but if you double the amount of seats, you'll get a massive discount and maybe it'll be $1.3 million." "Oh, great, I'll buy the double seats because my company's growing so fast." That's what happened.
A lot of that happened during the ZIRP era. So it was real revenue, and you're making a conscious decision to actually get the premium multiples. And so that filtered down into the growth company, into the growth markets and the growth people were funding that.
I'm not saying it was the right thing or the wrong thing to do. Clearly, it's the wrong thing to do. That was the game on the field at the time. Clearly, it was the wrong thing to do now, but that was what was getting rewarded in the public markets until it stopped, until the music stopped.
And yeah, I guess what we could have all been a little bit more sober about that process. But then you weren't getting rewarded. If you were growing 60% and your competitors growing 200%, but burning three times as much cash, they're going to be valued more triple valued versus you, you're a slow grower.
Here's the irony of it all. I just tweeted out the other day, my friend Rob Bartlett, who used to be at Goldman infra, now he's the head banker at Guggenheim Securities. Six months ago he called something called the death of hypergrowth, and hypergrowth to him were publicly traded enterprise software companies that were forecast to grow greater than 40% in the next 12 months.
So that was six months ago. There was a death of hypergrowth, no more 40% growers. He just sent an email out to his mailing list earlier this week called The Death of High Growth. High growth is enterprise software companies poised to go greater than 30% in the next 12 months.
Turner Novak:
There's almost none above that, right?
Ed Sim:
So then take leap a step below, who are companies growing 20% to 30%, now there's 25 companies forecast to grow 20% to 30% in the next 12 months.
And you're like, on the one hand, it's a death of all these companies, but if you think about it's also one of the biggest opportunities ahead. And here's why. Because now the public market's saying, "Gee, I need some high growers again."
So the companies that are growing in the 30% plus range that are private right now, who are cashflow breakeven, so very similar profiles to the companies that are there today. They're going to be pretty attractive when they decide to go public. Let's get through the election, let's get through the rate cuts.
But when this next batch of company comes out, there hasn't been a lot enough product for Wall Street to buy lately into high growth. And so now you're more attractive because you're a profitable company growing 30% to 40% a year, and you're not compared to a public company growing 150% a year burning lots of cash.
So now if you come out with a profile that you're profitable, and you're growing like that, you're going to get a premium valuation. So I think we're going to see a massive unlocking sometime next year.
Turner Novak:
So you're not getting the 37x multiple, but you might get 20x instead of 12x, or whatever.
Ed Sim:
Less.
Turner Novak:
Okay. Well, whatever's reasonable.
Ed Sim:
I guess I say 10x to 15x at your best forward multiples versus eight. Look, there are still some public companies now trading at 12x to 15x. But yeah, I'm just trying to balance that.
But look, that has implications for everyone in terms of what entry price do you come in at? When do you exit? When do you take some money off the table? If you're not going to have a $50 billion company that doesn't deserve to be 50, those companies are worth 50, are probably worth $10 to $15 billion now.
Turner Novak:
But it's like they're worth that. It's a real business. They generate cashflow.
Ed Sim:
It's a real business generating a billion dollars of revenue. These are real businesses. Even UiPaths, you see, they dropped 30%, but they're-
Turner Novak:
It's not like 15% or 30% of people stopped using their product, it's just-
Ed Sim:
They're doing $1.3 billion of revenue. It's a real fricking business. They have $1.9 billion in cash on the balance sheet yet their market cap was at $6.9 billion. So their enterprise value was $5 billion after the last week's-
Turner Novak:
And they have no debt, I'm assuming too.
Ed Sim:
So anyway, so I don't know. I just think perhaps there could be a massive adverse reaction. And I think I always think about it, where's the opportunity. You can't always look at the glass half full perspective.
Turner Novak:
Yeah. What's something that you would say, this is a sign that's gotten out of hand, in either direction, we're being too excited, we're being too generous, we're being too critical. Maybe the UiPath, whatever those numbers backed into 3X forward revenue based on backing out the cash top and bottom.
Ed Sim:
Yeah, I'd say definitely UiPath in the sense that, and they're investing, they're going to buy companies. There's an AI threat.
I'd say on the other hand, man, the amount of money pouring into these AI companies into coding copilots and stuff like that right now, is absolutely bonkers. Limited revenue, no revenue of raising at $1 billion, $2 billion valuations.
That's like playing Russian roulette. Someone's going to win, and the person that's going to win is going to be absolutely massive, trust me on that. But there's going to be five other chambers that are shot that there's going to be other chambers that are shot that you're going to lose, as well.
Turner Novak:
So then when you're thinking about you're doing inception stage, there's all these incumbents and there's maybe a great idea, but it's like, man, that is in striking distance of a GitHub product line extension. How do you just think through that as an investor making the bet early on?
Ed Sim:
I think that's a great question. So the thing I've written about in the past in my newsletter What's Hot in Enterprise IT/VC, but is basically what are the second order effects of what's happening today? So if you assume certain things are a fait accompli, then what will you need?
I'll give you an example, true to your point. Coding copilots, it's very structured stuff, just like customer support is. I'd argue those are the two most viable GenAI related products in terms of deflecting and saving money and creating more productivity.
Turner Novak:
They actually are being used. People spend money on them.
Ed Sim:
And whether you believe Microsoft, that 50% of people get productivity out of it or whatnot, but I've talked to many banks where they'll say 30% productivity. So even 30% productivity is a massive boost.
So let's just say, and by the way, there's been dozens and dozens of companies creating coding copilots. Let's just say that's a fait accompli, and maybe it gets even better. What happens next?
There's more code. There's more code being written, I talked about earlier with Snyk. There's more code being written, perhaps there's more insecure code. What are you need after that? You're going to probably need more code reviews. Code reviews are going to have to get better. So you're going to need AI to keep up with AI.
So you're going to have to do AI driven code review, and maybe grab data from telemetry trade and everything else to speed up the code review process. Why? Because humans will not be able to keep up with that.
Perhaps you need AI generated testing. Perhaps you're going to need security copilots that are AI to keep up with all the code happening being built with AI. So how do you get ahead?
And then the question you have to ask is, who are the incumbents poised to win? Or is this an opportunity for a net new company? Or is this an adjacent piece that GitHub eventually adds?
And you're going to have to look at each different market, and then you have to look at the people and say, "Can these people run fast enough to create something?"
And so those are the questions you ask. But I keep thinking about, what are the second order effects if something else is real.
Turner Novak:
So you say the craziness, you're like, I assume everyone's smart enough that whatever they're crazy about is probably true. But then, what happens after the craziness settles?
Ed Sim:
Exactly. Yeah. So that's how we're thinking because our job as an inception investor, is to be two to three years ahead of everyone else. If I'm five years ahead, then I like to say pioneers get arrows in their backs. And I've gotten many arrows shot in my backs for being too early. It's hard to time market sometimes.
But, if you get it right, the goal would be when you make that investment, people are like, "I don't believe in that." Even when we invest in Protect AI, people are like, "Who needs AI security?" When we funded that with Acrew, we're like, "Let's just make sure that Ian and D and Badar have three years of runway because we just don't know when there will be an AI attack." We just know it's going to happen.
Why? Because Ian was selling and D, and they're all selling go-to market for AWS. And the most sophisticated organizations are saying, "I've got all these models in production, let's say ML models, not GenAI models. And if I went to a CSO and said, "Do you know how secure they are and how vulnerable they are?” they couldn't answer that.
And we know that they're going to have to answer that question. And we knew that the product ideas that Ian and Badar, and D had, they were going to be able to build it. And we knew that they would get their first 10 or 20 customers just by brute force. What we didn't know is that a market would evolve, or ChatGPT would come out, and everyone's asking about this now.
So that would be an example of ... And now everyone's saying, "Gee, I think I need security for all the AI models I have out there. So there's lots of companies now, but these guys had a headstart for quite a period of time.
Turner Novak:
So it's a sense of you got to get ahead of stuff and maybe you have to get lucky too. You didn't know that it was going to get this advanced this quickly.
Ed Sim:
And by the way, I like to think about it as people are like, "Hey, what's the TAM?" I call it intuitive TAM.
It's like, if you believe that security is out there, and if you believe that if you look at concepts in the world that I'm a Chief Data Officer and I have a dashboard right now that shows a hundred model ML models in production. And I know how, which are externally facing, which are internally facing, and how they're performing.
And you take that leap of faith and ask a CSO and say, "Do you know the exposure you have on the AI ML side? Do you believe that there are going to be more models?" They'll say, "No." You're like, "Okay." And then we know that the most sophisticated customers would want one of those.
What we did know whether a hundred or a thousand people would want one of those. And so that was the intuitive TAM was like, "Okay, I could see this thing one day being a solution." And what I keep tweeting about now is that there's no AI at scale in the enterprise with that security. It's just what you hear about all the time. So that's intuitive TAM. There's no Gartner report. No one's going to tell you how big, it's just intuitive. Yeah, that ...
Turner Novak:
You know it's there. You just don't know is-
Ed Sim:
It's when, or how, or whatever. But you can intuit that if this happens, then yes, you're going to need that.
Turner Novak:
There will be a market of some kind, and we don't know if the outcome on this investment will be one, 10, a 100 billion. It will be something.
Ed Sim:
Yes. And people will buy it, and we know who those people will buy and what those will be. And so those are the bets we're making. And by that point in time, you hope two to three years from that investment that then it becomes cool enough where people start market mapping it.
Turner Novak:
Yes. So you invest before pre-market map?
Ed Sim:
Yes. I want to be on market mapped.
Turner Novak:
Okay. Yeah, that's fair. That's how I think about it too, where it's like-
Ed Sim:
I love it.
Turner Novak:
... if there's a bunch of blog posts about a category, it's probably too late, as somebody who's investing super early.
Ed Sim:
I do not have a right to win after it's been market mapped.
Turner Novak:
Really? Okay.
Ed Sim:
It's not my job. My job is not to go compete and butt heads with all of the largest firms and say, "Hey, I'm going to give you $5 million here and $50, a $100 million dollars at a time." I don't want to do that every day. I want to find the founders who are just crazy enough that they're going to try to create some new market, or reinvent something that already exists, but in a way better way.
Turner Novak:
Yeah, that's a good way to almost end. I have one final question. So Shomik said you crazy work schedule, traveling a lot. You're on tons of boards, helping all these founders all the time. But you find a way to work out, stay in shape. How do you do it, as someone I need to know, I need to get better at balancing all this stuff.
Ed Sim:
Man, God, I guess it's always been a part of my life. I was a college athlete. I played lacrosse at Harvard. I recruited to play. I played until I was 45, and after three surgeries, Achilles surgery, ACL and back.
Turner Novak:
So this was like rec league lacrosse until you're 45?
Ed Sim:
Afterwards, my competitive club, I did club level and then-
Turner Novak:
Oh, nice. Okay.
Ed Sim:
But it's always been a part of me and it's my stress release. And so my wife and I got into CrossFit five years. We were always doing stuff, but we got CrossFit five years ago, and now my wife is a certified Level 1 instructor, Kathy.
So she and I motivate each other. And so that's our date day. If I'm really busy, we're like, "All right, let's carve out, how are we going to carve out an hour?" And so efficient you can get it done in an hour, or an hour and 20 minutes, with everything from warmup to workout.
And so I love it because every day you don't know what you can get. It's like life is like a box of chocolates, you don't know what you going to get. So every workout's different. It's varied. You're never good at it. Literally, no matter how good you are, we log everything in this app and you're like, "Oh my god, there's so many people, thousands of people, better than me."
So it always drives you. And then it's our date day. And so we make it part of our lives, and everything else gets structured around that, and it makes me happy, clears my mind. So I think I would just say it's put in your calendar and make it happen. Find time, and if it's important to you and you put a calendar in it for an hour, and then find a program that's going to challenge you, and get you excited and motivated.
And some days, there are certain days where I looking at it, I'm like, "I don't want to do this workout," but you go do it. And as the guy that I follow says he goes, "Fitness will be achieved no matter what." Some days ... You can't bring it every day. But yeah, so that's how I got into it, and my wife and I make it a part of our journey together.
Turner Novak:
So it's hobbies, you do it with the people that you want to spend time with. And then your kids are older. I have two little kids.
Ed Sim:
I have two kids. One's in college and the other is a professional musician, producer, writer out in LA.
Turner Novak:
Oh, amazing. That's cool.
Ed Sim:
Yeah, so they're both out of the house. So as I like to say, there's this period of time family's very important to me in terms of how I structured my life.
And I remember when my son was two, this was in 2003, and he looked at me, I was sneaking out of the house to try to catch a 6am or 7am flight to California. And I used to go spend a week a month out there, just because I felt like being in New York, I was a disadvantage. I needed to build my network.
And I heard this stirring. And my son had come down. He was two years old, he had his diapers on, and he had his little lunchbox with him. And he goes, "Daddy, where are you going?" And I go, "I'm going on a business trip." I said, "Lucas, where are you going?" He goes, "Me going business trip with you." And then he goes, "When we be back?" And I said, "A few days." And he goes, "Daddy, why do you go away so much?" And I was like ...
Turner Novak:
Yeah, that's really hard.
Ed Sim:
That devastated me for a while. And then I tried to figure out how do I find the balance in terms of being a father that was around a lot and also get work done. And I would say that my productivity suffered a little bit.
The trade-off was I wanted ... the family was more important, was more important to me. And then now it's like it's all part of our lives. My daughter helped me do the Superhuman investment. She was sitting in and I brought her into work and Rahul comes in and goes, "Hey, look what happens with Gmail. It's ugly. What if x all these things out?"
And my daughter's like, "And they showed me this is superhuman." And she's like, "Oh yeah, it's like text messaging for email." And she was 10 or 11 at the time. And so my family now has been exposed to all these founders and they're all part of it.
Turner Novak:
Interesting.
Ed Sim:
It's been fun. I guess I found a way to incorporate it all together.
Turner Novak:
Yeah, that's fair. I had one of those moments actually walking here to record this. I was FaceTimeing my daughters, and one of them, the youngest one was like, "You're never here." And well, when they're that young they'll say bold things.
Ed Sim:
How old are they?
Turner Novak:
They're three and seven.
Ed Sim:
Partly true.
Turner Novak:
Yeah. Well, to them, just this concept of work. Dad goes to work, they don't know what that means. Maybe they get some abstract thing that they can grasp it. But yeah, it's really hard. I've been trying, it's something I've struggled with forever, since they were born.
But yeah, it's good to hear the perspective of you basically just try to combine it as much as you can.
Ed Sim:
I combine it. Yeah. And we'll have founders come down and visit us in Miami for a few days and stay with them and the kids know them or ... Yeah, it's all incorporated. Or even when I was in London and Copenhagen visiting my daughter, she was a semester abroad, and I'd bring her on to dinners with the founders and she was just like ...
Turner Novak:
Amazing. And she likes it?
Ed Sim:
Yeah.
Turner Novak:
It's fun?
Ed Sim:
Yeah. And now she loves it. And my son loves it too. My son absolutely loves it.
Turner Novak:
Amazing. Well, this is a really cool conversation. Thanks for taking the time. This is great.
Ed Sim:
Well, Turner, thank you. Super well researched, man. I went to the depths where I didn't even know where it would go, so thank you for bringing me back into some of those memories for me.
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