🎧🍌 Inside NYC's Scrappiest Accelerator, Elbow Grease | Dan Teran, Gutter Capital
The best founders want help, the most helpful investors have concentrated portfolios, creating a board and using OKR's in the early days of a company, and big wave surfing with Adam Neumann
Fresh off of selling Managed By Q to WeWork, Dan Teran and his friend James Gettinger started Gutter Capital during the depths of COVID.
It has evolved into one of the scrappiest early stage funds in NYC, culminating in Elbow Grease, a hands-on accelerator based in the heart of the city.
They just raised another $75 million to run their second cohort and put 15 teams in one building on Canal Street and help hire their first employees. (They’ve hired over 100 people for companies in their first two funds!)
We talk about why the best founders actually want a lot of help, how portfolio concentration allows investors to be more hands-on, selling Managed By Q to WeWork, going big-wave surfing with Adam Neumann and Laird Hamilton to close the deal, how raising a fund was harder than selling a company, and why he thinks startups should use OKR’s and form a board from day one.
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Timestamps to jump in:
0:00 Elbow Grease: NYC’s scrappiest accelerator
7:39 Building a small, hands-on, in-person experience
13:39 Recruiting 100 people into portfolio companies
16:25 Portfolio concentration makes investors more helpful
24:58 Why raising Fund 1 was so hard
28:08 Advice for new fund managers
30:30 “Hiring today is as competitive as ever”
32:23 Selling Managed By Q to WeWork
35:23 “Never raise too much money”
39:43 Almost buying his company back from WeWork in Feb 2020
43:50 Starting Gutter Capital in the depths of COVID
49:34 Funding angel investing with gambling proceeds
52:39 Behind the name “Gutter Capital”
54:49 “Raising a fund is like getting punched in the face”
59:03 Writing long LP letters
1:06:45 Investing in real world problems
1:09:48 What a Gutter founder looks like
1:12:46 How Gutter makes new investments
1:18:41 Importance of customer calls at pre-seed
1:21:59 Evolution of NYC tech over last 15 years
1:26:15 Why you should form a board at Seed
1:28:29 How to run a Seed stage board meeting
1:34:04 Sharing carry with portfolio founders
1:35:56 The best founders need lots of help
1:39:30 Big wave surfing with Adam Neumann and Laird Hamilton
Referenced:
Apply to Elbow Grease
WeWork Acquires Managed By Q (TechCrunch)
Find Dan on LinkedIn
👉 Stream on YouTube, Spotify, and Apple
Transcript
Find transcripts of all prior episodes here.
Turner Novak:
Dan, welcome to the show.
Dan Teran:
Thank you. So excited to be here.
Turner Novak:
You guys just announced something. There’s pretty big news. What’d you just announce?
Dan Teran:
Yeah, so we announced earlier this week that we’ve closed our third fund. We raised a $75 million Fund III, and as of this week, applications are open for Elbow Grease, which is our accelerator based in New York City. We ran the first cohort earlier this year, started in January, and it was a huge success. So we decided we needed to do it again. Applications are open right now, and they’ll be open until about August.
Turner Novak:
So why start an accelerator? There are literally 100 accelerators, and people kind of make fun of why there are so many. Why start one?
Dan Teran:
Yeah, I think it’s a good question. For us, this was about a year ago that we started thinking about it. A couple of things. One, we saw that companies today are able to do a tremendous amount with very little resource. And so for an early-stage venture capital firm, we found ourselves asking: how do we make the argument to founders that they should partner with us? I think a lot of our industry should be asking themselves that question.
A lot of investors go out of their way to say they actually don’t add value. They say, “The best founders don’t need help. We’re gonna stay out of your way.” And that’s fine, but in a world where you don’t need capital to get to a million in ARR, and therefore don’t need capital at all in a lot of cases, that’s a really fraught pitch. We’ve seen, even since we started the first program, seed prices continue to explode. I think there are 25 to 30 posts now, which is more than double where they were a year ago. That’s what happens when you don’t need money to get serious traction.
So a lot of what we were thinking was, how do we make sure we’re relevant to founders at the earliest stage in their journey? And then the other piece is that as a firm, we’re very hands-on by nature. A lot of our companies work out of our office down on Canal Street. We do a lot of the recruiting and building of the early teams.
When you do that and step in at the seed stage, often you’re stepping into a lot of decisions that have been made without you at the table. So our thinking was, why don’t we just get involved as early as possible in the journey of the company and be a part of those early decisions? If they’re good decisions, great, and if they’re not, then we’ll help resolve them. We just found the earlier we get involved, the more impact we can have. And the only way you can really attract people at the first instance of company-building is a program like this.
Turner Novak:
And the name sounds pretty apt, then. Elbow Grease, like you’re getting your elbows greasy. You’re rolling up your sleeves.
Dan Teran:
Yeah. It’s on the website, but I was figuring out names for the accelerator and I came across this quote from Andrew Marvell in the 1600s. It was the first instance of “elbow grease” in the English language. He says something like, “A few brawny fellows in the corner with mere ink and elbow grease are worth more than a thousand systematical divines with their sweaty preaching.” It’s pretty close.
Turner Novak:
Interesting. And so he probably just made that phrase up.
Dan Teran:
Yeah, it was from a poem or something, and we just thought, wow, that feels very gutter, very essential to our brand. Just mere ink and elbow grease. So it stuck. That was the name we went with, and now there’s an identity around it. The founders call themselves greasers. Their word, not ours. It’s taken on a life of its own, and it’s a lot of fun.
Turner Novak:
And the accelerator, is it a global thing, San Francisco? What’s the location of this thing?
Dan Teran:
My partner James is a lifetime New Yorker. I’ve been in New York for 16 years. I built Managed by Q here. We’re very much a New York-based firm. We have an amazing office down on Canal Street, in Chinatown, a gritty part of town, where we’ve been for many years now.
We have two floors that are home to about 15 companies, about 70 or 80 people depending on the day of the week. It’s an incredibly vibrant hub of builders and founders, ranging from companies started last week to Series B and beyond. The Elbow Grease Accelerator is hosted at Gutter headquarters, which is a really special part of it, so everybody’s working in the same space.
One of the things that’s unique about our program is that companies graduate, as in the program ends, but we’re not kicking anybody out. In fact, we want them to stay. We had eight companies in the first Elbow Grease in Q1, and of those eight, about half still work out of our office. Two of the companies relocated to New York because we were able to convince them they’d build a bigger company faster working alongside us. That’s become a big part of the draw. If things keep going at this pace, we’ll be taking another floor of the building pretty soon.
Turner Novak:
Interesting. How many floors are in this building?
Dan Teran:
The building has an interesting history. It was actually my office before Managed by Q, when I was at Prehype. Then Barkbox, before they went public, took over the sixth floor, and then the fifth, fourth, and third. They took over this entire building in Chinatown. Then they went public, COVID hit, they moved to the financial district, and the building just sat empty. So we were able to take over the lease from them at the tail end of COVID, and have since taken another floor. The building has some good history to it, and we’re lucky to have it.
Turner Novak:
So you’re taking up two floors. It sounds like you have four more to expand into.
Dan Teran:
We’ll see. If they get leased up, we’re out of luck, but it hasn’t happened yet.
Turner Novak:
You can argue there are so many accelerators, so what’s the point of even doing this? There are just so many options. How do you stand out as a new accelerator?
Dan Teran:
Our approach is pretty different. It’s very hands-on. If you take the number of accelerators and boil it down to whether they’re led by founders who’ve built and sold companies in recent memory, who actually know how to do the thing they’re advising people to do and have done it well, the universe gets pretty small.
Then if you ask, is it on location? Are you physically working with the people every day, in and out with them? It gets even smaller. And then if you ask, is it a small batch, say less than 20 companies? Is there one-to-one mentorship? Is there actual tangible value-add? There aren’t a lot of programs.
What you see from the insane numbers of applicants to some of the more scaled accelerator programs, literally 20,000 people applying for 200 spots, tells me there’s way more demand from great founders looking for help than there is supply of programs that can actually help them.
That was part of our insight when we started Gutter. There are amazing founders with tremendous potential, but maybe they don’t come from tech, they don’t have deep networks in the tech world, they haven’t built a company before, and with a little help they could do incredible things. That’s what we set out to do with Elbow Grease. So for the type of work we’re doing, there aren’t a lot of great options, and there’s plenty of room for more, honestly.
Turner Novak:
It’s one of those things we were talking about earlier. There are tons of podcasts, but are any of them actually that good? Do you even listen to them? It’s the same thing. If there’s any category where you could argue there’s too much of a thing, it’s probably even more prominent if you can’t even name a specific one. If someone says, “Oh, I’m starting an accelerator,” and you say, “Name another accelerator,” they can maybe name one or two, but there are so many of them they can’t name any.
Dan Teran:
Totally. So many people we talked to said, “We tried this years ago, it didn’t work.” And it’s like, well, what did you try? “Well, it was all remote,” or it was this one theme. Okay, what was the program? “Well, we had a couple of speakers.” And it’s just...
Turner Novak:
You phone it in, basically. You’re checking boxes.
Dan Teran:
Yeah. Everyone’s intentions are good, it’s just that we do things our way. People approached me with the same logic when we started the fund, which was, “Does the world need another venture fund?” And it was like, I don’t really know, but we’ve been doing a thing. We have a practice in terms of how we work with founders, how we invest, the level of concentration, the services we provide. And from what I can tell from the founders and the performance of the companies, it’s going very well, so we’re gonna raise a fund to do that. The accelerator’s kind of the same thing.
Turner Novak:
But same with the fund, that’s kind of the pitch every VC has. “We add value, we roll up our sleeves.” Whatever people say, you’ve probably heard this pitch a million times before. So you’re saying most people don’t actually?
Dan Teran:
I mean, you work with these people too. It’s interesting. I had some of the best investors in venture, like Satya Patel at Homebrew. Hunter and Satya led my seed round when they were the emerging manager back in the day. It was super lucky, kind of life-changing, not only because they were great investors and board members, but because they were incredible mentors when we were starting our fund.
But if you look at the average seed investor, I realized this more after Managed by Q, when I was advising other founders and looking at the experience they were having at the board level. These seed investors, respectfully, had done nothing but work at venture firms, didn’t have a lot of credibility when it came to operational decision-making, and frankly had no interest in being involved in the operations of the business. So we take a really different approach, which is a lot more hands-on, and a lot more qualified to be hands-on.
Turner Novak:
So a lot of people don’t take an operational approach. What’s the chasm you’ve crossed that other people aren’t, in terms of rolling up their sleeves and getting the elbow grease?
Dan Teran:
It always starts with getting aligned on the goals. We work really closely with founders. We’re big believers in OKRs, which I know is a controversial topic.
Turner Novak:
Yeah, it’s a hot take. That’s a big-tech, 100,000-employee type of thing, not a two-person startup.
Dan Teran:
I think it doesn’t matter the size of the organization. Saying what you’re gonna do, and then either doing it or failing and learning something, is really important. The earlier you go, the more lightly the OKRs need to be held, and you have to accept that you’re gonna be wrong. But a lot of companies wander for a long time because they’re just not explicit about the actual thing they’re testing right now. What do we want to learn this week, this month, this quarter? Just have an honest conversation about what’s working and what’s not. Hitting OKRs at a pre-seed company isn’t the same as at a public company, but it’s about enforcing a cycle of learning, and it’s super valuable.
So it starts with the goals, and from the goals we work closely with the founders on what we can do to help them hit those goals. From the first fund we raised, we knew talent was gonna be a big factor. We talked previously about companies like Opus and Bikky in our first fund, where in both cases I was advising the founders really closely during COVID. Before we started the fund, I helped them recruit their founding team. In both cases I introduced them to their two co-founders, and we saw that drive tremendous inflection in the business. They’re both thriving today, some of the top performers in our first fund.
It was taking these super smart, principled, mission-driven operators who didn’t have great networks in software, and matchmaking them with really great co-founders. In one case technical and product, in the other technical and sales. We’ve been able to replicate that at scale with the fund.
You asked what it actually looks like, what we do differently. My partner Richard, who runs talent at Gutter and was previously my head of talent at Managed by Q, has now recruited over 100 people into the portfolio. Our portfolios are very concentrated, so it’s only 14 companies per fund. So in four years, 100 people recruited, less than 5% regrettable attrition. A typical Gutter company will reach the Series A and we’ve actually hired about two-thirds of the team, which I don’t think literally any other investor can say. When you’re making a pitch to founders, that’s pretty differentiated.
Turner Novak:
So what does the recruiting help typically look like from a venture fund? Because if I’ve never heard this before, it sounds great, it sounds awesome, but other people are telling me the same thing, that they help me with recruiting.
Dan Teran:
So Richard is a recruiter. It’s what he’s done his entire career. He was head of talent for Managed by Q, head of talent at Primary Ventures, and then at Alma briefly after. His goal every quarter, his OKRs, because we take our own medicine, is a certain number of critical hires. It’s usually on the order of five or six critical hires per quarter, where we sit down with the portfolio and prioritize the most important roles, and Richard owns the goal. He’s already hit his OKR for this quarter. He’s hired six people, working directly with the founders to troubleshoot the most critical roles, and then going out and helping find that person. A lot of times these founders don’t have strong networks, and he’s able to build them.
I can talk about one hire in particular that was exciting. We invested in a company called Farm Evo, based in Karachi, Pakistan, and one of the markets they sell into is the silviculture timber market, forestry in Canada and now the United States. They’re in the process of relocating to New York to work out of our office. They needed to hire someone to run business development for these timber operations in Canada, and Richard was able to immerse himself in those networks, meet all these people, and get referrals. We’ve now made two or three hires for them in the US to run the go-to-market for these timber operations. That’s a level of embedded operations that many venture funds aren’t willing to undertake, or would frankly have the capabilities to.
Turner Novak:
I feel like a lot of the value-add is they’ll help you if they feel like they can invest more capital. To your point, they’re not an operator. If I’m being really critical about this, it’s basically that they see it through a lens of, can we clip some management fees, raising capital to put into this business? That’s the business model of a venture firm: raising capital, deploying capital. So the startup is kind of just a conduit for doing that.
Dan Teran:
Totally. For us, the other thing that’s important to note is that because we’re so concentrated, for our top positions we own like 30% of these businesses.
Turner Novak:
I was gonna say, you’ve got some that are in the 30s.
Dan Teran:
So we have pretty significant ownership, which means there’s a real ROI case for us and for our LPs to be rolling up our sleeves, making these key hires, making customer introductions, helping open new markets, whatever the plan calls for. If you own 2% of a company, it’s not gonna be worth it to make a hire. But if you own 30%, it changes the calculus of your decision-making, which points to a really hands-on model.
Turner Novak:
When I think about the incentives, if I own 30% of a company valued at 5, 10, 15 million, just an early-stage company, and then it goes public and it’s worth $10 billion, and you invested $2 million in that first round and got diluted a little but still own 20% at a $10 billion valuation, your stake goes from $2 million to $2 billion. I’m making all these numbers up. But the amount of money you make as a firm is absolutely astronomical.
Dan Teran:
That’s the hope.
Turner Novak:
Versus a lot of the model where you only own 1, 2, 3, 4%, and the way you actually make the money is, as it’s going, you put more in. It’s a much shorter timeframe too. So it’s less of, “Hey, we’re gonna get it started, hire some people, and in four years raise a Series A when we get this thing cranking,” versus, “It looks like this thing’s gonna go public in 18 months, can we invest a couple more times before that happens?”
Dan Teran:
We have a very unusual strategy. We arrived at it through doing over 100, like 110, angel investments ourselves before the fund. James and I were the biggest investors in our first fund and almost the biggest in our second. We’re a much bigger part of the capital base than the typical venture GP. So when we’re thinking about strategy, we’re really thinking about what we’d do with our own money.
We know from our experience that the returns are best the earliest you go. And there’s a myth about diversification in the industry. Our own primary research, looking at a data set of 25,000 venture investments from the ‘90s to today that have had long enough to achieve outcomes, found that the returns to diversification, just talking about variance, basically fall off a cliff after about 10 investments. We ended up doing 14, because 10 is scary to LPs.
Turner Novak:
It’s pretty scary, yeah.
Dan Teran:
There are modest improvements to the average return, but the variance kind of flattens out. So our view was, you get modest improvements to the average return, but you don’t contemplate the cost. And the cost is that when you have 40 companies in a fund, you can barely remember their names. For us the cost is very clear: there’s a degradation of the founder’s experience if you’re saying you’re gonna actually move the needle for them.
Turner Novak:
I’ve had a similar conclusion on concentration. I’ve seen similar data around public-market portfolios, which is like 20 companies, something like that. Between 15 and 20 it starts to degrade. And intuitively you’d think with early-stage venture maybe you should increase that a little, like 30. A lot of venture funds will say they do 40 or 50. Mine is generally around 20. That feels pretty concentrated, probably to your point of going a little more, but it’s not existentially scary of “this is way too few.” So how did you get this data around 10? That seems almost too small.
Dan Teran:
It is. This is the one thing I’ve learned from James, who spent nine years as a professional gambler. That’s the most hardcore education in risk management, because you have to always be ahead or you blow up. I think 1% of gamblers get ahead and 1% stay ahead, so very few people actually retire from gambling not owing somebody money.
We did our own primary research. We had 110 investments of our own, and then through an LP we got a data set of 25,000 investments. So we did primary research to figure out the right number. Our conclusion was that after 10, obviously it’s uncomfortable. The optimal strategy is often uncomfortable, which is kind of the biggest thing I’ve learned from James.
Turner Novak:
So what’s happening with the 11th, the 12th, the 20th, the 30th investment? What happens to the returns at that point, and psychologically, why would people do it anyway?
Dan Teran:
Diversification isn’t bad if there’s no cost to it. I’d do 1,000 investments in a fund if there were no cost. But the cost is that you can’t actually know what’s going on in the companies. You can’t build meaningful relationships with the founders, and you certainly can’t do things that change the outcomes. So our bet was that the ROI of us actually doing stuff was gonna be higher than the cost of having fewer positions.
Turner Novak:
It’s something I’m challenged with right now too. Someone needs help with something and you just have so much else going on, but you’ve gotta help. I have one company where I’m trying to help them get the first couple of customers, so we’re doing like 20 pretty intense customer research calls together, getting a bunch of people to talk, and it’s gonna take a ton of time. And I want to do it.
Dan Teran:
It makes you a better investor too.
Turner Novak:
Oh, yeah. But then the company might be raising a Series A or B and you want to help. Somebody might be looking to hire a new head of marketing, you want to help. I also have all my own stuff going on, multiple other things, personally or with Banana, with the podcast. I have to write the LP update, all this stuff. So if you have 1,000 investments, you literally can’t do anything.
Dan Teran:
Yeah. Your strategy has to be not doing anything, which didn’t feel right to us and also wasn’t suited to our skill set. There aren’t a lot of pre-seed and seed investors, forget Elbow Grease, who will lead rounds, take board seats, and have actually built and sold a company before. So we needed a strategy that actually let us leverage our competitive advantage, which is being able to roll up our sleeves and build companies alongside founders.
Turner Novak:
It feels like the diversified strategy makes sense when the companies are later and don’t need your help, and you’re just giving them $100 million. They just need a big chunk of money. It makes more sense to be super helpful super early on, where you need to be more concentrated. But then it gets scary thinking, all right, you made 12 investments, and the data says there’s a very high chance these will all go to zero and you’ll lose all the money. So it’s almost like people just don’t do it.
Dan Teran:
To look at it from another perspective, the unicorn rate, the percent of companies that raise a seed and become unicorns, bounces around, but say it’s like 2 to 2.5%.
Turner Novak:
Probably a lot higher today, right now.
Dan Teran:
Sure, but say 2.5%. That means the average seed fund probably has 40 companies. In a 40-company portfolio, statistically, if you’re average, if you have no picking skill, you get one unicorn. Could you imagine pitching an LP and, when they ask why you have this number of companies, saying, “Because I’m average. Because I actually have no edge in picking”? If you’re twice as good at picking, then you should have half as many companies. You know what I’m saying?
Turner Novak:
Yeah, that’s fair. So is that what you did when you were raising the fund? Did you go out and say, “We’re just better at picking than everyone”?
Dan Teran:
Not necessarily at picking, I’d say at helping. It’s important to note that our first two fundraises, the first one in particular, were brutal. Nobody believed us. Nobody thought it was a good strategy.
Turner Novak:
Really? So what was the pitch at the time? What did it look like?
Dan Teran:
The pitch was a highly concentrated, hands-on venture fund. Richard was part of the picture in Fund I, so we had the talent capability. We had a few case studies of companies where we’d made a big impact, but they were early. Now all of those companies are post-Series B and still on a venture trajectory, so it’s a lot clearer that we’re capable of making a big impact and that we’re good at picking good companies. But at the time, they were still all early.
We raised the fund to lead seed rounds at Forerunner, Bikky, and Opus. We did Faraday in Fund II, and those were all companies I was advising prior to the fund. So there just wasn’t a lot to point at. I’d obviously had a good run as an operator, we had a nine-figure exit, but it wasn’t the world’s greatest outcome in venture, and we sold to WeWork, who then exploded. So people weren’t looking at me like a top-tier operator. I don’t think we were getting credit for that.
We also had a funky strategy. A big learning from raising from LPs is that the funkier you are, the harder you make it for yourself. That doesn’t mean it’s the wrong thing to do, but these people are not looking to take risks.
Turner Novak:
I don’t know what the chasm is, when you cross over to “now you’re legit, we trust you, we think you’re really good.” Maybe I’m just making up a number, but it’s like, you invested in or started a company, built it or invested when they were starting it, and now it’s crossed $100 million in run rate. It’s a real business.
Dan Teran:
Totally.
Turner Novak:
So if you invest in a Series A or B when it’s at 15 or 20 million, it takes a year to get to 100, whatever the number is.
Dan Teran:
You have a lot more data. You kind of know what’s gonna happen in the next year or two.
Turner Novak:
Yeah. But if you’re investing when you’re starting the company, doing some R&D, gaining customers, it’s four years later and it’s not super clear yet. It might take another couple of years, and then you might have a company. So to your point, it’s not like you open up your coat and it’s, “Here, look at all these hits we have.” It’s still kind of in this weird gray area.
Dan Teran:
It’s a business where Satya, when I had dinner with him while we were raising Fund I, I asked him, “What’s the one piece of advice you’d give me that I might not listen to, but I should?” And he said, “You just have to know that you don’t know, and you won’t know for a long time which ones are gonna be fund returners.”
He used the example of Q, which at one point they thought was gonna be a big fund returner. It ended up being fine, but nothing to write home about. And there was Chime in their portfolio, which has gone public. They really struggled, they’ve talked about this publicly, to raise the Series A, and it ended up being a much bigger outcome than Q, orders of magnitude. They didn’t know that until the out years. I spoke to a GP yesterday who told me they have two multi-billion-dollar companies in their first fund, and it was literally seven years until they thought they were even gonna make money on them.
Turner Novak:
That’s insane.
Dan Teran:
I was like, oh, fuck. We’re on year four and a half. We might not even know.
Turner Novak:
Did you raise the first fund in 2022 or ‘21?
Dan Teran:
We raised the first fund in ‘21.
Turner Novak:
Because when you think about what a 2020 or 2021 fund goes through, it takes a really long time to know the companies are working. But there’s also the fact that you invested in the summer of 2021, at prices that were too high objectively. So the valuations being paid have to get cut way down, in addition to you actually having to make the progress. You have an extra thing going against you, the outside world saying, “Oh, this is working.” Instead of it being a 5x, you did a down round at the seed, and you barely break even even though the company’s actually doing well. So it’s really hard for all these different things to go right.
Dan Teran:
The second fund got easier because we were fortunate to have a really great first fund, and despite 2021 we were very disciplined on price, so we continued to see really great performance there. But yeah, it was a brutal year for a lot of funds.
Turner Novak:
Talking about 2021, how has the hiring market changed between now and then, and even before, with Managed by Q? Have you seen the hiring and recruiting challenge founders are facing evolve over time?
Dan Teran:
We’ve seen it ebb and flow. Right now is as competitive as we’ve ever seen it, including some real go-go years in the late teens at Managed by Q where it was really competitive for engineers, and then the COVID years. But if you ask Richard, hiring engineers with some experience today is completely counter to the narrative that there are gonna be no more jobs for engineers. No, no, these engineers became 10 times more valuable because of how much code they can ship. So why would you not want to hire twice as many engineers, not get rid of them? It’s incredibly competitive for people who have experience, and we’re seeing that across all roles. Even in sales, if salespeople are more productive, then the best salespeople are worth a lot more. We have to move faster to offers on candidates we’re excited about, or they’ll get scooped up literally within a week of being on the market. It’s frantic. The pace of hiring right now is frantic.
Turner Novak:
How do you navigate that? How do you make a good hire versus a bad hire? What’s the process for knowing if somebody’s a good hire?
Dan Teran:
It really depends on the role. There’s a technical evaluation if someone’s in a software engineering role, and even for sales we’re doing mock presentations where people actually have to pitch, as practical as you can possibly get. And then references are a huge part of the process, being exhaustive and finding out what it’s like to work with someone, ideally trying to find a bad reference, trying to get the edges of what the person is really like. It’s similar for our investing process. You’re not gonna know what it’s like to work with them until you hire them, but you can get pretty damn close if you talk to enough people.
Turner Novak:
One thing you mentioned was Managed by Q. If we can talk about it for a couple of minutes, there’s some interesting stuff to pull out. What was it, really quick, for people who don’t know?
Dan Teran:
Managed by Q was a combination of vertical software for the office manager and a marketplace of commercial services: cleaning, maintenance, IT, security, administrative staffing, all the things that go into running an office, where you could book, manage, and pay through a single platform. We started in New York City, and at our peak we had thousands of offices using our platform to run their operations. We went from New York to Chicago to San Francisco to LA, then launched a third-party marketplace and were available nationally. We acquired a French company that had software capabilities that helped us go global. Ultimately, and this dates us, this was 2019, it really was the case that if you went into a startup’s office in New York, they were either in a WeWork or in their own office using Managed by Q. Oversimplifying, but that was the logic that made WeWork want to acquire us, which they did in 2019.
Turner Novak:
It was a bit of a challenge fundraising for Managed by Q, but you also had some amazing investors. What was the process like of fundraising initially?
Dan Teran:
We were pretty lucky. I was at Prehype when we started the company. We raised a $400,000 pre-seed round, and we were fortunate to have folks like Scott Belsky in the pre-seed. It was actually Scott who introduced us to Homebrew, who had just raised their first fund. For the seed, we weren’t even going out to raise. We didn’t have a deck. We met Hunter and Satya, they were excited about what we were doing, and because when we onboarded a customer we were taking over the cleaning service, which is the largest line item for a facility, we were able to grow to a million in revenue really fast. This was also the heyday of the on-demand economy, bits moving atoms, a real obsession with software as a remote control in the physical world. And it was B2B, very high ACVs, so the unit economics were very attractive relative to an on-demand dog walker.
Turner Novak:
Because with a dog walker you pay him 20 bucks, but the cleaning relationship is retentive.
Dan Teran:
They’re coming every day of the week.
Turner Novak:
And it’s big contracts.
Dan Teran:
The pitch was, once they trust us to do one thing, they’ll hire us for other things. So you end up getting that full wedge of the facility spend, which proved out over the life of the business, where you could continue to take on higher and higher margin services. We were pretty successful at fundraising early on. It got more challenging toward the end of the business when we were selling, but that had more to do with the business and finding the limitations of the business model than with the capital markets.
Turner Novak:
So how’d that influence how you advise founders today to think about fundraising?
Dan Teran:
It had a tremendous influence, because it’s the opposite of it being hard to raise. I was a very good fundraiser. We always raised way too much money. We found ways to spend that money, and we managed to sell at a price that cleared the preference stack and everybody did fine, but barely. When I look back on how I would have built that business if I’d been more cash-constrained and more thoughtful about how to make it generate cash, I think the outcome could have been very different.
So now we’re super disciplined on operating expense with our companies. We typically want companies to burn no more than $100K a month through the Series A, which is pretty unique, and until there’s product-market fit, well below that, to really invest when things are working versus hire a team and try to figure it out. I’ve reacted, and hopefully not overreacted, to my own experience as a founder, which is that raising too much money does more harm than good in most companies. And in my experience it’s inescapable. You’re not putting the money in a different bank account and pretending you don’t have it. Everybody spends it.
The ways it’s destructive are insidious. If you hire an expensive head of marketing, an expensive CFO, an expensive head of HR, it’s not that they’re bad or have bad intentions, it’s just that they want to talk to you. And if you’re talking to them, you’re not talking to customers and you’re not building the product. Those people all have a role at a certain scale. This AI-led founder-mode renaissance of founders as individual contributors is pushing against the grain of that, and it’s changing in a really positive way. But my experience was that you can do a lot of things that feel like success as a founder, like talking to all these executives all day and managing a team, and then you wake up one day and you’re like, “I’m not building the product or closing deals.” That’s probably true of public-company CEOs, but a Series A founder should probably be closing deals and building the product.
Turner Novak:
Because the bigger the company is, a lot of your OKRs are how many people on your team you’re managing, not necessarily whether you’re closing sales or increasing revenue. It’s just not necessarily your job per se. So it can be a little distracting, especially if you have influence coming from that. How many people are on your team?
Dan Teran:
It’s funny, now I think it’s a flex to have as few people as possible, which is awesome, especially as investors. It used to be a point of pride that you had 35 people on your team at the Series A. That’s a lot of people. And then you hired 100 people in a year, that’s amazing, you must be an operational genius.
Turner Novak:
And you must be doing well because you’re hiring so many people. It’s the same trope as when you go to a tech networking event and meet someone, and it’s, “Oh, how much money did you raise?” That’s the first question. You didn’t even ask their name. That’s the thing people care about.
Dan Teran:
And it is so not the right thing to focus on. It’s a powerful tool in certain companies and certainly necessary to accomplish things in certain companies, but we’re seeing so many of the businesses in our funds that are break-even, modestly profitable, and growing on crazy venture-scale trajectories. It’s no longer the indicator it used to be that things are going well to be raising lots of capital.
Turner Novak:
So the guy who helps you hire people is saying you shouldn’t hire that many people. It’s interesting, from a framing lens.
Dan Teran:
We want to hire excellent, excellent people and then get a ton out of them. We don’t need to hire an army.
Turner Novak:
So Managed by Q was sold in 2019. How did 2019 go? What was the series of events throughout the year? Because I think you were acquired by WeWork around April.
Dan Teran:
I’ll give you the high level and we can drill in as it’s interesting. We sold in April 2019, almost five years to the day that we launched the company. As part of the deal, I became the head of corporate development and ventures at WeWork, overseeing a broad portfolio of stuff on the WeWork side. So I actually left Managed by Q. My head of product became the CEO of Managed by Q and reported up to me, but I went to work at WeWork every day, literally from the day we closed the transaction. I worked at WeWork headquarters, did a whirlwind tour traveling to Asia to visit the regional leaders, trying to do a lot of things in a very short amount of time as the company prepared to go public, which historically did not happen, at least at that time.
Then in late October, I believe, I left WeWork. That was the end of my tour of duty. The company failed to go public twice, and the CFO came to the conclusion, and I agreed with him, that everything I was overseeing needed to be divested pretty much immediately. As part of that, they also divested themselves of me, which was probably the best thing that ever happened to me. I was basically laid off from WeWork within a month or so of COVID happening.
Turner Novak:
And you actually tried to buy back Managed by Q, is what you told me.
Dan Teran:
I did, yeah. It was crazy. I refer to it as my attempt to break into prison, and I’m glad the guards were on duty. WeWork was doing a fire sale of all the companies they’d acquired. Seth from Conductor, for example, bought back Conductor for basically nothing. Kevin Ryan partnered with David Siegel to buy Meetup, and they just sold it again to Bending Spoons and did incredibly well. Flatiron School was spun out. Managed by Q was also on that list.
There was a period where I thought we’d get a really good deal, buy it back for nothing, raise some money for the forward operations, and continue building the vision. But because it was my team overseeing the divestitures, they paid a lot of attention to how competitive the deal was. We had a YC-backed competitor that had raised some money and was insistent on buying Managed by Q from WeWork. They bid up the deal to a point where it didn’t make any sense. I dropped out of the process. I told the guy running it that they didn’t need to inform the competitor I was out, so they ended up bidding against themselves to a number that made no sense. Managed by Q ended up getting sold to a competitor sometime in February 2020.
Turner Novak:
Oh man, what a time for that.
Dan Teran:
It was crazy. It was literally the day it was declared a global pandemic. And how lucky am I to not have been running a money-losing Managed by Q, an office services business, going into the end of the office as we know it.
Turner Novak:
And I think you told me every single WeWork acquisition was a stock deal except for Managed by Q.
Dan Teran:
There were large stock components to all of them. The one thing that was unique about Managed by Q was that we negotiated it so that every employee got all cash at close, which I think is a contributing factor to why so many of the Managed by Q team members still work with me in our orbit today.
Turner Novak:
You mentioned there are 40 employees who still work in the Gutter orbit, is that right?
Dan Teran:
Probably, yeah, or it might be slightly higher today. 35, 40 last time I checked work within Gutter companies, and probably six or seven who are founders.
Turner Novak:
So around this time was when you started everything. All this went down, COVID happened. Were you in Asia still? Did you move back to New York? What’d you do when COVID hit?
Dan Teran:
I was in New York. When the deal closed with WeWork, the way I got my employees paid all cash is that I made a deal with Adam that I’d defer 80% of my compensation to the escrow, which was literally just a way to punish me. So I didn’t get any cash at close. I got enough to put a down payment on an apartment and move into it. But as things really started to hit the rocks at WeWork, I realized that if WeWork went bankrupt and I couldn’t recover that cash, it might not be an apartment I could afford.
So I literally spent COVID in an empty apartment in Tribeca. I thought it would be bad luck to buy furniture, because that would mean I’d never get paid. But for the grace of God, I did end up getting paid eventually. Just to set the stage: I’m in New York, in this empty loft apartment alone, unemployed for the first time since I was 14 years old. James and I had done a bunch of angel investments before, so there were a lot of New York-based founders hitting me up for help with various things.
By February 2020, the remaining Managed by Q engineering team that was acquired by this company literally all walked out, and they were ready to suit up for the next tour of duty. I was advising a few companies. One was Opus. Rachel from Opus introduced me to Abhinav at Bikky. Where it all started to come together was Opus, which was originally selling English as a second language over SMS for kitchen workers in New York. Very, very niche.
Turner Novak:
That is the most niche possible thing to imagine.
Dan Teran:
Very niche. Rachel is amazing. She ran training for Danny Meyer’s restaurants, and she was teaching ESL in kitchens, so she turned that into an SMS-based service. When COVID hit, obviously that’s not something restaurants are paying for, and she had the idea to turn it into COVID safety training for all desk-less workers, because there was a huge need for it and nobody was doing it.
Turner Novak:
And she had the infrastructure all set up.
Dan Teran:
She had the infrastructure, but she didn’t have the world’s best software engineering team, and didn’t really have the team to make this happen at scale, and we wanted to get it to everybody. So I put out a call for volunteers to the Managed by Q team who were on the beach, figuratively. We had a Zoom meeting on a Monday, and it was crazy: 15 people showed up, incredible engineers I’d worked with for many years, who were like, “Let’s do this.” Jeff Silver, the CTO and co-founder of Opus, was part of that crew. Vince Lee, who’s now at Gutter but was a co-founder and head of product at Opus, joined too. They ended up hiring a bunch of the best engineers from Managed by Q and built an incredible business at Opus. Now it’s a mobile-first, multilingual LMS for frontline workers with a lot of other functionality for managing large distributed workforces.
That was the genesis. We then all moved into this abandoned building in Chinatown, which is not the one we’re in today. It was across the street, and there were four floors. The second floor was a foot massage parlor.
Turner Novak:
Was it active or empty?
Dan Teran:
It was empty. Everything had been abandoned from the building. But I guess a lot of people liked it, because James and I were on the second floor, the floors were so tiny, the size of this room, so everyone had their own floor, but people would walk in at least once a week looking for a massage. Someone came in once in a suit and said, “I took the train all the way down from Yonkers for a foot massage.” What do you mean? And I was like, he probably could do it if you want.
But it was amazing. New York was locked down, deep COVID, these companies were going through the wringer trying to save their businesses, and I was like, let’s do this. James and I moved into the office. Richard started working with us. We had Bikky there, Opus there, Faraday there, which is in Fund II. We all went through that time together, and we started to build that muscle of working really closely with founders. At the time we were introducing them to other investors to lead their rounds.
At a certain point, a bunch of these companies were raising at the same time. Forerunner, where USV did the A and Wellington just did the B, is one of the top performers in our first fund, founded by JT White, who I think you spoke to, who was my head of design at Managed by Q. They were raising a seed, and JT came to us with the opportunity to lead it, and James and I had this moment of, well, what are we doing if we’re not doing this? Fast-forward to August of ‘21, and we raised Fund I in September, October. I think I wired the money for Opus and Bikky before we’d even raised the fund, because we were like, we’re doing this, we’re all in. That’s the genesis of the firm.
Turner Novak:
Did you, I think it’d be called warehousing it, essentially give them your own money and then raise capital from LPs? You probably made a contribution to the fund when you say you were the biggest investor.
Dan Teran:
Yeah, yeah. Fund I was wild in that we didn’t know how big it was gonna be. We weren’t sure how much we’d be able to raise, but we kept having these opportunities, and we kept committing capital and then figuring out how we were gonna fund it. We could have figured it out all personally, but we would’ve been quite extended. Fortunately, we were able to raise. We set out to raise 15 and ended up raising just under 25.
Turner Novak:
And I think you funded a decent amount of it with James. You said he was a professional gambler. He funded some of it with gambling proceeds. So how does that work?
Dan Teran:
James has an interesting background. We met at Johns Hopkins, on the rugby field. We both played rugby for Johns Hopkins and built a really strong friendship over a few years at college. We both studied economics, we’d train together, became good friends, and both moved to New York after college. James had a startup that I did some of the design work for, and that company ended up not working out. James started playing poker on the internet to support himself.
He was doing pretty well at it, and this was the dawn of daily fantasy sports. He heard that daily fantasy was like poker had been 10 years ago, basically people betting real money with no level of sophistication. He tried it and realized there was a huge opportunity to build a more sophisticated operation. He had a five-person research team generating unique data sets. He’d done his master’s in computer science at Hopkins, he’s a software engineer, and he was building software to predict athletes’ performance, predict his opponents’ behavior, and size bets, which is roughly the three things you need to do well in venture. He became the biggest winner on sites like DraftKings and FanDuel. He did it full-time for nine years. I feel like I barely saw him during that time, because it’s an antisocial job, just sitting at a bunch of monitors all day.
He approached me around 2016 with the idea. He was making so much money on those sites that he could no longer invest it efficiently in the game, because if you’re more than 3 to 5% of the market, everyone just copies what you’re doing. So he came to me with the idea to start investing in venture. I had an amazing network of founders. I was the guy people were sending their founders to for help with fundraising, either to make introductions or work on the pitch. So in 2017 we wrote our first check to Ryan Dennehy at Electric.ai in his seed round.
Turner Novak:
Just one more comment on that. James’s LinkedIn says he’s a world champion in both football and basketball fantasy. What does being a world champion in fantasy sports mean?
Dan Teran:
They had world championships, I’m not sure they still do this. In football he won the DraftKings world championship, and I think he was a runner-up in basketball. It’s hard to know for sure if you’re the best in the world, because you don’t really know everyone’s numbers. But at the top it’s a pretty small community of people, and literally all of them are our LPs. I’ve gathered over the years of knowing these guys that James was very good. They’re all making more money now that James stopped playing. They’re thrilled he’s doing venture.
Turner Novak:
They’re making more money, and then they can give it to you guys.
Dan Teran:
Yeah.
Turner Novak:
And the name of the fund, Gutter Capital, is obviously pretty intentional. Where’s Gutter from?
Dan Teran:
It’s funny. The real story is from 2016, and we still have this email. I don’t really remember how we came up with the name, but James sent me an email, this is when I was still running Managed by Q, and he said, “I envision a situation where we invest my gambling winnings into venture, and I can do the investment diligence, analysis, and risk management, and you can work with the founders.” It was very prescient, kind of what we’re doing now. And I responded literally in six minutes and said, “Fine, we’ll call it Gutter Capital.” That was where the name came from.
Originally we didn’t want our names on people’s cap tables because we were doing a ton of angel investments, so we started Gutter Capital, LLC. But at a certain point it was on 110 cap tables, and founders kept coming to us. We’d be talking to founders and they’d say, “Oh, you’re Gutter Capital.” VCs would say, “I see you on all these cap tables.” So it started to take on a life of its own.
My wife is an art dealer, and she would tell you it’s an institutional critique. Every venture fund wants to sound as prestigious as possible, and we felt it was integral to who we are to have a fun name that almost intentionally sounded unprestigious. Actually, LPs hate it, because they have to go to their investment committee and say, “We’re suggesting a $10 million investment in Gutter Capital.” They hate it. But one LP said something I liked: “If you call yourselves Gutter Capital, you better be good.” I thought that was a really nice, succinct way of putting it.
Turner Novak:
It reminds me of garbage, like the most non-prestigious, unsexy, uninstitutional, throw-them-in-the-gutter kind of name. Which is good. Sounds like you’re in the gutters, cleaning out the gutters, getting in there.
Dan Teran:
Thank you. You get it. Ultimately it’s a brand, and brands are whatever life you breathe into them. So it’s working for us right now.
Turner Novak:
You got the fund together, you got the name, 2021, first couple of deals, first couple of companies, got this thing going. What was it like raising money for a fund versus a company? Because you just said you’re pretty good at fundraising. It sounds like Managed by Q was a breeze, you’re helping founders, people are introducing you because you’re good at fundraising. What was it like raising money for the fund?
Dan Teran:
It was like getting punched in the face. It was crazy. Arrogant’s a strong word, but I was confident going into the fundraise, because as a founder, I started Managed by Q when I was 24, and we’d always raised more than we needed on great terms. I was good at it. I assumed raising for the fund would be similar, and we’d done it before: we had 110 angel investments, really strong performance, all top quartile if not top decile every year.
Then we started trying to actually raise, and the biggest insight I had about raising as a founder versus as a GP is that as a founder, when you’re pitching good VCs, they want to believe you. They want to sit on the same side of the table and see what you’re seeing. They’re compelled by your vision. LPs are trained to look for reasons why you can’t do it. Everyone we talked to just wanted to tell me why we couldn’t do it, which was not my experience as a founder. VCs would ask constructive questions, even ones I didn’t want to work with wanted to know, “How big can this thing get?”
Not, “Are you sure you can lead a round? Is that a real question? Why would founders want to work with you?” We’d get these antagonistic questions. For a certain type of LP, we just weren’t what they were looking for.
You probably experienced this as well. Spin-outs have been in vogue for as long as you and I have been in the venture business, and for a lot of LPs, they’d take the call, but as soon as they learned I didn’t used to work at Sequoia or Andreessen, they were never gonna invest. So what I found, and James and I say this all the time, is you find your people in this business, and we really found ours. We have some incredible LPs. They’re not the usual suspects, because we’re not the usual suspects, but that’s also kind of awesome about this business, because hopefully we’re gonna make them a ton of money.
Turner Novak:
To your point, my deck is a bunch of memes. It’s just, here are some examples of memes I’ve made, and a lot of LPs are like, “What the fuck is this?” They’re honest. They’re just like, “This is not a strategy. This doesn’t work.”
Dan Teran:
Authenticity is, it’s cheesy, but authenticity is the only strategy. The older you get, the more you realize that, and the more confidence you have to live this way. Authenticity is the only strategy that ever works in anything. If you’re trying to be the best in the world, you can’t do what someone else is doing.
We’ve leaned into that. We got through the hard fundraises, and now they’ve gotten easier, like with this most recent fund. It was really gratifying, because the first two funds took the full two-year time limit and we didn’t hit the target either time. For Fund III, which we just announced this week, we hit the hard cap. The target was 50, so we hit the hard cap, and we did it in like three or four months. The hard work is ahead of us obviously, but it felt very nice that there are LPs who’ve been following along and are open to seeing that our strategy is working. A lot of LPs are like, “This doesn’t look like what other people are doing. You didn’t used to work at these firms. Best of luck.”
Turner Novak:
I feel like you have these legendary LP letters. I didn’t get to read all of them, because they’re pretty long.
Dan Teran:
Well, thanks for even looking at them.
Turner Novak:
So why do you write these super long LP letters? Who cares? What’s the point?
Dan Teran:
James and I are both big writers. We draw a lot of inspiration from people who’ve written amazing letters, some of the best investors in the world: all the way back to John Maynard Keynes, an incredible writer and thinker; obviously Buffett; Howard Marks. We draw a lot of inspiration from people who put a lot of thought into the written word. And it’s a way for James and me to really get on the same page. We alternate who’s writing it every quarter.
Turner Novak:
That’s a good approach.
Dan Teran:
We fight like cats and dogs about it. We really care, and you probably got that from the letters. We take the job, the responsibility, and our commitment to our founders really seriously, and the letter is where it all comes out. We write really detailed letters, do a lot of proprietary analysis, and we have to get really in sync on how we’re communicating things. Every quarter, and this is true in any partnership, there’s stuff you thought you were on the same page about, even sitting next to each other all day, that really comes out in the letter. So that’s a great part of the process. For me, it clarifies my thinking and my messaging.
It’s grueling. The latest one I sent you, I literally had a board meeting in Atlanta, went a weekend early, and stayed in a hotel room the entire weekend writing, and I still didn’t get anywhere. It’s always a 40-hour process. But it’s fun to have a small community of LPs who really read them. People look forward to them at this point. They really know us, what we’re doing and why, and they’re following along the journey. For fundraising it divides the world, because most people don’t read, and that includes LPs. Anybody who actually reads the letter either invests or we have a really good conversation about where they think we’re wrong, and we might learn something, which is also an awesome outcome. It always pays to have a perspective, because either you sharpen your own point of view or you give people a target to shoot at if they think you’re wrong, and then you can have a discussion and learn something.
Turner Novak:
They almost know what you’re gonna say in some cases, so they can jump to the second or third order of the discussion, versus just, “Tell me about your portfolio,” or, “Where do you get your deal flow from?”
Dan Teran:
And you get into this habit of being wrong. If you have a point of view all the time, which James and I do, and you tell people, you’re just gonna be wrong sometimes, and you get really comfortable being vulnerable and sharing exactly where you were wrong, where you were right, and what you’re doing about it. Then people don’t mind engaging with you on how it’s going. I’m an LP in a dozen funds from before we started this, and the updates are all kind of the same: GPT-led market analysis and then very rosy updates from companies where they clearly don’t really know what’s happening.
Turner Novak:
One LP told me, “I can tell you actually really understand what the portfolio companies are doing.” And it was kind of surprising to me. I was like, “I thought I was supposed to.”
Dan Teran:
Seriously. Which I get. If there were 100 companies, I wouldn’t know what they all do. It’s just too much to remember.
Turner Novak:
I’ve been trying to figure out the right pace. I’ve been slowing down a little just from the current macro state of the market, going a little slower than I otherwise would. The pace is like one or two a quarter roughly. I don’t have as big of checks as you guys, I don’t promise quite as much. But I’ve been trying to figure out an okay state of how many new companies I should invest in and founders I should really start to help, to the extent of actually knowing what’s going on, and also being the one they text. With the company I mentioned earlier, we identified about 20 different potential customers I think I can introduce them to. It’s gonna be a pretty hands-on opportunity.
Dan Teran:
You learn so much doing that, and you get empathy for the operator. It’s amazing. We do that in the investment process. We basically play the SDR, and we have a rule that if I can’t generate a couple of meetings for you from my network or even just cold outreach, it’s probably gonna be very hard for an SDR to do it. We learn a lot when we source those calls and actually try to pitch the product to someone. But we also show the founder what kind of partner we’re gonna be, which gives us a lot of leverage in the deal.
Turner Novak:
I always think a lot about how I could actually help if I invest. There have been cases where I just don’t think I can do anything, I don’t really get it, and I don’t have a strong opinion. It’s almost the shower test, where if I’m in the shower, will my mind wander to the thing they’re doing and I come up with something that could help.
Dan Teran:
You get amped by thinking, oh, I could do this. That energy is really positive, because it carries through everything in the relationship.
Turner Novak:
This one I mentioned, I can probably say it. They’re basically making health insurance for startups, a better health insurance product. When you think about the wave of neobanks that came for startups and made banking a little better, they’re trying to do the same thing with health insurance. It’s a really big problem, and it’s very down the fairway of, I’m pretty sure I can help you with some stuff. I don’t know anything about insurance, we know nothing about it, aside from that it sucks.
Dan Teran:
Yeah.
Turner Novak:
So I’m exaggerating a little, but I can be super helpful of, “Hey, I know a ton of people I could probably just tell, you guys should switch to this, because it’s a better product and cheaper.” That’s the holy grail. I’ve been thinking about this for a while. I was thinking about my first ever mortgage payment for the first house I bought in Grand Rapids, Michigan in 2015.
Turner Novak:
It was like $444, my all-in mortgage payment, the taxes, insurance, and the actual debt payment, the interest and principal. My current health insurance premium that I pay every month, married with two kids, is like $2,800 a month.
Dan Teran:
That’s crazy.
Turner Novak:
Insane. People complain about the cost of housing, and it is expensive, but I was reflecting on this a month ago, like, man, I pay so much for insurance. 2015 me would be absolutely blown away by what my current insurance costs. It’s just nuts.
Dan Teran:
And you don’t have a choice. You barely even think about it.
Turner Novak:
You barely think about it until you go to the doctor and, “Oh, by the way, this is still $700 for this thing.”
Dan Teran:
Yeah, sure.
Turner Novak:
Plus, “We think you might have cancer, but come back in six months and we’ll see if it got worse.”
Dan Teran:
Totally.
Turner Novak:
And you’ll pay $700 again, and you’ll pay $2,800 a month every month between now and then. It’s just crazy.
Dan Teran:
It’s a broken system for sure.
Turner Novak:
So speaking about interesting problems in the world, one thing you mentioned before is that you would never do Managed by Q again. If you were to start a new company, you wouldn’t do it. Why do you say that, and what would you actually be investing in right now today?
Dan Teran:
The Managed by Q point has a lot less to do with the problem and more to do with me. I spent five years of my life focused on office management. I don’t think it’s one of the most pressing issues facing the world today. There were ways we made it interesting, and I loved our customers and partners and working with small businesses in the marketplace, and that stuff was all great. But I feel like I’ve lived that chapter of my life. We have a company that just went through Elbow Grease that’s doing AI agents for the back office for commercial service companies, and I’m happy to open up my Rolodex of large janitorial companies for them. So I’m still happy to keep a foot in those worlds, but if I were to build another company, it probably wouldn’t be around office services, just because I’m trying to hold myself to a high bar of what are the meaningful problems for me to solve personally.
Turner Novak:
So what kinds of areas are those that you’re most interested in right now?
Dan Teran:
For the first Elbow Grease, we had a focus on real-world problems: energy, real estate, construction, manufacturing, small business, government. That’s historically the themes we’ve invested in. Because of AI, the entire economy is up for grabs, so we’re moving away from just doing vertical software and vertical software marketplaces where we had a lot of domain experience. We thought those categories were the most under-penetrated by software and therefore the most interesting. That’s still true with AI, but given the proliferation of LLMs into the entire economy, you’re gonna see literally every industry turn over who the dominant players are. So we’re really broadening the aperture today. As an example, we were angel investors in Cure Hydration, which is a hydration supplement, one of those sachets you put in your water.
Turner Novak:
I’m pretty sure I had one of those last night, actually. I’m pretty sure it was Cure.
Dan Teran:
I’m a very proud investor. We were angel investors, and I just joined their board post-Series B, because Lauren, the founder, is a good friend. She’s amazing. It’s not the type of company we would’ve invested in at Gutter two or three years ago. But there’s kind of a why-now for everything with AI, given that the cost structure of every business has changed. So we’re trying to keep a really open mind. For anybody considering applying to Elbow Grease, we’re just like, if you’re doing your life’s work, we need to know about it. There’s a much broader universe of what could work now that couldn’t work before. We’ve historically done a lot of real-world gritty stuff like field services and manufacturing, and we’re open-minded today.
Turner Novak:
So what does a Gutter founder look like? Is that something you guys think about?
Dan Teran:
That is probably the thing we think about the most. When you’re investing at such an early stage, to our earlier conversation on concentration, the most important decision is who the founder is, because you’ve got to want to be in the trenches with them for a decade for our model to work. At a high level, we think about an exceptional level of drive, high integrity, and good judgment. Judgment’s the hardest thing to evaluate, but it’s the most important thing. You can really only do it experientially. Do they have a history of making good decisions? Do they understand a good decision from a bad one? Can they talk about mistakes comfortably? Can they tell you what they learned from mistakes? Do they focus on process, not outcome? A lot goes into it, but the beauty of Elbow Grease is that our intention is to lead the next round, so we get to watch them make decisions nonstop for 10 weeks. That’s a really good way to evaluate it.
Elbow Grease and Gutter founders don’t need to be the central-casting Silicon Valley founder. We’re not obsessed with second-time founders. We think they’re overrated relative to first-time founders. We don’t mind if people don’t have a technical background. We almost prefer people to have a deep connection to the problem they’re solving and a deep commitment to the industry we’re in. Rachel from Opus is a great example. She was literally teaching English as a second language in kitchens in Danny Meyer’s restaurants, nights and weekends. She was so driven to improve the life of frontline workers that nothing was gonna stop her. Abhinav, the founder of Bikky, his mother-in-law owned Indian restaurants, and it was her problem he was solving when he started Bikky. We see those types of stories across the Gutter portfolio. We want people who have an authentic connection to the mission that’s not going anywhere.
Turner Novak:
Is there anything you wouldn’t do, or a red flag, anything where you just shy away a little?
Dan Teran:
We’re really interested in founders that are called to solve a problem, so broadly we have not historically been excited about crypto, gambling, gaming, advertising, sports, things that are maybe charitably more nice-to-have than need-to-have, and in some cases create more problems than they solve.
Turner Novak:
I could see that. It’s interesting now with James, with his gambling background, you haven’t done any of it.
Dan Teran:
Part of the reason he wanted to quit was that it’s become a lot more common knowledge that there are pretty negative externalities to those businesses. It’s often people who can’t afford to lose the money.
Turner Novak:
So you do all this analysis. Now on portfolio construction, I know you use a lot of AI to make things run more efficiently, but you’re also very much not leaning into using AI to make all the decisions. Where’s the line? What do you use it for, and where do you not use it, internally at the firm?
Dan Teran:
Our investment process uses very little AI today, because at the very earliest stages, when you’re doing these founder assessments, our process probably doesn’t look that different from other people’s. What’s unique is a heavy emphasis on customer calls, talking to a lot of their customers, but also prospecting and finding net-new customers we can pitch on the problem. One advantage we have as people who’ve founded businesses before is that I know what it feels like when I’m pitching someone vaporware and I’m like, “They’re definitely gonna buy this,” or when they’re just being nice to me. I’ve been there before. That’s a pretty unique part of our process.
Then the founder assessment is kind of the full thing. We’ve evolved it over the last three or four years, and the shape it takes today is I do a 90-minute interview with each founder, and James does a completely different script, a completely different 90-minute interview with each founder, and we’re assessing the things I mentioned earlier along with some others. It’s intensely personal and biographical, walks through their career, walks through scenarios and decision-making. It’s meant to really assess the founder on a number of dimensions. That’s pretty unique and differentiated, and something we keep building on.
Not only do we not use AI to evaluate it, we actually have another human, a guy named Josh Levine, who’s an expert in the Enneagram as well as a CEO and founder coach. All he does is work with founders, and he reviews the founder assessments and grades them for us. So we have an independent third party who’s evaluated almost every founder we’ve invested in, which lets us go back and have a really spirited conversation comparing the founder in hand to historic investments. That piece is pretty unique to us, and also pretty low-tech, all things considered.
Turner Novak:
I’ve had this internal debate in my head. People talk about how in the next 18 months the investment process is gonna be totally AI, where you don’t have to interface with the VC at all. You apply, give them your data, and the VC just shows up, decides if they should do it or not, or it’s automatically deploying the capital.
Dan Teran:
I’m not sure. Especially at later stages when there’s a ton of data, I think AI is probably pretty good at deciding what you shouldn’t invest in. There are rules-based things: if the net revenue retention is really bad, or the growth is really bad, there are things you can determine. So with Elbow Grease, as we think about using AI in our process, it’s certainly not gonna be selecting companies. It could help filter down, but ultimately there’s so much nuance to choosing people and missions, and the AI is not a great bullshit detector. We’ve tried to do the founder assessments using AI, and someone will say, “I have a ton of integrity,” and the AI will be like, “This guy’s 10 out of 10 on integrity.” The AI is very easily fooled. Well, how do you know? He said so.
Turner Novak:
Yeah, exactly.
Dan Teran:
Obviously you can tune it beyond that, but that’s generally what it’s like. It’s just not at a point where it’s in the same room with the person, watching how they’re sitting. Are they fidgeting when they say it? How credible are they? How much conviction do they have? When they’re talking, it’s, is this a guy or a gal I want to work for? I don’t think AI is gonna be able to figure that stuff out in the near future. So there’s still room for guys like us.
Turner Novak:
The AI is using whatever data is out there to make a decision. You could ask, is this a good market or not, give me a market map, give me all this research. But then the founder actually has a new data point, like the ACVs are five times bigger today, or there’s a new way of acquiring customers.
Dan Teran:
It’s also that the founders are using the AI too. So they’re not gonna present you with a market the AI says is bad. The AI is probably gonna say all the markets are pretty good, because the founder used the AI to describe the market to you.
Turner Novak:
I had one founder, it was a pretty funny conversation. He was like, “By the way, this isn’t in Claude.” There are a couple of times you mentioned where I know you probably just threw this in and it spit some stuff out, but you can’t figure this stuff out using Claude. He specifically knew, because he’s probably gotten the same things over and over from people, so he was like, “I actually didn’t do this. I didn’t talk to Claude at all before I talked to you.” I just thought it was funny, because I was like, well, I didn’t know this anyway.
Dan Teran:
At this stage in the game, where the LLMs are useful is to help point out things I might be missing, but never making judgment calls. We have an app we built where basically every customer call and reference call, all the transcripts, get pulled in, and it has a blueprint of what a complete investment memo would look like in terms of the volume of information about competitors, the market, the founders, all these things, and it helps us make sure we didn’t miss anything. But the answer is always, “You need to do another customer call with someone in this segment.” It’s not, “You should invest” or “you shouldn’t invest.”
Turner Novak:
So when you do these customer calls, what do they look like? What are you looking for? Because you mentioned you weigh quite a bit on what the customers are saying.
Dan Teran:
I have a background in design, so we put a heavy emphasis on user research. We’re basically doing a user research call. We want to understand them and their world: who they are, what their job is, how they’re compensated, how their job performance is evaluated. We want to know what other software tools they use, what their universe looks like, how they first learned about the product, why they agreed to take the call, and ultimately how the purchasing decision was made. Who holds the budget, who made the decision, and so on.
And very specifically, when they made the argument internally, what was the value they said it could provide? Has it met that value? There are little user research things, like what do you do right before you use the product, and what’s the first tab you open after you use it, understanding the adjacencies, which gives you a sense of what else might be up for grabs. And then the most important question is, how upset would you be if it went away? The whole thing builds to that question, because we’ve had people literally say, “I’d quit my job if they took it away from me,” and we’ve had people say, “I’d use this other thing,” and you’re like, oh, I see, that’s bad.
Turner Novak:
Because ultimately the value of the company comes from customers paying you money. What is that worth?
Dan Teran:
And the lock-in is derived from there not being suitable alternatives.
Turner Novak:
I think that’s super underrated. A lot of it is that the company is just the value of the cash flow you get from customers, really, at the end of the day. It’s a super simplified way of extracting it in one sentence, but it’s super important.
Dan Teran:
And the durability of those cash flows, and the ability to expand them over time.
Turner Novak:
Exactly. What does this look like? How much money can you get from them over time?
Dan Teran:
A lot of times with pre-seed, one of the things you’ve got to look out for is, are they saying, “I love Steve, we love him, he’s great, he does whatever we ask”? And it’s like, but what do you use the product for? And they’re like, “Well, whenever there’s an issue, I just talk to Steve.” Oftentimes really great founders are great at client service, so you want to make sure the product is the thing they’re valuing, not an expert person to talk to. That could still work, but that’s the kind of nuance you only get when you really talk to a lot of the customers.
Turner Novak:
Slightly different topic. How has New York tech changed over the past, I don’t know, 15-ish years? I’m not sure how long you’ve been in it, but how has it evolved over time? What’s the difference you’ve seen?
Dan Teran:
It’s a lot bigger. When I started Managed by Q in 2014, you could fit every founder into a room, and they kind of did. You saw the same people over and over at every SVB dinner. It was very small and intimate, and we really knew each other. Everyone was in the same offices that changed hands, so it had a cottage-industry feel.
The biggest thing that changed, probably 10 years ago, Google kind of led the way, but Google, Facebook, and Amazon all realized it’s the opposite of the post-war era where you build the factory and the town springs up around it. Now you need to build the factory where the talent is, because they’re gonna live where they want to live. And everyone wants to be in New York City. Not everyone, but pre-AI boom, when smart kids were graduating from college, all things being equal, a lot of people wanted to be in New York. It’s very vibrant, it’s got an amazing cultural community, there’s just so much happening here.
Turner Novak:
My daughters want to be in New York, and they’re nine and five.
Dan Teran:
They should. You should bring them.
Turner Novak:
I’m like, “Why do you want to be in New York?” And it’s the propaganda of culture.
Dan Teran:
Totally. It’s like every other show on television.
Dan Teran:
So that happened, and then Amazon opened a huge office here, Facebook opened a huge office here, Google bought the St. John’s Terminal and has another huge office here now, plus the whole Chelsea Market. Basically, those companies hired tens of thousands of software engineers in New York, so we went from having no software engineers, period, to a pretty well-trained workforce. That definitely unlocked a whole other level of the game.
Then there have been some huge winners: MongoDB, Datadog, Squarespace, Oscar. None of those companies really existed when I got here, and now there’s a pretty big ecosystem. Datadog is a good example, a real software business, a highly technical product. The meme when I started was that New York was only e-commerce.
Turner Novak:
And brand, consumer.
Dan Teran:
Media, marketing. That was sort of the thing. A lot of the D2C stuff for sure, which kind of came and went.
Turner Novak:
Did you say you invested in a CPG company, though, like Cure?
Dan Teran:
Cure was an angel investment. We did a ton of branded CPG as angels and honestly have done pretty well there. Another one we invested in as angels that’s an incredible business is Rowan, which is piercing studios for little girls.
Turner Novak:
Like ear piercing?
Dan Teran:
Yeah. Amazing business. Branded consumer services. Luisa, the founder and CEO, is a good friend and an LP in the fund as well.
Turner Novak:
So this is like Claire’s, the one we used to go to in the mall back in the day?
Dan Teran:
Totally. It’s like the Claire’s killer.
Turner Novak:
So it’s Claire’s made for the modern day, not in the malls.
Dan Teran:
Totally. I think New York, because you have industries that are not tech here, you do have a lot more interesting diversity of businesses. Obviously the Casper, CPG era didn’t exactly end well, but for this AI moment, with the cost of building a company driving down to zero, there’s a lot of opportunity here.
Turner Novak:
Speaking of building, do you have any opinions on building a board early on? Because you guys invest super early.
Dan Teran:
I do.
Turner Novak:
What do you usually recommend?
Dan Teran:
I mentioned earlier that I was really lucky to work with Satya Patel. He joined my board when I was 25. They were known for being dogmatic about forming a board at seed, which used to be a big taboo. Founders would tell you horror stories about losing control, and about it being a pain in the ass, extra work. What I experienced firsthand, at Satya’s direction, was that the board meeting itself made me a better CEO. The same way writing our quarterly letters is taking the medicine, it forced me to get organized once a quarter, step off the trail, reflect on progress, and have a strategic view of the business. It gave me a reason to ask all my functional leaders to generate materials that made them have a view on the business versus just plodding along.
And you really can get insight from a board who can hold you accountable to, “What was the plan? What did you say you were gonna do? What happened?” Even if things are going well, it’s really important to drill into the things that didn’t work, because you’re calibrating as an organization. What are the things we say we’re gonna do that never actually happen? What are we not good at because we don’t have the right people? You’re also normalizing talking about failure as part of the company’s culture, which I think is really important. So we’re dogmatic about forming the board. We have board meetings starting at pre-seed, which is much lower overhead. There doesn’t need to be a formal board, because it just makes more legal bills than are required. But at seed, it’s usually me and the founders, or James and the founders.
Turner Novak:
What’s the appropriate amount of work to put into this? Because based on what you just said, somebody could say, “Man, this sounds like a distraction if I’m a pre-seed company.” What’s the appropriate amount of effort going into this? Do I have to make a deck and prepare a bunch of stuff? How much time should I spend? Because it could be a lot in some cases.
Dan Teran:
It’s a good question. Basically it’s no work if you’re running the organization well. What I mean is, what we tell founders and coach them on is, if you’re using OKRs to run the business, and by run the business I mean you have a weekly meeting with your team and the OKRs are the lens through which you talk about progress, and when you write your monthly investor update, that’s the lens through which you communicate it, then at the end of the quarter you have a board meeting. And what does the board meeting do? You review the quarter’s performance through the lens of the OKRs, which you’ve already graded because you use them every week. We literally give a document to founders on how to run a Gutter board meeting. It’s performance against plan, what’s going well, which are the things that are green, and then you spend 80% of the time on what’s going poorly, the things that are yellow and red. And then what are we doing next quarter, which is usually an answer to the things going poorly, our hypothesis of how we’re gonna make those things go well.
If you set OKRs and don’t have the infrastructure in place to actually measure them, and you never talk about them and don’t even remember why you set them, then at the end of the quarter it’s a mad dash to make some stuff up to present to the board. But if you actually have an operating cadence and use it to run the business, it’s literally no work at all. Maybe there are some strategic topics you want to prepare for because you actually want input into a new direction. But the meat and potatoes is really dead simple as long as it’s being used to run the business regularly.
Turner Novak:
It almost sounds like, if I’m a founder who’s pretty on top of it, I have some investors I catch up with semi-regularly to keep them up to date and ask for help on some things. It sounds like that’s basically what this is at the end of the day.
Dan Teran:
And the founders it really benefits are the ones who are not on top of it. I say that from experience. I was never an organized person. I got religion around it because I became a CEO as a 25-year-old and needed to figure it out. I had one very bad board meeting I remember, where I kind of blew up because I didn’t have good answers to questions. I was defensive, and Satya was like, “Well, let’s make sure that doesn’t happen again.” And I was like, right, and the way to make sure it doesn’t happen again is just to be prepared. And being prepared just means never being unprepared.
Turner Novak:
Being prepared is such an underrated strategy.
Dan Teran:
It’s not the preparedness that matters the most. It’s all the implications of always being on top of your shit.
Turner Novak:
My very first job out of school I worked at a bank, lending money to small businesses. We had this thing called credit committee where every person on the credit team met and discussed the loans coming through. Someone usually presented it. There were different teams, and each team had a meeting the day before going through the deals. It’s pretty low-stakes stuff. But I remember one time my lender, who I worked with because I was the analyst, asked me to present the loan. I don’t even remember what it was. I just wasn’t prepared to do that. I forgot what it was, and he asked me to do it right there, and I just made something up, honestly. It was terrible. It was a disaster.
Dan Teran:
Yeah.
Turner Novak:
I’ve never actually reflected on that until right now. But that was probably my worst moment of not being prepared at work. It’s kind of embarrassing, honestly, because usually I was pretty on top of things.
Dan Teran:
It happens. You evolve these operating systems for yourself to not feel like that again. That was my experience of it. So when I’m trying to impart this on founders, it’s not like there’s no friction, because it is a little bit of a pain in the ass. But you’re gonna raise the next round, and if you come in with these bulletproof decks from every board meeting and every update, even if things aren’t perfect, they’re gonna look at how you operate and think, “This is a team that makes commitments, follows through on commitments, and when they don’t, they learn from it.” That’s all an investor is looking for, obviously the business also has to perform. Versus, if you set goals and never address them, that’s what they’re gonna get.
Turner Novak:
Because in most cases it’s not gonna be that you show up, meet someone, and right there they invest immediately. A lot of people like to see that line going up over time.
Dan Teran:
Totally.
Turner Novak:
And the more you can do to synthetically give that to them, whether it’s a chart of the revenue going up or some metric, some OKR, and if you can’t get to know them over a long period of time, maybe it’s, “Hey, here’s two years, eight quarters of board meetings. Here’s what it’s like sitting in those.”
Dan Teran:
I love those as a material. Usually the companies are pretty new, but I’m reading them from the beginning chronologically and seeing how a company sets goals, identifies a problem, proposes a solution, executes on the solution. Then that’s not enough of a problem anymore, now something else is. If an organization or a founder has demonstrated that that’s just how they roll, that’s gonna happen all the way to being a public company CEO, because the whole thing is just identifying, diagnosing, and solving problems over and over again.
Turner Novak:
Speaking of how you guys specifically do things with founders, there’s one thing you do with the carried interest from the funds. What do you do that’s a little different than most people?
Dan Teran:
We wanted to have a model. We know the fund’s gonna be very concentrated, we’re gonna have this dense community of founders, we’re all gonna be in the same space, and everyone’s gonna be pulling for each other. We wanted our founders to have a shared interest in each other’s companies. We were pretty strategic in that we didn’t tell any of the Fund I companies we were doing it until after we’d invested. We didn’t want this to be a pitch, because it’s almost adverse-selection-y to tell someone you’re gonna give them equity in your fund.
Turner Novak:
Like, if you fail, you’ll still make money.
Dan Teran:
Yeah. That’s not what we were trying to do. We were trying to reinforce the behaviors that were already happening, which was, “Oh, we hired an amazing engineer, but we had another candidate who was great, do you guys want to meet him?” “Oh, you’re raising a Series A, I just finished my process, here’s my list, here’s who’s good, here’s who showed up unprepared, they’re a waste of time, I’m happy to make the intros,” because intros are always better coming from founders than from VCs. We have a lot of companies with overlapping industries that help each other with customer introductions or intelligence in the market. So we wanted to incentivize those things that were already happening. It’s worked out great. Who knows what it actually does, and whether people would just be doing these things anyway. I think they probably would, it’s the kind of people they are. But as an investor, it feels really good to know that if we shoot the lights out and are so lucky, because past 10x it’s luck, but if we’re lucky and have a generational fund, all these founders are gonna participate in that. That’s pretty fun.
Turner Novak:
It sounds like the founders at Gutter really stick up for each other and try to help each other. There’s this mantra of, the best founders don’t need help. I don’t know if we really talked about that earlier, but what’s your opinion? It sounds like maybe they do want help.
Dan Teran:
Everyone needs help. What a crazy thing to say, that the best founders don’t need help. The history of Silicon Valley is actually littered with the opposite. Don Valentine famously, when I think Nolan Bushnell introduced Steve Jobs to him, said, “Why did you send me this renegade of the human race?” And he introduced him to Mike Markkula, and without Mike Markkula we might not have an iPhone. You see a similar thing play out at Google with Eric Schmidt, where John Doerr gets involved. People like to say the best founders don’t need help, but often what they’re saying is they’re not interested in doing the work to help founders, or they’re not qualified to. A lot of investors are not qualified to help founders. But it’s silly to say the best founders don’t need help. History tells a very different story. If Steve Jobs isn’t the best founder, then I don’t know who is.
Turner Novak:
Do you think it comes from the best founders don’t need help because most of the help investors give is just not helpful?
Dan Teran:
Well, they might not need your help. Not you specifically, but they definitely don’t need help from somebody who’s never really done a relevant thing. But do they need help hiring an engineer, if you can pull that forward a quarter? Could it change the trajectory of the company? For sure. Introducing co-founders. It also depends who we’re talking about. Some founders do have a ton of experience, and they probably don’t need my help, but that’s not really the archetype of founder we’re typically investing in. Even in our case, we’ve funded second-time founders, and they don’t need help, but they certainly appreciate it, and it’s certainly impactful to the business when we can pull in the right customer at the right time or the right investor at the right time. So it’s lazy and self-serving to say the best founders don’t need help. And it’s a pretty poor strategy for a venture fund to brand themselves as not willing to do anything.
Turner Novak:
It’s interesting that the heyday of this with Tiger, that was almost the branding, that they don’t help you. It’s great.
Turner Novak:
I love that they just get away from me, which I guess some people do like, but maybe it was because they’d had such bad experiences with the overarching hand of meddling with things.
Dan Teran:
People might like that, but did it go well for them?
Turner Novak:
And they actually do help. What I used to do a lot was email Tiger and ask, because they had all this data that Bain would do for them, I’d ask, “Hey, do you guys have any research on this?” and they’d send me a 60-page deck, a ton of stuff on some market, which I thought was pretty helpful. And I also knew if they didn’t have anything, that was a signal to me. It could mean it’s just a bad market, it doesn’t matter, it’s not significant. But often it was, wait a second, no one’s paying attention to this, it’s overlooked, this is an interesting spot.
Dan Teran:
Totally.
Turner Novak:
I remember one specifically that has gone pretty favorably. Part of my thinking around it was that a lot of it was really good, but there was just not a lot out there and literally no one was talking about it. I was kind of like, man, I just don’t know if this is a good idea or not. It might be stupid, just not even a good opportunity. So I think you had one other crazy thing you’ve done. You’ve gone surfing with Adam Neumann, and Laird Hamilton, he’s a pro surfer, is that his name?
Dan Teran:
Laird is the most famous big-wave surfer in the world. I can tell this story because Adam has told it publicly, much to my chagrin. We were in the middle of negotiating the deal for the sale of the company. This was New Year’s of 2019, and Adam was like, “I’m going to Kauai with some of the leaders, you should come.” I had to be somewhere, so I literally flew to Kauai, which is very far from New York, for a 24-hour period. I got there and he was like, “Meet us here.” I get there, and I’m pretty sure it was Laird Hamilton’s house, which is on this river up from Hanalei Bay.
I get there and they’re in the sauna, and we’re doing the sauna and the cold plunge, and they’re like, “Come on, we’re going surfing.” And I’m like, great. We’re getting the cars, and I didn’t realize there’s this river with the jet skis tied up, and everyone’s hopping on the jet skis. They’re like, “Oh no, just hop on, we have a board for you.” I’m a fine surfer, I’m not a great surfer. They had this little tiny short board, and it’s Laird’s crew, and they take you out on the skis. I’d never done this before. I’d never surfed off a jet ski before.
Turner Novak:
Oh, you surfed off a jet ski?
Dan Teran:
Yeah, they’re towing you into 20-foot waves. It was crazy. It was a very crazy thing to do. But I was trying to get this deal done, so I would do literally fucking anything. Forgive my language.
Turner Novak:
Put your life at risk, it sounds like.
Dan Teran:
Yeah. So we go ripping out to the far end of Hanalei Bay, and they’re just gunning it into these waves that are as big as a house. The guy was really nice. I was like, “I don’t really know what to do.” And he was like, “I’m gonna slap your leg, and when I do, you go. You don’t wait, you don’t hesitate, because the ski can get caught in the wave. So you dump onto your chest, and then you’re going down the face of this huge wave, and you have to get up immediately.”
And then I was like, “What happens if I fall?” And he was like, “You just go underwater and count, and wait for the board to start to pull, because you might swim in the wrong direction. It’s such a big wave that you don’t know which way is up.” And I was like, “And then what?” And he’s like, “Then I’ll pick you up. But as soon as you get up, grab on,” there’s a foam thing on the back of the jet ski, “because the next wave is coming.” So you get up half drowned, because I did get crushed by these waves, I was not very good, and you grab onto the back of the jet ski, and they immediately gun it into the face of a wave, and you have to get over before it breaks. Literally, Adam’s jet ski got caught, and I just remember seeing his jet ski get thrown like a ragdoll. He jumps over the back of it, and we were out with Laird’s crew, and Laird had seen this happen from the gas station and came out on his jet ski and was like, “Everybody okay?” It was a very surreal experience.
To make a long story short, Adam’s like, “Do you want to go in?” because I kept getting pounded, and I was like, “No, I’m gonna get it.” I had to get it. And I ended up catching one beautiful wave most of the way in. There’s footage of this, because of course Adam had a drone out there covering the whole thing. I was just trying to get through the experience. Then six months later, Adam’s announcing the acquisition to the entire global WeWork, and he starts launching into it, and I’m like, oh God, he’s gonna tell this story. For one, I was embarrassed, like, was surfing with him the highest-leverage thing for the business? And then he keeps going about how he knew I was the right person after watching me get crushed by wave after wave after wave. And this is in front of my whole team, which didn’t know this happened.
Turner Novak:
The grit, that founder grit.
Dan Teran:
That was what he was trying to get across, while also really taking me down a notch. It was fine. It was a wild experience, and one I’m not dying to repeat, but it was cool.
Turner Novak:
But didn’t you cut yourself once surfing and then go to JT’s wedding the next day? Is this the same thing or no?
Dan Teran:
No, that was the day of JT’s wedding. JT’s wife Caitlin is amazing, a good friend, and she was very adamant that we could not get hurt. It was the day of his wedding. She was adamant that JT could not get hurt. And we went surfing on a very stormy day in Little Compton, Rhode Island, and I very stupidly paddled into a closeout, and I felt something on the back of my head, and I just remember getting tossed in the waves. I get up, and I feel the back of my head, and I’m like, “Please don’t be bleeding, please don’t be bleeding.” And my hand was completely covered in blood.
So I’m paddling in, and it’s so stormy that it’s very rocky there, and the beach is just throwing rocks at me. It’s making fun of me. The surf is throwing rocks at me while I’m paddling in. Then I go to my car, and there’s some family in the parking lot, and they’re like, “Do you need help?” And I was like, “No, no, no, I’m fine.” I’m bending over because I’d put the keys on the hub of the wheel, and every time I bend over, blood just dumps out of the back of my head. I’m starting to get lightheaded, and I can’t find where I put my keys. And this family’s just standing there, and I was like, “Actually, you could do one thing. Could you find my keys for me?” They feel the perimeter of the wheel wells, find the keys, and they’re like, “Do you want us to take you to the hospital?” I was like, “I’m fine.” And they’re like, “The fire station is just down that road.”
So I drove myself to the fire station. I walked into the ambulance bay, and the guy’s eating a meatball sandwich, and he’s like, “Can I help you?” I’m in a wetsuit. Then I turn around and he’s like, “Oh, fuck.” And I was like, “Don’t get up, I just wanted to know, do you think I need an ambulance to get to the hospital, or can I go myself?” And he’s like, “It’s kind of a toss-up. It’s just straight down that road. If you wanna give it a shot, you know how to reach us.” And I was like, all right, fine. So I drive myself to the hospital. I walk in, I get like nine staples, maybe it was 19, let’s say nine, down the back of my head, and I’m rushing to get out of there. I literally go to the hotel shower and arrive as JT’s wedding is starting. So anyways, a lot of surfing mishaps.
Turner Novak:
I’ve had one slightly less head-open-bleeding thing. It was in the winter in Michigan. I was trying to move my garbage bin to the curb, and it was buried in snow, and I was shaking it, trying to pull it out, and I wasn’t paying attention, and an icicle on the roof...
Dan Teran:
Oh my God. This is like Final Destination.
Turner Novak:
Almost. I didn’t even realize what happened until later. But the icicle came down and hit me in the head, and I was like, “Oh man, that kind of hurt.” And I just moved the garbage to the curb. Then I got to work, and my head was still kind of sore. And the other intern I was working with on my team was like, “Dude, what happened to your head?” Apparently it was bleeding like crazy. It wasn’t quite as bad, I didn’t need nine staples, but afterwards I realized, holy shit, I had an icicle fall on my head, I could have died.
Dan Teran:
That’s serious.
Turner Novak:
It was wild. Anything else you want to talk about, or should we end it on that?
Dan Teran:
That’s a pretty dark way to end it, but it feels fitting. It’s a very gutter ending.
Turner Novak:
It was literally from the gutters. It was attached to the gutters of the garage.
Dan Teran:
There you go.
Turner Novak:
So it’s actually a perfect way to end it.
Find transcripts of all other episodes here.
