🎧🍌 Rick Zullo on Building Equal Ventures, Why Traction is Overrated, and Advice for Emerging Managers
Why venture capital isn't venture capital anymore, how PE firms will benefit the most from AI, why it sucks to be a Seed investor right now, and inside the struggle of raising Equal Fund 1
Two of the best businesses Rick Zullo invested in had no growth for years before he invested.
This new podcast episode gets into Equal’s unique approach to venture capital, thinking more like public market and private equity investors, and why they think traction is overrated at Seed.
We talk through Equal’s thesis-driven model, employing a team of product owners, only investing in only 3 to 5 themes at once, and Rick’s admiration of Charlie Munger.
We also talk AI - who will benefit the most, what he does and doesn’t like in terms of investing in the space, why venture capital is not really venture capital anymore, and why it sucks to be a Seed investor right now.
Rick also runs the Emerging Manager Circle, a group for emerging fund managers. We get into the origin story of the group, his own struggles raising Equal Fund 1, and why talent is leaving the mega funds.
Timestamps to jump in:
3:38 Why venture capital isn’t venture capital anymore
11:33 How founders should approach raising a Seed round
14:13 The realities of downrounds
15:55 Rick’s favorite founders that raised little capital
18:54 Biggest fundraising mistake founders make
21:21 Why we need to stop funding AI companies
28:34 How AI will benefit private equity the most
33:30 Three levels of opportunity in AI right now
38:36 Why traction is overrated at Seed
41:38 Investing in businesses with compounding returns on capital
52:07 VC lessons from PE firms
56:24 Why Seed investing sucks right now
1:04:15 The beauty of small exits
1:12:52 How failing to start a fund in college led to Equal Ventures
1:20:06 The struggle raising Equal’s $55m Fund 1
1:23:23 Why the best talent is leaving mega VC firms
1:30:16 The Emerging Managers Circle
Referenced:
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Transcript - (read on Rev)
Find transcripts of all prior episodes here.
Turner Novak:
Rick, welcome to the show.
Rick Zullo:
Thanks for having me.
Turner Novak:
So, excited to have you. We're going to talk about a lot of different things. One of the ones I'm really excited to talk about, you feel like venture is not venture. So this asset class, we all work in venture capital, you feel like it's not really venture capital anymore. What's going on?
Rick Zullo:
I think if you look at where venture was 10 years ago when... I broke into venture and business school in 2012, 2013 and you were thinking about seed rounds for $1 million checks you were thinking about... If you had a billion dollar exit, that was considered like a-
Turner Novak:
Insane.
Rick Zullo:
... great thing. I remember the first hundred million dollar fund or first billion dollar fund and thinking, "Wow. Venture is becoming real money." NEA was the biggest venture fund back then. And now, as you think of where venture funds are and some of the news that we've seen from Andreessen, Sequoia, Lightspeed, Insight, General Catalyst, it's become a completely different mechanism. That as I look at the companies that you can fund as well as the outcomes that you need to achieve, the size of funds. Like if someone told me 10 years ago that we'd be managing a quarter billion dollars, I'd be like, "You're high. There's no chance that's actually ever happening-"
Turner Novak:
Like you would assume you were the biggest player in the space, like biggest most AUM of any early stage fund
Rick Zullo:
Yeah. And how I think, when I started working at Lightbank, I think first round was one of the bigger seed funds and they had a hundred. And look at guys like Roger Ehrenberg in their first fund was 55 million and that was a very big time fund. And now, to a certain degree, is if you're not playing with 100, $200 million, you're a subscale for being able to lead rounds even at seed stage. So I think the game's changed in a lot of different ways and part of that is the amount of AUM that's come into the ecosystem. And some of the impacts that has on it and some of the incentives that it brings. And we can definitely talk more about that.
But a big part of it's also what's happening on the company side and how investors are looking at this. And I think, by and large, a company like HubSpot probably couldn't get funded in today's environment. "Hey, we're going to build SMB marketing software." People would just say like, "Ah, too crowded of a landscape. There's not really a way to go and get excited about the size of that company, the total time..." That's a $40 billion company, like I'd be very happy to be an investor in that. I think went public at around a billion and a half. A lot of what we're doing now is either lottery ticket chasing or infrastructure investing... Planning to put a billion dollars to work to get something that's going to yield maybe like a 10 to 15% IRR. And I think that's fundamentally different than the true art of venture investing, which actually increasingly fewer firms are doing that.
Turner Novak:
So can you even do venture investing in today's environment?
Rick Zullo:
Yeah. I think that there is. But the reality is you got to think about how you're going to play that game and make sure that you can achieve the outcomes that you want to achieve without being fully reliant on the downstream capital that's in the ecosystem. So yeah, we did oppose for our LPs. We don't share everything that we write externally, called offense and defense.
And the way that we were thinking about is, "Hey, there's going to be positions that like we want to go into own as much as this company as possible." Like, "This company is achieving profitability early. We want to get them off the big venture machine as fast as possible." And we just did that on one of our companies that went from roughly 1 to 10 million in two years. It's profitable. A company that we love. We plowed into it, because they didn't need a 30 to 50 million round. We now own north of 20% of that company and we think it's going to be a massive outcome for us, but they don't need to get onto the traditional venture capital trade.
It's very likely actually the next set of investors that come into that company. It could be Temasek or Blackstone or Ares or Apollo just as much as it could be Andreessen Horowitz. We think playing offense in positions like that, building your ownership, and making sure that you can control the game is a very interesting strategy for us.
And then, there's others where we need to play defense. And that's making sure that we are going and getting positioning to make sure that the company's either getting into profitable as fast as possible or we're protecting ourselves with certain rights to make sure that we can't get bullied around by the big VCs. And we think that being aggressive on the positions that we think are going to scale and being defensive to make sure that we aren't relying on, "Hey, if we can't get Lightspeed to come in or Andreessen to come in, in this round, then the company's dead." It shouldn't take $150 million for every single vertical SaaS company to get profitability and a bunch of ours don't.
Turner Novak:
So how do you think we've gotten into this state of being? When you say you need $150 million to get a company profitable, it sounds insane, but it's kind of a standard, I guess.
Rick Zullo:
I mean, show me the incentives and I'll show you the outcome-
Turner Novak:
Okay. So what are the incentives? Someone who's listening to us and they're like, "I don't get the incentives. I don't understand why this would be a problem."
Rick Zullo:
So when you look at venture capital as game, it is a way better business to be in the fee stream game than it is to be in the carry business. I got into venture to be in the carry business, not into the fee business.
Turner Novak:
What does this mean for someone who doesn't know?
Rick Zullo:
So when you think of the 2 and 20 model, 2% management fee and 20% of profits-
Turner Novak:
So you raise money, you charge 2% of the money you raise every year in fees that just... It's like "revenue" that comes into your business as an asset management firm-
Rick Zullo:
And 20% of the profits that you generate on a net basis. So if I turn $100 million into $300 million after fees and everything else like that, I'm collecting $40 million, i.e. 20% of those profits-
Turner Novak:
Because you profited 200 million and you get 20% so 40 million. Okay.
Rick Zullo:
So the reality is the number of funds that have had more than 3x funds more than three times is extremely, extremely small. It's actually just a handful of-
Turner Novak:
I'm sure we can come up with it on just two hand. We could probably-
Rick Zullo:
Yeah. I've-
Turner Novak:
... or close. Somewhat close to that-
Rick Zullo:
I've gone through the list with one of our LPs and they're like, "If you can 3x three funds in a row, you are literally in legendary territory. Because out of the history of venture capital, especially over the last couple of decades, there have been thousands of firms and there's less than 10 that have actually done that," which is insane. Like-
Turner Novak:
Wow. Yeah. That's super surprising. I would not assume. I would assume it's way higher-
Rick Zullo:
It turns out, median venture returns are actually pretty bad. And so, when you think about that, it's a lot easier to be in the fee game. We're going to go raise a ton of money because LPs are going to get... And that $100 million fund, I'm actually going to clip down 20 million in fees. And oh, it turns out that if I can 2x a $200 million fund, I make way more money than actually 3x-ing or 4x-ing, i.e, generating a way better return from my LPs a subsequently smaller fund.
Turner Novak:
Plus, if you raise the fund, you "guarantee"-
Rick Zullo:
Guarantee.
Turner Novak:
... like you're pretty much going to get that money and-
Rick Zullo:
Well, you're also getting time value of money. You're getting that money today-
Turner Novak:
Yeah. Faster-
Rick Zullo:
Whereas right now, I know the numbers of our fund but none of them... It's not like I can click a button and access that. I'm going to wait 7 to 10 years to get that in. All along the way, I'm putting GP commitments in and so forth. So the reality is it's a better business to be in the fee business. And actually, the public market's treated as such. If you are an asset manager, the value that you get from public market investors is based on your fee stream, not your carrier performance. And I think it's something like 15 times fee stream is what most of these asset managers trade for. That the terminal value, i.e., like the worth that they give to your business for your carry is next to nil which is crazy. Because at the end of the day, that's what matters. Are you beating public market equivalents?
But because public markets and fee streams and the way that this 2 and 20 model has evolved, has anchored the incentives around management. Every venture firm wants to scale. Just the way that in private equity folks scale and that's the reason why we have Blackstone and Apollo and Carlyle, $100 billion dollar entities, venture is heading in that way. Along the way, we missed what made venture special and that this is the only asset class that was about to carry. That you can actually get more than 2, 3 bagger fund and that there are cases where you can get 10, 20 bagger funds. I think that's the special side of this business. But as the incentives change, the behavior changes.
Turner Novak:
Yeah. And so, if I'm a founder and I'm learning more about this and I'm thinking I might want to raise a little bit of money for my first round, a million, 2 million, 3 million, 10 million, 20 million, there's a pretty broad range. What do you think I should think about if I'm approaching an Equal, like you guys, or if I'm approaching someone else. What should be my thought process generally of thinking about how much money I should raise?
Rick Zullo:
I think it really depends on the partner that you're working with and making sure that there's alignment there. There are many ways to win in this game. The reality is if you have misalignment with someone who's on your board, especially as that board gets control of your company which ultimately is going to happen at some point-
Turner Novak:
Is that common, you feel like?
Rick Zullo:
Yeah. I think most companies give up board control in some capacity by the Series B or Series E. There's some cases where that's different. I've seen companies give away board control at Series A. Now, I would not recommend that. You, as a founder, it makes sense for you to hold on to control of your company for as long as you can. But if you're going to continuously raise capital, there are tons of horror stories of people who have raised too much money, given away control of their company. Late stage investors ultimately have different incentives.
At the end of the day, all they want to do is get their preference structure back. And that means that a company that was once valued at a billion dollars sells for $250 million. Late stage investors get their money back, founders and early stage investors get washed out, because different incentives are put in place. So I think making sure that you share incentive alignment with your investors is extremely, extremely important. That's one of the reasons why we've decided to keep our funds smaller so that we can maintain alignment with founders rather than getting too big to the point that the seed stage check doesn't really matter.
Turner Novak:
But it sounds awesome. Like if I raise a million dollars, I could raise 10 million. Raising more money just sounds great, right? Because it'll solve your problems and-
Rick Zullo:
So why do you think it solves your problems?
Turner Novak:
You get more money in your bank account. I mean, in theory, that's the pushback, right? It's like you want more money to work with, right?
Rick Zullo:
See, a company like Veeva likely could not... Veeva raised a combined $9 million before going public. It's a $30 billion, $40 billion company right now-
Turner Novak:
And it's like a CRM of verticalized for healthcare, biotech-
Rick Zullo:
It's a verticalized CRM for life sciences. So Emergence Capital is the only investor in the company. The CEO was the CTO of Salesforce, Gordon Ritter, who led the investment at Emergence. He had worked with Marc Benioff to start a company before that. Emergence was an investor in Salesforce as well. And you look at the capital efficiency of a company like that or Google, which I think had raised $30 million before going public, it shouldn't take that much money to get a lot of these companies profitable if things are really, really working. The amount of downside scenarios that can happen when you raise too much money are really perilous and that's-
Turner Novak:
Can you just explain a bad case scenario to me?
Rick Zullo:
Yeah. Look, if you take a down round, most investors will not do the work of doing a down round. Like-
Turner Novak:
They'd rather just let you die-
Rick Zullo:
Yeah-
Turner Novak:
... [inaudible 00:14:28] money.
Rick Zullo:
They'd rather let you die. If you believe venture is momentum game, then you need $10 billion outcomes. What real incentive is there to go and save 50 cents on the dollar, 70 cents on the dollar of what you have? And there really isn't a private equity landscape for companies that aren't profitable. So the reality is down rounds usually don't happen. Those companies just die.
And I think, sadly, we've seen a lot of that over the course of the last year of companies that raised a lot of money, maybe raised at a billion dollar valuation. Founders got excited that they had a unicorn status, decided not to click the secondary sale button. And all of a sudden, they're looking 12 months later, "Hey, I'm doing okay. I'm 15 to 20 million in revenue. But there's no chance I'm going to be able to raise on 60, 70 times my revenue again. And it turns out, my investors don't want to put in more money. It turns out actually the person who led my round is now at a different firm. They're incentivized to do different things. I'm left here by myself and I can't get to profitability. So now, my company is actually not worth a billion. It's not worth a hundred million. It's worth zero." And that's a really, really tough situation to be in that I know founders who have been at it for 10, 11, 12 years, built companies 50, 60, 70 million in revenue, that are walking away with nothing.
And that's actually really sad when you think about it. All the hard work that goes into that, to be in a position where you once thought you're going to be walking away with $100 million and instead something else happens. Which the first two companies I exited at my prior firm, one was a company named Vettery and I think they raised about 8 or 9 million bucks total. And it was like us and Greycroft we're the primary investors in the business who sold it for a little over nine figures. Each of the founders made good money on it, enough that they would never have to work again in their life. But they raised 8, 9 million bucks and sold, had a great outcome. Not something that any venture investor, especially like one of these gigantic firms would ever talk about-
Turner Novak:
Yeah. I've never heard anyone mention this company before. Yeah.
Rick Zullo:
So do you know who the founders are?
Turner Novak:
No, I've never heard this company before.
Rick Zullo:
Yeah. So the founder-
Turner Novak:
Vettery-
Rick Zullo:
Yeah. It was a talent marketplace based here in New York. I think it was the second investment I ever made. So the founders went on to start two other companies. One was Archer Aviation, which they started in my office when we were starting Equal. Archer Aviation is a electric vertical takeoff landing company-
Turner Novak:
It's a VTOL.
Rick Zullo:
... that's now a public company. Probably the leader in the space, multi-billion dollar valuation. Brad has subsequently gone on to fund-
Turner Novak:
Figure.
Rick Zullo:
... Figure which just made an announcement about breaking up the partnership with OpenAI. I think latest valuation on that was $2.6 billion-
Turner Novak:
Are you an investor in that one?
Rick Zullo:
I'm not. That's not what we do. So the reality is Brad and Adam have been great friends to us and seeing that company go... But look, going through that first doorway of having a really great exit, making a life-changing money for each of them, it opened a door to something that was very different. And I still look back at... I had this VC mentor in New York at the time. When I told him I was going to do the Vettery deal, he was like, "These guys aren't real founders. They're finance guys. They went to University of Florida. These guys will never make it." He literally had the audacity to tell me, he was like, "Rick, if these are the types of deals that you're going to do and the type of founders that you would back, you're never going to make it in venture." And I find that so hilarious that I'm like, "Okay. Now, these guys have built two multi-billion dollar companies," and a lot of people think very highly of Brad and Adam like-
Turner Novak:
It's funny that you then didn't invest in the other two that sounds like bigger numbers-
Rick Zullo:
No, you got to have a discipline in what you do. I don't regret either of those. It shows you the importance of founders. If you believe in people, they're going to find their way to great things. I couldn't be happier for either of them. But the reality is you can see that what a great founder is, is definitely changing. But it's also a completely subjective bullshit thing. But the reality is in today's venture ecosystem, I'm not sure Vettery would've ever been funded. And that could have actually completely changed the dynamics for that, the trajectory of those guys' career, the humanoid space. Yeah.
Turner Novak:
Yeah. That's true. We wouldn't get the Figure robot taking over the factor, doing the automation-
Rick Zullo:
I mean, I'm sure you're going to buy one. I-
Turner Novak:
They seem cool.
Rick Zullo:
I'm hoping to have one in my home soon. The videos are pretty awesome.
Turner Novak:
Well, so you brought this interesting point where a lot of the funds have gotten bigger. You may or may not want to take some of these bigger rounds. Why is it happening? You just talked through this. It's like, "Okay. If I'm a founder, I can raise a couple 5 million bucks, get to profitability. Sell my company for 100 million, life-changing amount of money." Why would I then raise 20, 40, 50 million? Is it something with fun-sized dynamics?
Rick Zullo:
That's it. I would say this is the biggest mistake that I see first-time founders make is that the allure of the valuation of the venture firm's brand and everything else is what pulls them in. And look, the sales process that those firms throw at you is it's strong, right? And-
Turner Novak:
Okay. So can you describe the process to me?
Rick Zullo:
Oh, I mean, you're getting phone calls from the CEOs of the firm and they're having LPs calling you. They're throwing out all the stops. Maybe taking you out on a private jet. There are a lot of things that they throw at you to make it look like that you've made it. The reality is you haven't made it until the company's sold or you've taken it public. But I think that there's a lot of allure in that process. I think one thing that we've... I grew up in this industry backing first-time founders that... Largely finding needles in a haystack. Five of our last six founding teams have been led by people who built billion-dollar companies before and I think-
Turner Novak:
So this is at Equal?
Rick Zullo:
Yeah. At Equal now. And the reality is, I think a lot of that has to do with a lot of these repeat founders saying like, "I've seen that product before and I know what it is and I know what it isn't. I want to bring in somebody who will be a true partner to us and help me navigate the stage. And be the bulldog in the boardroom to help me navigate those types of situations." And we've really aligned with a lot of founders on that and I think that's a nice spot to be in. I'm certainly not taking any founders on private jets any time soon.
Turner Novak:
You don't have a private jet?
Rick Zullo:
I do not.
Turner Novak:
No?
Rick Zullo:
Contrary to popular belief. Our $100 million core fund does not quite have the fees to pick up the NetJets membership. But once you get into the carry game 10 years from now, hopefully we'll see it maybe.
Turner Novak:
Yeah. Then, you'll get the private jet. You can compete with the big funds [inaudible 00:21:12].
Rick Zullo:
When that happens, I'll probably be a hermit living in the woods. That's probably a little bit more my style. So yeah.
Turner Novak:
Yeah. And so, it brings up an interesting point where today, a lot of the companies that seem to be getting funded, a lot of AI stuff. I think I saw a stat... I forget the number. I'm going to forget the number, but it was like 40 or 60% of all venture dollars and specifically early stage was going to AI companies. How do you feel about that?
Rick Zullo:
So I think AI is like every single hot, buzzy thing that's happened over the course of the last six years. Shai Goodman formerly from SBB then Brex had a really funny tweet maybe two years ago about like, "Here's the hot thing that happened every single year." And actually if you looked at it, whether it was VR or gaming or mobile-
Turner Novak:
Scooters.
Rick Zullo:
... or scooters-
Turner Novak:
Scooters is my favorite one. Yeah.
Rick Zullo:
Yeah. Actually, if you invested in that year in that asset, you'd perform terribly and-
Turner Novak:
Like a 0.0x-
Rick Zullo:
Yeah. The reality is investing is a buy low, sell high game. Not a buy high and the hope things keep on going higher. And perhaps there are some folks who have made money in that game. But largely, the basket of those years has underperformed. So my belief is AI is going to change a lot of things, but it doesn't actually just create a new category. It just accelerates what are already good businesses or accelerates the demise of what our bad business is.
So what we've seen is that our companies that have really strong network effects, really strong flywheels in their business, when they go and start implementing components of AI, they're accelerating very, very quickly because they're great core businesses. If you are an AI agent or bot or some type of application that's out there with a couple hundred thousand dollars of ARR, that means absolutely nothing in today's game.
I was speaking to another investor and they were talking about everything around legal AI and legal contracting. And they said, "Rick, every single one of these companies is working." If every single company in a category is working, that's probably the scariest thing that could happen, because that just means that there's no alpha in the company that you're generating. It's just the entire beta of the category. And we saw that happen in mobile. We saw that happen in the internet. You saw all these companies rising at the same time.
But what you really want to determine is, which one is Amazon and which one is pets.com? And I think that's where actually the true investing and true work that needs to go in is, how do you determine company quality amidst this? Which there's a bunch of great companies getting created, but everyone's just throwing money at this category with a non-discerning lens. And sorry, but I don't believe that investing at a $500,000 of revenue, a $500 million valuation in something that doesn't have moats, doesn't have durability, I personally don't think that's going to work out in a long span. But there's certainly a lot of people who are just shooting the cannon and saying like, "You know what? It's a lottery ticket. We'll see what happens. I need to be in this space because of FOMO." That's just not the way that we're going to play things.
Turner Novak:
Yeah. Because I think people... I mean, you see the data and the pace that some of these companies are accelerating is the fastest ever. Before we started recording, we were like, "This company went from 0 to 20 million ARR in a month or two." That used to be a 10-year process or a couple of years before. But it's interesting, I think with crypto is another one of these phases where the company saw a really rapid adoption. If you're looking at a spreadsheet, even if you're looking at revenue and EBITDA numbers, they looked pretty good. And I think it's interesting when you frame it next to AI. You take these two new technologies, right? Blockchain, crypto, NFTs, and everything we're doing right now with LLMs, if you're a board and you're talking to the founder, you're a management team, and you're like, "You know what? This crypto thing, we probably don't need an NFT strategy." You're an airline, you're like, "We don't need to launch an NFT." It's pretty easy to just dismiss that and be like, "We don't need to do that." But with AI, it's like, "We actually could probably incorporate this in some way." So you see-
Rick Zullo:
But think about mobile. We all have some form of how we've incorporated mobile into almost every single technology platform. But there was companies like Uber that had amazing network effects associated with what they were doing. How many mobile CRM companies did we see? I probably personally saw 20 that I was looking at the time because-
Turner Novak:
It was an app that was a CRM?
Rick Zullo:
Yeah, it was a mobile-first application for SaaS. How many of those are still around? Virtually zero.
Turner Novak:
Yeah, it was just Salesforce with an app even if it sucked.
Rick Zullo:
The companies that actually had the inherent platform advantages were the ones that ended up taking advantage of that. And I do think that's what we're going to see. There's a bunch of incumbents that have the capability and the capital to make sure that AI can work for them the same way that mobile did. Yes, there will be some AI-native companies that emerge from that, but I think the same impacts that we saw from mobile or every single technology intervention that demonstrated that leap is different than saying, "Okay, this broad basket of if you're an AI-native company, then you're going to kill it." I think the crypto thing, that's a whole different universe. I'm an LPN, some crypto funds, we don't do any crypto investing. I refuse to-
Turner Novak:
I'm in the same boat.
Rick Zullo:
... make that part of my universe. It's just very different thinking about... We're neoclassical value investors, we think of, "How is this company going to generate a ton of cash flow in the future?" If you're a crypto investor, you need to be thinking about liquidity, capital markets. It's almost like you're a commodities trader.
Turner Novak:
Yeah, you're debt trading.
Rick Zullo:
That's not what I do. I want to be in something, watch it run for 10 years, and hope at the end it's doing a billion dollars cash flow.
Turner Novak:
You're solving a problem and you're generating revenue and profit because you're solving problems for customers and making their life better.
Rick Zullo:
Look, there's a lot of different ways that you can win, and I think plenty of people have won a lot in crypto, but the people who lost were the ones who entered late, didn't know what they were doing, didn't see ahead of the curve, jumped in in 2021 and 2022, did companies at 10 billion valuations, then watched them go all the way down. The folks who were the big winners are the folks who saw ahead of the curve and said, "Hey, I believe there's an opportunity here," and then click the sell button in 2021 or 2022, or when those companies went public, perhaps held on some of those stakes. I do think, for better or worse, you need to be thesis-driven around where the market's heading. And with that, regardless whether it's AI, crypto, mobile, being ahead of those trends is really, really important, which if you look at the companies that have been the most valuable emerging from this, OpenAI, when was its seed round done? When was the series A done? It wasn't done-
Turner Novak:
In 2023.
Rick Zullo:
Yeah, it wasn't done amidst all this hype. It was done before it, and now people are investing at these valuations that, "Look, you can get serious money to work and if MASA is going to mark you up, that's a pretty good situation to be into." But there's-
Turner Novak:
Maybe not.
Rick Zullo:
Especially if you can get liquidity.
Turner Novak:
Yeah.
Rick Zullo:
But the reality is it's a really expensive game to play, and I don't think that's venture investing.
Turner Novak:
And it's interesting. I think you brought up this point earlier where a lot of the benefits of AI have just been Facebook runs better ads, or Accenture, I forget the number, but they're doing-
Rick Zullo:
I think it's like $8 billion.
Turner Novak:
Of just implementing AI products for their clients, the consulting clients.
Rick Zullo:
Yeah.
Turner Novak:
It's like more than every startup, probably other than OpenAI and Anthropic maybe or maybe it is the same as them.
Rick Zullo:
If you look at most services companies or the revenue that Deloitte, Accenture, McKinsey, Bain, BCG, these numbers are gigantic. And if you look at what AI does really well, it's doing a lot of knowledge work services.
Turner Novak:
It's basically automates their business.
Rick Zullo:
We do a lot of insurance and all I'll say is that there are a lot of bodies insurance that are doing redundant tasks that don't require much creative thinking, but require document extraction, document generation, some form of business logic that's formed in that. Insurance is an area that's very ripe for AI that as I look at this landscape and I think about, "How are you going to create production value, i.e, how are dollars that we invest in technology going to lead to economic value?" I actually think in private equity and service businesses, they will make way more money in production value than venture capitalists make in total revenue from those companies. And I think that's intuitive.
When you think about the 10X principle of, "Hey, a customer needs to reap 10 times the benefit that they're willing to pay for something." And I think that's not exactly the case in today's day and age, but the reality is if you believe that to be the case that customers are going to get 10X the benefit, it is a really, really great time to be in the private equity business right now. That you can go and look at a portfolio and say, "Man, I could probably eliminate 10 to 15 percentage points of EBITDA." And if you look at your existing basket of companies, especially those who have distribution networks in place, maybe have some real IP around their core business or core data sets, you're going to see a bunch of those legacy companies starting to look massively, massively profitable.
I talked to our LPs and said like, "Hey, this is not what we're going to do, but I bet you a private equity fund would make more money than a venture fund right now, especially with the way that venture assets are being priced."
Turner Novak:
If you just think about the PE Playbook, it's like slash costs and flip it. It's perfect for them.
Rick Zullo:
For all our companies, I think a lot about market share being the best leading indicator of margin, margin being the best leading indicator of cash flow. The reality is if you think of the ability to invest in AI to accelerate your domination of a market, competition is just bad for business. We spent some time looking at the claims automation space, and there are a couple of players who own the majority of data or maybe a third of the data in the space, low margin businesses, they've been around for forever, but existing data sets that are truly proprietary to them because there's an input and output on both sides and you're like, "Yeah, right now the reason why those are low margin businesses is because it's someone manually tagging photos all day."
And you're like, "Ah, man, what would Scale AI do to this business right now?" What would implementing AI do into some of those? And I truly do believe that you could actually fundamentally reinvent the margin structure of those. Think about collapsing the pricing structure, pushing the others out of the market who are late to the game, and then all of a sudden you're sitting on top and owning a billion-dollar revenue business with 30% to 40% EBITDA margins. That sounds pretty exciting to me. The reality is this is where the nexus of private equity and venture start coming together, which I think we spent a lot of time with private equity investors.
I think that's one of the benefits of being here in New York. When I went to business school, venture was considered the pat on the head venture asset class, it's like, "Oh, that's cute. You're managing..." I went to business school reunion, everyone's like, "Rick, you're managing a couple of hundred million bucks. That's cute. We got a couple of billion." And I was like, "Okay, guys." But the reality is those folks working in venture and technology, they're starting to actually be more interested than I've ever seen them before because they realize, "Hey, this isn't innovation theater. We can actually make some real money off this type of stuff." And the reality is most AI-driven products are so underpriced right now that it's a pretty easy trade for both sides to make sure that there's value being created. So I think private equity is going to make a lot of money off AI.
Turner Novak:
[inaudible 00:33:03] the playbook is low margin business. They have an existing cost structure that's there. They have 5% margins. You can actually lower their pricing. You reduce the labor overhead that goes in. You can maybe speed up using a lot of the AI tools, they're probably going to get better in the future, the cost of those is going to come down, and then you boost your margin on some insurance manual business from 5% to 20% EBITDA.
Rick Zullo:
I don't think it has to be insurance. I think there's good, better, best here. And I think good is, "Hey, you found something that is a high services business that has a lot of low logic tasks that AI is really, really good at attacking." That's good. But I actually think that those businesses will largely have linear growth. Then you'll see a bunch of different players go into them. And I actually think that's how I'm seeing the claim space evolve right now. I've probably seen 15 different claims automation companies. They're all competing for the same customers. I'm starting to see pricing curves come down a little bit on that. Unless you lock up a really interesting asset, I think its disruption at its core.
All the legacy players are going to die, new players are going to emerge, but then margin structure for those are going to compress over time. I think there's good opportunity to make money in the short term, but companies are ultimately valued on their long term. I think the better is, "Hey, we actually have some really unique data sets that we have here and because of that we can get a true advantage over other folks in the industry." If you look at some of the players in the auto claims market, for example, there are players that have data on what an accident is, what body shops will charge for every single car, they have endless amounts of pictures of what's happened. There's a lot of opportunity not for just cutting the fat, but actually having a beyond incrementally better service than everyone.
Then you can actually see that there's a little bit of a moat that they're establishing against the competition because theoretically the better the data that they have and if they can keep on subsidizing that, they should be able to deliver a better quality service than those who don't have the advantage of that existing data set. I think really the best is you become a monopoly. And I think that requires a very patient path to, all right, undercut the competition because you found a way to reduce your services. You've locked up a monopolistic data set that maybe you have a third of a market or something like that, go and buy up the rest of it so you can own it and have 60%, 70% market share, start pricing everyone else out that you can own 90% or 100% of market.
And I think the reality is those are the businesses that when you can own 80%, 90% of a market that are just going to have absolutely massive amounts of cash flow. You don't have to spend anything on sales and marketing. You can charge whatever you want because you have pricing power over the customer. Those are the best businesses. So what we really would love with AI businesses is cases where we have found a monopolistic data asset or a monopolistic network effect, we think we have a couple in our portfolio, and then how can we supercharge that and make sure that we accelerate owning 70%, 80%, 90% of the market. And I think this actually pairs very well with marketplaces as well as platform companies that are connecting people on both sides that if you can do that, then that's actually just a cash flow monster.
Turner Novak:
So you have this concept of captivity being super important. Is this what you're getting at is capturing proprietary data of some kind or workflow of some kind?
Rick Zullo:
I think it doesn't have to just be data. Bruce Greenwald, he was a professor at CBS, he was kind of this age to Warren Buffett, big influence on him as well as a bunch of other investors that we respect. He really embraced and thought about this concept of captivity. And captivity can be on the supply side or demand side. I think he called it resource or customer. But the reality is how can you have power over that side of the market? How can you have power over customers or your suppliers or vendors, very Michael Porter-based.
Turner Novak:
So it's kind of this concept of they must use you.
Rick Zullo:
Yeah.
Turner Novak:
Okay.
Rick Zullo:
So if you're in a complete commodity market with perfect competition, the reality is you have no power. If I'm selling apples at the farmer's market, it's a pretty competitive market. You can look at Turner's apples versus Rick's apples. His are 99 cents, I'm trying to charge $1.49 for mine, and the reality is most people are going to choose the ones that are 99 cents unless my apples look shinier and whatever it is.
Turner Novak:
You're next to the cookies or some fancy high traffic area, nobody wants to come to mine.
Rick Zullo:
Well, the reality is you're going through a slog trying to convince customers to buy you. Whereas if you're the only person selling apples there, you can charge five bucks and there's going to be people who will buy them. So you want to find markets that structurally enable captivity to happen over customers and then find ways to actually lean in on the core competencies of the business to reinforce that and make sure that you have some compounding advantages. You can think of this as everything from having a furniture store in the middle of nowhere. If you are the only furniture store within 200 miles, you want a couch, you're going to buy it from them.
Turner Novak:
You got to pay 500 bucks, a thousand bucks for this couch.
Rick Zullo:
Yeah, you have to do that versus, "Hey, you want a cup of coffee in New York City?" There's pretty high perfect level of competition on that. So we look for businesses that either have the potential. Most of the businesses we do are-
Turner Novak:
Because you're starting the company. You don't know-
Rick Zullo:
Not always, but a lot of the companies we do, we are funding shortly after incorporation, sometimes starting the company with the founder, sometimes they've been around for a little bit, but we never look at traction as a core deciding factor for whether we're investing in the business.
Turner Novak:
Oh, really?
Rick Zullo:
Yeah, I actually think traction is extremely overrated [inaudible 00:38:54].
Turner Novak:
That's the number one qualifier for most people, isn't it? Most investors.
Rick Zullo:
Here's the reason why. If you are a strong founder, you can actually fake product market fit.
Turner Novak:
And you can fake traction going up.
Rick Zullo:
Yeah. Look, if I were starting a company tomorrow, could I call up a bunch of insurance customers that are working and be like, "Hey, give me a six-figure contract. I'll do some of this stuff"? And I'm like, "I kind of did that during business school. I had a startup that I was able to go and get enough traction for. We had actually some serious AR." Now, was that company actually a good company? No, it was terrible. It was awful. I don't even put it on my LinkedIn because I'm so embarrassed by it. The reality was we were basically a software dev shop and was it real? Did we have product market fit? No. It was a side project that I did for business school credits that somehow magically stumbled into some revenue. So as I think about that, if you're a good salesperson, you can fake product market fit. You can at least achieve some level of what investors would consider from a metric basis.
I think the more important thing is finding your path to moat. And that's actually the thing that we focus on. When we're working with a company, it's not how do we get you to a million of ARR? It's how can we get you to that first demonstration that you have a motive for competition, and that's, "Hey, how are you starting to demonstrate that you have a real network effect with the business, or if it's a tech-enabled service, that you have actually the potential on one of the four core unit economic metrics, COGS, CAC, OPEX, or willingness to pay that you've been able to outpace everybody in the competitive landscape on that?" That path to mode is ultimately the thing that gives us conviction that you're going to be the winner-take-all of the market, the category leader. And that's what we focus on, which is generally not going to be determined by whether you have $500,000 of revenue. If you've been around for six years, do I want to see that you have customers with some level of capital efficiency?
That's actually more like a function of us determining whether you're a good operator or not. But some of the best businesses that we've been in not only were ones that didn't exist, we funded them at formation. I think of two of the best businesses that we're in today were basically flat for multiple years when we invested, but we developed conviction in the founder. We actually convinced them to pivot their model a little bit. And with that, they've exploded since. And I think that's the reason why we're not in the finance game being seed stage investors. If I'm looking at your CAC/LTV ratios as a seed stage investor, I'm doing it wrong.
Turner Novak:
I've heard you described before this, maybe it kind of plays into this compounding returns on invested capital. How should I suss that out? If I'm an investor thinking of this or maybe if I'm a founder, I've never even heard this concept before, how do I implement it in my own business? You kind of hit on it a little bit, but-
Rick Zullo:
Yeah. Look, flywheels happen all around us. The reality is are you getting better every single day that you're doing this? What are the things that you do that develop increasing value every single time? This podcast is one of them. When you think of when we met years ago, that was a big investment that you made into your brand and the media platforms and now they kind of just work for you. I think about how much work you probably had to put in back then versus the unit of effort that you had to get to get a unit of value is so much worse back then than what it is today. And that's demonstration of compounding value.
Turner Novak:
Yeah. Well, to explain to people. I think the first time we met, I was working in an LP and I DM'd you and there was probably no reason for you to talk to me other than I was pretty strategic of, "I work in an LP." And you're like, "Yeah, I'll talk to this guy, whatever." That's probably why-
Rick Zullo:
I talk to everyone, man, but yeah.
Turner Novak:
And then if I would've been, at the time, like, "Hey, Rick, do you want to sit down for two hours and we'll talk about all this stuff?" Who knows? Maybe you would've said yes. But it was truly a last minute, like a day ago, I was like, "Hey, do you want to do this tomorrow?" And you're like, "Yeah, let's do it."
Rick Zullo:
Think about it from the reward side now. If you had done that back then maybe you'd have 100 people listen, probably less.
Turner Novak:
Oh, fewer. It would've been like 10 people.
Rick Zullo:
And now you put something on TikTok. What's the biggest thing that you've had on TikTok in terms of total number of views?
Turner Novak:
TikTok only, I think 122,000. But on Twitter, I think my biggest tweet was 43 million views or something like that. Something a little bit ridiculous.
Rick Zullo:
So you had to invest a lot into that compounding asset of your Twitter following. And now you could tweet out something that is probably not particularly novel and it's still going to hit hundreds of thousands if not millions of views because it's just you have this compounding asset. Meanwhile, I tweet out something and no one cares. They're like, "Grumpy Rick talking about value investing and venture."
Turner Novak:
[inaudible 00:44:00] like, "What is this?"
Rick Zullo:
Let me fall asleep. But the reality is, I think that's how businesses need to think. It's not about productable or the customer today. Businesses are not about your revenue multiple today. It's about ultimately the value that you can generate in long term. And that's how a discounted cash flow model works. And that's how all of investing is centered around. Ultimately, how much cash flow can you produce as an organization? And you can see this with the best businesses. They go through these J-curves and then all of a sudden, I have mixed feelings on businesses like Tesla, but it's like, "Oh, you were unprofitable for 13 years and now you're starting to have some cash flow." That's what investors were running.
Turner Novak:
Your higher margin is every other automaker and some of them are probably going to go bankrupt now.
Rick Zullo:
Yeah.
Turner Novak:
Anyway.
Rick Zullo:
So I do think all that is because Tesla has its series of moats and compounding advantages, whether it was their EV charging network, their IP, a bunch of other things that you can throw in there. I think there's better demonstrations of this like Google and Amazon and so forth that have become absolute cash flow cows. And I think that's what you need to do as a founder is find not the way that you can go and incrementally get that next customer, that's one thing, how do you create a machine that starts working for you when you're not working?
Turner Novak:
So how do you get that next customer easier or faster than before?
Rick Zullo:
So we think a lot about incremental ROE or what's your moat, return on equity. So how can you as a customer or as a company outcompete everyone? And if you're getting 20% return on your equity, which is great, and everyone else is getting eight, you're going to win. You will ultimately win that market provided that you have enough time and capital. So the company that has the strongest flywheel, that demonstrates the biggest moat, will always win the market provided they have enough time and enough capital. Now, there's plenty of capital in this game. And if the market opportunity is big enough, VCs will give you the capital and give you the time to go get there. And certainly, there's plenty of patience in this game for companies that aren't profitable, provided that the size of the price is big enough.
Turner Novak:
So how do you think I should think about if I am a founder, I'm starting a company I really resonate with and maybe I think in the same way, how should I show that when I'm talking to investors or building my company in the early days, what things should I approach or maybe how you guys will do diligence on me? How do you tell that I have compounding advantages as I get more customers or build my business up?
Rick Zullo:
Yeah. Well, you got to separate the business from the founder. For us, there's really three principle things that we look at. One, we're developing conviction behind a market opportunity. And generally, we only meet with companies if it's in something that's on what we refer to as our hunting range, which is our big board of what are our biggest ideas.
Turner Novak:
What are those? So people know.
Rick Zullo:
It changes, actually, pretty frequently.
Turner Novak:
Oh, interesting. Okay.
Rick Zullo:
We only invest in four categories, energy, insurance, retail, supply chain.
Turner Novak:
You said energy, insurance, retail, and supply chain.
Rick Zullo:
Yeah.
Turner Novak:
Okay.
Rick Zullo:
So we have three product owners, which are industry segment leaders that are responsible for driving our research, building our network of bridges, which are our industry experts and private equity folks that we work with, customer networks that we have in those, and sourcing within those channels. But in each one of those categories, energy, insurance, and we bundle retail and supply chain together, at any given time, we have between three and five of these are our big ideas that we're doing a lot of outbound sourcing. We may be speaking to folks about forming a company there. Occasionally, something walks in our door that's in one of our four sectors that we're like, "This is really interesting." We hadn't thought about that idea. But I'd say about 85% to 90% of the deals that we've done as a firm over the course of the last six years, were eventually, at some point, on our hunting range.
We develop conviction around a market opportunity and then we try to develop conviction around who is the best founder in that space. And then we want to make sure the third step is how can we get alignment on the strategy that we have with that founder for how you're thinking about business value creation. And that's generally the approach that we've leveraged across. And we'd like to think of ourselves as not the operators of our business, but consultative to the founders is this concept of wedge, flywheel, moat, expand. So what is your wedge to subsidize getting critical mass for the company? I.e, like that initial product market fit, you're starting to get some product pull. We generally like mechanisms like counter positioning or how can we incentivize people to get on our platform. Sometimes that wedge is just like, "Hey, we have a pre-banked network of 25 customers." We just did a company in the insurance space, two weeks in, eight design partners.
And it's because we've been explaining the concept to customers six months in, but this company literally did not exist three weeks ago. We funded it two weeks ago and now it has eight design partners. And that's a good wedge. But we think a lot about what's the flywheel behind the business? What is the thing that we are anchoring on that will provide perpetuating increasing returns to scale? Is it a data network effect that we have? If it's a marketplace, we're thinking about customer network effects. If it's a platform business, we're thinking about how many developers can come on that. If it's tech-enabled service, are we seeing something that's going demonstrate the potential that maybe it's economies of scale that enables us to have an edge over the competition the bigger and bigger and bigger we get? What is the thing that incentivizes us to be big?
Does it generate a moat for the competition? And is that us having a better economic profile than the competition? Is it us being the only player in the market because we have a network effect and it's a winner-take-all market composition? And if you have a monopoly, if you have a moat in a market with a flywheel, there's plenty additional opportunities adjacent to any single business that you can imagine that you can expand into. So that wedge, flywheel, moat, expand, we generally will spend a lot of time looking at a market, figuring out the customers, diligencing the opportunity before we even meet a company, but then figuring out who is the best founder and then really trying to say, all right, how do you want to go attack this market? What's our path to [inaudible 00:50:11]? And really getting conviction behind that story and whether we align with them and whether we think that they have the mindset of not just being a great operator, but knowing how to win a market rather than just be one of the best players in it.
Turner Novak:
It sounds like you have quite a public market or a Charlie Munger more type approach, like you said, a more value investor type approach versus more of the venture technology investor approach.
Rick Zullo:
Yeah, I know very little about actual technology. I think one of the investors that joined our team last year was like, "Does Rick ever use this computer?" Two to three days in.
Turner Novak:
Does he know about ChatGPT?
Rick Zullo:
What's that? The reality is I'm much better off on the phone and a whiteboard than I am on a computer and that just is the nature of how I've always invested. I came up in consulting, private equity, lending venture, not because I was deeply technical, but because I thought this was where you had the best alignment with founders for building businesses and that ultimately where I could help bring something new to the table that others hadn't.
And so we do bring a tremendous amount of what we believe is the best way in creating business value is not just in building products. Whenever a founder has asked me for help on some pricing algorithm thing earlier this morning, I was like, "Unfortunately, I'm not the best investor to help you on that." But we do think that the way that we've positioned ourselves is, and how do we think about monopolizing market opportunities? How can we go and actually build a moat around this business? How can we leverage the customer networks that we have with people who we have a shared belief around value creation with? So we spent a lot of time with private equity folks.
Turner Novak:
That's weird for a VC to tell me that.
Rick Zullo:
So I'll say private equity folks are the most rational buyers of IT that you will ever find. When you think about it, they're not making political decisions. All they're thinking about is, how can you make me more money?
Turner Novak:
Yeah, okay. Solve this problem. I want to earn more cash.
Rick Zullo:
You solve this problem, I will give you business.
Turner Novak:
Yeah.
Rick Zullo:
And if you show up and you do that over and over and over and over and over again with folks, they develop a lot of trust with you. And I think one thing that we've been fortunate is that through this process of me doing this before and me doing this now in our firm, continuing to build upon this is helping will businesses into formation because we're saying, hey, AI services for insurance for example, we've spent a lot of time with private equity firms, big corporate buyers. We we're like, we need to figure this out. We went and met a ton of companies in the space. We developed our point of view. We found a pretty exceptional founder that I've worked with in the past who's built a billion-dollar company before and we spent six months working on that together. And now he's at the point that, okay, can you solve that problem for me?
He's built a billion-dollar company before, deeply technical. He's sold to a bunch of these folks before, but we can get in earlier to those opportunities because the private equity firms are like, hey, we need to go and find a way to shave 10 points of cost off every single one of our companies. Hey Rick, we have all these services companies. Instead of us going and building our own AI team, which we have no clue about how that works, can you go and help bring in somebody who can help us do this? And we're just going to run through a bunch of these private equity portfolios, which are all multi-billion dollar companies and pick up a lot of revenue from that, which I find that exciting. I find the alignment of interest, the private equity folks make money, the founders are going to make a lot of money. We own a decent chunk of the company, so hopefully we all make money on it, but everyone brings something different to the table.
Turner Novak:
Yeah, it's an interesting go-to-market almost for portfolio companies where instead of you go to one customer, that you go to this "customer", quote, unquote, that has a portfolio of a lot of different things that they can buy from different companies.
Rick Zullo:
Well, it's also like when you've sold one, then it spreads very rapidly across the rest of the portfolio.
Turner Novak:
That's like the classic P playbook too, is we apply this thing across the portfolio. You land one and it's like, oh, we're going to use this at all 15 other companies, because we've seen how much it works.
Rick Zullo:
Yeah. And they're all looking to get an edge on the competition as well. I mean, private equity people,
Turner Novak:
To your point. Super rational.
Rick Zullo:
They are abruptly ruthless. So there's no like, "Hey, we're keeping Karen because she's been here for 15 years."
Turner Novak:
She's just so nice.
Rick Zullo:
They're like, "Sorry Karen, you're gone." We found a way to make some more money, and for better or worse, that actually really incentivizes technology adoption that I find them to be great buyers, great partners, especially if they can be forward-thinking of saying, hey, there's not really a ton of risk in us trying this out, so let's give you a shot. Especially if they're folks that you've really developed a good relationship with, which fortunately again being here in New York, there's more private equity people than there are venture capital people. When I was in Chicago, definitely the case, very much private equity town. Same thing with a lot of these big corporates that operate with conglomerate-esque structures.
A lot of folks want digital innovation. They actually just really get analysis paralysis on figuring out what should I buy? I don't want to make a mistake. I get vendor fatigue that this is the reason why we believe, Warren Buffett has this concept called margin of trust, which is how much margin of error do you get because you're a trustworthy player, because you have integrity, because you do the right. And I think it takes a long time to develop that, but we've developed a good amount of institutional credibility with some of these buyers who are like, hey, if you're telling me that this is going to work, let's at least give it a shot. They're not going to blindly sign a $10 million contract, but it's going to give those companies a shot. And I think that's where we think there's a lot of opportunity in this new digital age.
Turner Novak:
You said something interesting where you said, okay, my logical conclusion is that I should invest super early at seed stage. I know you've told me before that seed stage is actually the worst place to invest.
Rick Zullo:
Seed stage sucks.
Turner Novak:
Okay, so explain this, and why are you doing it.
Rick Zullo:
So I'll go back to some data from, I think it was from a pitch book and we did analysis maybe 18 months ago at our AGM of the delta between a seed stage round and a late stage round. And historically I think that was like 20 times. So-
Turner Novak:
What does that mean?
Rick Zullo:
So think of seed stage round getting done at a, for ease, $5 million valuation in a late stage, let's call it series C, getting done at a hundred million. So you would see the late stage valuation is 20X, and that makes sense after you're talking about failure rates, dilution that you're going to take, time value of money, all those different considerations that that's just like the PPS that you have.
Turner Novak:
Price per share.
Rick Zullo:
Yeah, yeah. In 2021, that number hit 45 times. So that was actually the most bonkers time to be a seed stage investor. And when you think about that, let's just call it 50 for ease, a $10 million seed valuation, all of a sudden it was 500 million. So in reality, we were all investing in that 5 million. And in 2021, all our companies were maturing and raising at 500 million. So we were seeing truly the best time in the market to be seed investor was 2011 through 2019. If you were in the market during that time period and not making money, it's hard to say that you're going to make money moving forward because that was about as easy as it gets. Subsequently, now it's like, it goes back and forth, but around six to eight times. So it's become literally 80% less attractive to be a seed investor since 2021.
Turner Novak:
And that's probably because the series C valuation probably dropped back down from 500 to 100.
Rick Zullo:
It basically dropped down to 100. And seed valuations have gotten extremely expensive.
Turner Novak:
They've gone up. So it's basically saying your seed-
Rick Zullo:
Now, it's like 15, 16, $17 million to get a seed round done, and the prices come down on what late stage. So there's so much competition at seed, and that's because there's minimal barriers to entry. Raising a seed fund is way easier to raise than a 500 million fund, $20 million fund, 500 million fund. It is just easier. It's way easier to get access to these opportunities because they're more heavily syndicated, so there's more demand that[inaudible 00:58:47]. There's fundraising platforms like AngelList and so forth that'll do the competition at seed as well as these mega funds coming in and just saying, hey, the seed check doesn't matter, has driven up the price a lot. So I think seed prices are absurd right now. And if you look at later stage at some of our companies where we have a company that'll hit a hundred million of CARR this year. Last year we were able to do a round in that company at a several hundred million dollars valuation.
That seems like a very reasonable multiple. It was actually below public market valuation multiples when we looked at comps for that business. That's certainly not what's happening in like, hey, here's the seed business that was started two weeks ago that's going to raise at a 40 cap. That's like what you're seeing from the big funds. And we're starting to see a lot of CCH funds follow that behavior because they're like this is what the market is now because that's what-
Turner Novak:
You have to play the game.
Rick Zullo:
You need to play the game that's on the table. So we don't play that game, for what it's worth. We've always invested in fund one, it was one to 2 million for at least 10% of a company. In fund two, it's been two to 3 million for at least 10%. We're averaging like 16%, 17% ownership in companies. So we are more value disciplined, but the reality is, it does change the way that we think about investing that it used to be, hey, you want to get as much ownership at seed, and then actually the later stage rounds are insanely priced.
Then now we actually think of, hey, still get a lot of ownership at seed, but it's actually the biggest investment decisions we make are, hey, we're going to put $7 million in this company at the A or $7 million in the B and really do that double down event. And we've put 20 million to work into some of our companies to the point that the seed stage check doesn't matter as much. But I do think for better or worse, seed is always going to be our entry point because one, we want access to those opportunities and we do all this research, we might as well get compensated in some way, shape or form for it, if we're going to bring all those customers that I think we're always going to be a seed focus firm. But very much over the last couple of years, the dollars that we have put into companies have progressed later to actually more of a focus at series A and series B where we feel like the rounds are much more reasonably priced than what they were in 2019 through 2021.
Turner Novak:
Fair. So you have the capabilities to tilt where you come in at just from a weighted dollars invested standpoint based on how the market's moving, but you just really want the capability of when you start the company, we want to invest and we also want to invest later on too if you're doing well.
Rick Zullo:
Yeah, I think, I believe getting your ownership early is really important. So the question that we have is, are we building our position and trying to get to 20, 25% ownership, which obviously ownership is a big driver of returns. Some of our founders actually don't want a bunch of other investors. So the reality is if we're not taking another board seat and we can get a round done quickly and build to that 20% level. I think we have three or four companies in the portfolio that we own north of 20% of the business. We love that. And some of those will be massive drivers for us because we own so much of them. It also it leaves a lot of optionality to the founder when you're talking about like, hey, I think of a business that I had at my prior fund that we had an offer on the table for a hundred million dollars outcome. The company had only raised I think 11 million bucks.
The investors around the table did not want a hundred million dollars outcome. They wanted them to go for the billion dollar outcome. Founder did not sell, that company, did not work out, no one's fault at the end of the day. But if we're in a company and we own 20% of it on a hundred million dollars fund and the founder wants to sell for 200. Guess what. We win. Sell for 500? We win. Sign for a billion? We win more. Decacorn? We win more. So at least all options on the table. Whereas if you take 20, $30 million or a mega fund owns 20% of your business, don't think you're selling for 200 million.
Turner Novak:
Yeah. So a way to think about it as a founder is you want to be a material percentage of your investors' business. You have a company where if this company does well, it's not like a small little French fry for you. It's like the whole plate. You're like, I can return a meaningful amount of the business that I have, the capital that I have in the game. If you do well, I do well, versus it's like-
Rick Zullo:
I would say, especially in some of these big funds, you can certainly see that if the amount of attention that they give to, and I like your analogy, the French fry, but I'm thinking of a dinner plate of that little tiny parsley or garnish that's sitting on the side of the plate versus the steak. They care about the steak. If you are a mega fund, you care about Rippling, you care about Deel, you care about OpenAI, you care about whatever one of these businesses is worth five, $10 billion. The company that is doubling year over year, tripling year over year, but is going to sell for-
Turner Novak:
10 years to get there.
Rick Zullo:
Yeah. 10 years to get to a $2 billion outcome is often not that loved. And that's actually a really unfortunate thing. And the reason why you need heavy alignment of interest and this, and I do think that is often lost on founders who are approaching it the first time saying like, okay, there's a lot of pushing companies to operate in irrational ways that are actually not to their benefit just for the chance that they could get so big. There was actually someone who tweeted about this the other day, I want to say they were from Khosla, and was saying, "Hey, we actually made the decision, against our own interest, to tell the founder to sell."
Turner Novak:
Take their early exit. Yep, I saw that.
Rick Zullo:
Because it's life-changing money for the founder. And I actually really respect the fact that they did that because I've definitely seen other firms be like, look, a $200 million exit doesn't really get us excited when the founder could have walked away with 40, 50, $60 million.
Turner Novak:
Can you explain that for somebody who thinks it still seems like a big number, that seems like they would care, why would they not care?
Rick Zullo:
I mean, when you're talking about them owning only 10 to 15% of the business that sells for $200 million-
Turner Novak:
So they get $20 million back.
Rick Zullo:
They get 20, $30 million out of a multi-billion dollar fund.
Turner Novak:
So that's like they'd have to get a hundred of those in order to return all the capital back to their investors.
Rick Zullo:
I mean, even think about this. So when we sold RiskMatch, that was a nine figure outcome that we achieved in less than one year. We led a $3 million seed round into that company. It's seven months later, it received an offer for nine figures. The founder walked away with more money from that transaction than Aaron Levie did making from Box. Have you heard of RiskMatch? Probably not. Has anyone heard of Kabir Syed?
Turner Novak:
Actually, you mentioned this company to me at one point, that's why I know it.
Rick Zullo:
That was a life-changing outcome for him. And Kabir and I are close friends. He's a wild, wild individual and he's been massively helpful in so many aspects of my career.
Turner Novak:
Didn't he try to buy you a car or something.
Rick Zullo:
He did.
Turner Novak:
What happened there?
Rick Zullo:
So Kabir and I always have a bunch of wild stories. And it's like, he basically, we had a thesis on basically a counter position play, i.e., giving SaaS to brokers for free. And what RiskMatch was at its core was a software application that sat on top of agency management systems, which are the core system of record in the broker world. Give that software for free basically to brokers as a way to monetize activity on the carrier side. So if you accumulate all the data and what we wanted to see was if you could get the biggest pool of broker data out there, more data than any other broker ad, so our target was a hundred billion, that's bigger than Aon or Marsh, if you get all the broker data into one platform, then carriers would theoretically want to connect with you to get visibility into how that's performing, which AIG, I think is Aon like $100 million per year just to get visibility into the opportunities that they have. Just for directive.
Turner Novak:
Like CAC for them, like their customer acquisition costs, because they're paying the CEO the-
Rick Zullo:
So they either put it into their customer acquisition costs or as part of their underwriting expense.
Turner Novak:
Okay.
Rick Zullo:
So the reality is Kabir had been at the company for a couple of years. He bootstrapped it. Kabir is this older guy, maybe late forties or early fifties at the time, lives up in Greenwich, Connecticut. He wears suits, he's smoking cigarettes outside of the meeting. He is dropping F bombs every two seconds. The reason when we got to conviction on him and the business, which we met a bunch of gnarly insurance characters along the way that have subsequently become good friends, but he made me go out to dinner with him, his wife and my wife. He's like, "I want to know that we're really getting in business with each other." So Midtown Italian restaurant where we probably had way too many grappas and have one of those chicken parms the size of this table. But yeah, we had a great run with the company and when you make that type of money, which I can't disclose the full amount that he made, but you're talking about an extremely lucrative outcome, he calls me up and I'm living in a one-bedroom apartment in Chicago and barely affording my rent at this point.
And he's like, "Hey, what color do you want?" And I was like, "What are you talking about?" He is like, "Oh, I'm at the Maserati dealership. And I was like, "What are you talking about, man? I can't even afford the maintenance or insurance on that right now." And so then he calls me the next day, he is at the Tiffany's store. He's like, "Okay, what does your wife like?" And he was just like, he's a very generous person in that regard. So instead he invested in our first fund and he actually became one of the first investors in Archer Aviation that he met those guys at a dinner that we were hosting for our founders.
So I think Kabir's made like 15, 20 million bucks off that. So I guess the rich keep on getting richer. Kabir's done very, very well for himself since. He's a founder. I'm an angel in his company, but he's a character and I think that's a relationship that have we brought other investors in or blocked that outcome. I know his kids, Declan and Zeta, you wouldn't be able to have what they have today had a different set of funding scenarios happened that blocked him into a corner, not enabled him to sell when the time was right for the company. Meanwhile, we've had a very productive relationship. We recycled that insight into ThreeFlow has a lot of adjacencies to RiskMatch as a business.
Turner Novak:
That's his new company, right?
Rick Zullo:
No.
Turner Novak:
Oh, different business.
Rick Zullo:
Yeah, different. Actually the first investment we made in equalOne, we basically took that insight and said, "Hey, I want to do this, some employee benefits." Went to a bunch of the RiskMatch customers and said, "Hey, if we found this business and did the same thing in employee benefits, would you guys be interested?" And they're like, "Yeah, sure." So actually one of the brokers that we worked with through RiskMatch sent me the company. It was formerly known as WatchTower Benefits. And these guys had never worked at a startup before. They had been around for three, four years. The company was flat, and the CEO, I believe he still has up on his wall a note that he got from a local VC in Chicago that says he had signed up for office hours and the VC responded back saying, "We are not interested in funding your company. Please stop signing up for office hours."
And so-
Turner Novak:
That's crazy.
Rick Zullo:
So we engaged with Ryan, the CEO. Company ultimately pivoted from a SaaS model to the model that we implemented at RiskMatch. And it's just been absolutely gangbuster shit. So we led the seed. Emergence led the A. Accel led the B. Emergence led the C. We've plowed into every single round in the company and it's been a really, really great story. Kabir has certainly been extremely helpful along the way, and Kabir is also one of those folks that as we've met a bunch of these brokers, now some of them are LPs in our fund, and they all came from that initial core relationship that we had into-
Turner Novak:
But you didn't block the sale of this measly-
Rick Zullo:
Well A, we never had blocking rights to begin with. But I think we think about some of these founder journeys of Brett and Adam from Vettery or Kabir from RiskMatch. I was texting with Kabir yesterday because he introduced me to the CEO of a $60 billion insurance private equity fund. And he was like, "Oh, he wants to speak at your insurance capital summit thing." And I'm like, that's pretty cool. $60 billion fund. How many 60 billion venture funds are out there? You probably haven't even heard of-
Turner Novak:
I've never heard of an insurance, but yeah.
Rick Zullo:
Fund in private equity. But I think that's actually the pretty interesting thing that these guys can throw around a lot of money, have a ton of customers, and having one great relationship there can tee up a bunch of other great relationships that thinking about the long game, you can do that when you're an emerging manager and say, okay, this is still a great outcome for us. It doesn't matter that it's not putting $200 million into our fund. This is going to be a 20-year relationship with this founder. And you know what? I'll get them on the next one. And if Brett and Adam decide to start another company, I'm not going to make the same mistake a third time. I'm going to give them a check. I'm sure it's going to be expensive.
Turner Novak:
Not one of the theses, one of the four theses.
Rick Zullo:
Yeah. Now my last two investments are founders that I've worked with in the past. One, his first company was worth a billion, a second one sold for nine figures, the last one, his last company is a multi-billion dollar company. And now they're coming back to the well and saying like, okay, you did things right for us. And that's the fun part of this is there's not many advantages to getting old, but that is one of them that you're like, oh, I'm the only one left from, everyone else is so rich that they're gone. I'm your only person that you've worked with before. So I got that going for me.
Turner Novak:
Okay, so I think one really interesting thing you mentioned, you mentioned this fund Lightbank that you worked at back in Chicago. You almost started a venture fund back when you were in Chicago. Tell me about that.
Rick Zullo:
So it was actually before Chicago. In business school, for those who remember Mike Rothenberg, he was the young wunderkind starting a fund. Me and the co-president of the Columbia Private Equity Venture Capital Club, this guy Patrick Chang, he had worked in venture and private equity before school, honestly a better investor, a great person. We were best friends in business school. We were like, "You know what? We're going to start the East coast version of this. All focused on enterprise. Let's get this going." And we had structured all the programming that we had done around Columbia when we were there on recruiting the firm founders. And so I've long been very obsessed with how could you do venture differently? How could you do private equity differently? That concept of being a entrepreneur as a GP was something that was always interesting. And we decided, hey, we're going to give this a shot, partially because we weren't getting enough offers. No one wanted to hire us. So-
Turner Novak:
Is this a classic just college, I'm going to start my own thing.
Rick Zullo:
I'm going to start my own thing because no one will hire me. And I was like, okay, I've worked at a couple, I'd done some interning at First Round and at Bowery Capital and Foundation and this guy had some more experience and he had done some private equity. We were like, yeah, we can pull together a $10 million fund. And legitimately that may have been my only option. I was still waiting to hear back on a lot of stuff. So we gave it a real good go. We actually recruited a third person that we were going to do this with, Shruti Gandhi, who now ironically enough, it didn't work out. We had no ability to raise money. We would've completely failed. But all three of us independently have different funds now.
So Shruti runs Array Ventures. Patrick runs Dispersion Capital, which is this incredibly high performing crypto blockchain fund. Again, stuff that I know nothing about. And then we have the weakest of the three with Equal Ventures. But that concept of, okay, look, I think there's going to be a new class. I think that there's a lot of people from the legacy world that view the world very differently from me, I think they come from different pedigrees from me and I need to go and find a way to forge my own path. That is the way that I'm going to invest. And I'm glad that it didn't work out then because I think all three of us are better off. Patrick and I would probably not be friends had we started that fund together and meanwhile his wife and two kids are coming over this weekend.
Turner Novak:
Nice. And then you did end up starting Equal. How did that end up coming about? What was the thesis?
Rick Zullo:
Yeah, so a big part of the reason why I joined Lightbank was this point of view that if I went to a traditional West coast venture firm, I was going to get my ass kicked. And that's because you had all these folks who were deeply technical that could jam with the top engineers coming out of some PhD program at Stanford. They had a bunch of friends from Facebook or Uber or whatever hot company it was. They had a deep network of CIO, CTOs like that was not me. I was not going to be Alfred Lynn on the next hot enterprise IT company that was out there. So I spent some time with my mentors and spent some time with other investors to figure out, okay, what is my strategy going to be? And very much I had a belief that technology was going to start impacting these industries like energy.
First angel investment I made was Rigup, raised a couple hundred million dollars, I had a $3 billion from Founders Fund, [inaudible 01:16:19] Baillie Gifford and a bunch of other folks that investing in companies like that that were going to transform these trillion dollar industries was actually a much better fit for me because I came from consulting and private equity, could call it my network and the technology was pretty light.
So I truly Lightbank on this premise that hey, I'm going to be in Chicago. These guys are actually investing in a lot of vertical software building businesses that aren't research coming out of a lab, but rather companies like Echo Global, a tech-enabled freight broker that my boss had started or a Groupon or something else like that, more business model innovation than technology innovation. So while there, I very much realized that the process of me backing those founders companies like project44 or Clearcover or Rigup was very, very different for those founders who, yeah, all those were first time founders. They were folks who didn't go to Stanford or one of those schools. None of those companies were in the Bay Area.
Turner Novak:
They probably didn't look like a down the fairway for just a traditional normal fund.
Rick Zullo:
Definitely not down the fairway. And if you look at the questions that they would get when they were trying to raise their seed rounds, it's like explaining insurance 101 or explaining oil and gas 101 and then the founders have to explain, you can't do oil and gas development the way that Uber worked. Literally you will go to jail. And same thing with insurance. So with that process, it was very clear that the experience that most founders were getting, if you were starting the next version of Datadog, you could walk into Sand Hill Road or now South Park.
Turner Novak:
There's probably like a thousand funds today.
Rick Zullo:
Yeah. And they're like, "Oh yeah, I knew 10 people who worked there and I know this and I know a ton of customers that I can put you in touch with and I've done my market map and I understand this and I understand this." They share passion for that space too, but they also have a prepared mind on that space. And they wouldn't call it a prepared mind, but yeah, they know enterprise IT left and right. If it's a consumer investor, they know every single consumer app out there and they know the things that they're looking for. Meanwhile, when it came to looking at a business in energy, logistics or insurance, it was like, "Hey, can you explain this to me and can you put me in touch with a customer that I can call? Because I don't know anyone who runs warehouses. I don't know truck drivers."
Turner Novak:
I've read a blog post on energy.
Rick Zullo:
It's like, "Do you have any McKinsey reports that you can send me?" Stuff like that. So the reality is they didn't have a prepare mind for that. So the premise of Equal is very simple. It was if you believe that we're going from this age of developing technology to deploying it across these big markets, which vertical software was still a little bit of a contrarian. Veeva was really the first big win and Veeva was not a big win at that point, but companies like Veeva and Guidewire were really starting to pop up and become big companies. If you believe that was going to be the case, how could we lean in on that and bring a prepared mind experience to those founders the way that consumer and enterprise IT founders had prepared mind from their investors. So really we bet big on that and said, "Okay, the only way to do this is to lead checks from day one because we need to be able to price these runs, otherwise these companies are not going to get fundraising."
And really focusing on what are the markets that we think have enough catalysts that we think that there's going to be economic turnover, enough complexity that we think that we have advantage in there, enough of a connection to those markets that we feel like we can actually be helpful and candidly low enough competition that we felt like we could have a pole position. I'm not going to go jump into healthcare or FinTech or prop tech knowing how many investors are already in those waters. So we picked a couple of markets that we knew people that were super complicated that had a bunch of catalysts driving them and raised $55 million to go prove out that thesis.
Turner Novak:
And was it super simple? You just sent a couple emails and texted some friends and you raised 55 million or how did it go? What was the process?
Rick Zullo:
Worst experience ever. Yeah, so I think the whole process basically took 18 months, two years, slept on couches, slept in hostels, literally the night before our IC with who ultimately ended up being our anchor, we slept in a hostel. I had a, I want to say, three-week-old daughter, my first, at home. So if you want to find a way to piss off your wife, it's leaving a newborn at home. The only sympathy I got that was like, "Hey, it's not like I'm playing off at the Ritz. I'm staying at FieldHouse Jones in a pretty crappy place." So as you look at that dynamic, I had a really solid track record. I think I did 11 investments at my prior firm as either four fun or as an angel. Four of those ended up becoming unicorns, a couple other nine-figure exits. I thought it was going to be a lot easier. I had a bunch of people encouraging me to go out and then it was just like a total brick wall.
Turner Novak:
So what was the brick wall? What were you doing wrong?
Rick Zullo:
Well, I still think till today and moving forward, we are terrible at pitching our business, but I think there's such a focus on where you worked, what your pedigree is, how connected you are, which I had LP is being like, how can you prove that these numbers are real? And I'm like, "I go talk to Lightbank? Well, did Eric and Brad do those deals?" It was just a level of scrutiny that I would say is very fundamentally different than had I come out of NEA or General Catalyst or Lightspeed that Ken Lee, one of my good friends from business school who's an LP, he was like, "Hey, why don't you go and take a job at a marquee fund? I had a job offer from one of those marquee funds." He said, "Go work there for two years and then this will be a 10X easier experience." And personally, I didn't feel like I could do that. There were two reasons why. One, I felt the ability to do the deals that I wanted to do within those partnerships was not going to work.
Turner Novak:
Because you weren't going to convince, "Hey, let's do this insurance." Insurance is not a category anyone's investing in.
Rick Zullo:
I won't say the name, but a firm that offered me a job, again, some pretty scaled companies said, "Hey, do you ever think these companies will move the needle for our fund?" I'm like, "If a $3 billion company is not moving the Needle for your fund, then especially when I invested at a single-digit valuation, then I don't know what is going to move the needle for your fund." But explaining and actually recognizing that the product experience that those firms were used to was just so different than what we wanted to provide, that they wanted more enterprise it. They wanted consumer founders, they wanted the things that they were used to investing that I would've been a fish out of water there.
But then secondarily, if you're leaving a fund and you know you're going to leave there writing that check to a founder and saying, "Hey, I want to go take your board. We're going to be in this for the ten-year journey." I'm just a really bad liar that I don't think I could have sold that to founders and I probably would've gone two years not investing and just making a paycheck and being out of the investment gain because I would've felt really uncomfortable taking a board seat, leading investments, knowing that I was going to leave. That's not exactly the case of what I'm seeing at some of these firms that the junior partners know that they're going to leave and they're still willing to sling checks.
Turner Novak:
But there's kind of this exodus maybe happening. What are you seeing right now with partners-
Rick Zullo:
We had someone try to preempt one of our companies. Literally a month later I heard from an LP that like, "Hey, that person's raising a fund, what do you think?" And I had heard rumblings that that person was thinking about raising a fund and which is the reason why we shut down that process. But man, if that person had lead investment and then left a month later, that probably would've killed one of our companies. And again, we own 17, 18% of these companies. They're meaningfully impactful for us. We have 15 companies per fund.
Turner Novak:
Portfolios. Yeah, I was going to say it's pretty concentrated.
Rick Zullo:
So if we lose one, it's a big deal. We've only had one company die in the history of Equal and we focus on making sure that we have a very low loss ratio for better or worse. So as I look at that, I think there's a lot of these dynamics that if you're going to be an emerging manager, this is got to be your last job that you're ever going to have. And for better or worse, that's our mentality. I tell founders I have a relationship with every single founder in the Equal portfolio regardless of whether I'm on the board or not. That from here on out, if you're going to have your deal sponsor here, because ultimately I'm standing behind your deal alongside our product owners and generalists.
Turner Novak:
Yeah. So you mentioned your first ever pitch to a big institutional LP. You thought you're going in my tracker looks pretty good. How did it go?
Rick Zullo:
Horrible. So I had a friend who I interned with in business school. She was at another fund and she worked at that LP at the time and she set me up with it.
Turner Novak:
So it was like her boss is kind of-
Rick Zullo:
Yeah. And she really got on the soapbox and was like, "I've known this person for forever. I backed them blindly. I want to invest in their fund. You got to go take the meeting." And then immediately five minutes after the meeting, I'm hearing how bad the CRM notes are that it's like, "Rick, what did you guys do? The pitch doesn't make sense. The team composition doesn't make sense. What's the thesis behind this?" It is just bad, little things that you wouldn't even think of. "Wait, why haven't they changed their LinkedIn profiles yet? Why isn't their website up yet? Their logo, it doesn't look like it was professionally done," because I had made it in PowerPoint at the time, probably still would.
So all these little things that no discussion of track records or whatever, it was just like pitch doesn't make sense, not articulate, all these other things that are really perception bias rather than actually looking at the objective data behind it, unfortunately. But it was so bad that my friend was like, "You need to shut down your process right now and figure your shit out." So we took some time after that to really hunker down and figure out what our pitch was.
Turner Novak:
What did you change? How was it different from maybe that first attempt to what finally was landing with people?
Rick Zullo:
To be honest, the only thing that really made it land I think is people seeing enough work around the process, which when we went to ultimately who anchored our fund, we were bringing multiple markups already into that fund of what were positions that we had big ownership in and we showed up for our IC and we had already had a 2X markup on ThreeFlow from Emergence Capital on that. So bringing that and the markup for [inaudible 01:26:58] that we had on Leap and we had this markup on Block Renovations, which was an angel deal that we wear us in the fund from NEA. And Kleiner Perkins had marked up our investment in Pattern Brands.
So we were demonstrating a little bit of a track record, but I think actually showing the process of like, "Hey, here's how we do research. Here's a non-consensus opportunity. Here's how this deal came in via a insurance broker that I've known for six years. Here's this non-consensus thing that we found. The numbers don't make sense, but here's our approach to it. And now Emergence is coming into X-ing it," I think got some conviction on-
Turner Novak:
You bootstrapped or backed into that social signaling of like, "Oh, I know all these other good funds," and you're getting in earlier before they are.
Rick Zullo:
Well, I don't even think it was social signaling. I think it was legitimately had we not had a bunch of markups that people were looking at this fund and saying, "All right, I'm getting into a fund at cost when it's already marked up two and a half, 3X," like that helped a lot of people get there. I don't think that's what gave our anchors conviction. I think our anchor said, "Okay, while you are terrible at articulating what you do, I can see it given that I saw this process that you did with a company like ThreeFlow or an incubating Leap that you go through this long thesis generation process around markets that you know really, really well, you stack the deck with a bunch of customers that you know to reduce the risk along the way and that enables those folks to better articulate their stories and raise subsequent rounds.
I think we've become slightly better about showing people what we do, but the reality is we're not an Uber for X story. I think there's plenty of venture firms that have a verb about them and one LP was like, "Hey, you need to think about yourself of Union Square Ventures is about network effects," which I think USV would probably push back on today, but that's like, "Hey, we're a lot more than network effects." We think about things more probably than that, but hey, First Round is about platform and probably First Round would push back against that today. So I think a lot of LPs want to put you in a box early and say, "Hey, here's the reason why you're special. Hey, you're a media entity," or "Hey, you have this huge founder network that you have," or "Here's this XYZ where you worked at a buzzy fund that has," and I think that's what LPs want to see.
If you do not fit in one of those boxes, the process is always going to be incredibly painful and unfortunately incredibly unfair because I do find that the managers that I've an LP in several funds, to be honest, the ones that have performed the best come from the most obscure backgrounds and they're folks who didn't go to the top tier funds and they're just like dogs. They just keep on getting back up and they have unique flow. And when I look at some of those, it was like that was a nonconsecutive fun and they were often funds that LPs were like, "I won't even take the meeting," and versus some of the other ones I'm in like LPs love them. And then the returns are, look, we'll see what happens in 10 years, but not articulating as fast as some of those other ones.
Turner Novak:
Yeah. And then I think you do this really cool thing that I feel like I've gotten tell you a little bit better through this EMC Summit that you do. Can you explain that to us, what the whole group is then?
Rick Zullo:
So basically when we were starting to Equal, I had this Kush deal with some real estate guys that I was with who let me work in their space for free. And with that I was able this gorgeous space and Chelsea hosted because I couldn't afford Kaufman, brought in a bunch of other emerging managers.
Turner Novak:
No, that's why you did it?
Rick Zullo:
Oh, yeah, 100%.
Turner Novak:
I didn't know this.
Rick Zullo:
It was literally like me because I couldn't afford Kaufman getting a bunch of other emerging managers. It was like eight of us originally all starting firms in New York around the same time, great crew of folks, in person once a month, and basically talking about how shitty our lives were raising money and how hard it was to be, but just actually having a safe space that you could be like, "Okay, I'm dealing with this issue," or "Hey, has anyone dealt with this LP?" Or "Hey, I have to take a mark-down on his vestment," or "Hey, this lawyer's overcharging me like crazy, what should I do?"
And us drinking wine and eating pizza and lamenting and having brotherhood and sisterhood in our torment. And then every session someone ask for another person to join and be like, "Hey, Addie Lerner is starting a fund," or "Chris Paik is starting fund," or XYZ. So we'd start looping more into the group over time and that was a lot of fun. And then I was able to get some of these GPs and LPs to come speak to. So we had Josh Kopelman come and speak to the group and Roger Ehrenberg come and speak to the group and talk about their founding story.
And I thought that was really cool experience. And then a bunch of LPs from Greenspring or Accolade or [inaudible 01:32:04] or whatever come and meet the group and that was cool. Then COVID happened and we was like, "Okay, so that group's dead."
Turner Novak:
Oh, you thought it was going to be-
Rick Zullo:
Oh yeah, 100%.
Turner Novak:
Yeah.
Rick Zullo:
But I think at that point we had sprung up a Slack group and a bunch of people were asking, "Hey, what are you guys doing? Are your LPs defaulting?" Back in mid-March, which again we launched our fund, I think our announcement date was March 5th, 2020, which-
Turner Novak:
This is Equal fund one.
Rick Zullo:
Yeah.
Turner Novak:
And you had closed it-
Rick Zullo:
Yeah, we closed it in basically Q4 or at least had commitments and then formally closed it in Q1, tried to line up everything for an announcement, paid a PR firm. And then I was like, "Well, that didn't work out." But everyone asked, "Hey, what are you doing?" So I got together a couple LPs for a Zoom session to speak off the record about everything. And then a bunch of West Coast folks wanted to join in and I think we had 60, 70 GPs show up for that session. And then look during COVID, all of us, especially emerging managers, we were looking for a lot of answers and we were looking for camaraderie.
My employees could not understand the experience that I was going through as well as Jon Lehr for Work-Bench or Nick Chirls for Notation or someone else who's running a fund being like, "Hey, how am I going to go fundraise if I can't meet LPs?" Or "How am I going to engage in Porter? How am I going to handle my employees in a situation in that we're trying to do this remotely?" We were trying to figure a lot of things that knew for the first time. And so we started doing monthly sessions with GPs, LPs. I did a session with Jerry Colonna, like from Reboot in front of everyone in the group where he's like, "Who thinks I can make Rick cry in the first five minutes?" I will not respond to whether I did or didn't.
Turner Novak:
This is on Zoom?
Rick Zullo:
Yeah. In front of 120 GPs.
Turner Novak:
I'm trying to remember if I was in that one. I don't remember.
Rick Zullo:
Yeah. So I thought that was a very important thing to get me through. I had no child care help during COVID. My wife's a real estate private equity investor. We had a one-year-old daughter. We were living in the middle of nowhere with our in-laws. My mother-in-law was going through recovering from pancreatic cancer. It was a hard time.
And so the reality is having that group meant a lot to me that when I came out of COVID, it just was like, "How can I give back to this group and how can I make sure that I spend more time with these folks that have given so much to me and helped me get through what I would consider one of the hardest times of my life?" And with that, one of my LPs hosted this summit in Jackson Hole and it was awesome. I definitely did not deserve to go, everyone there was 10 times more impressive than I did, but it didn't feel like a conference. It felt so intimate. It felt like you could actually have real conversations. It felt like an anti-summit. And that's the reason why we deliberately use summit in the words that-
Turner Novak:
Instead of conference.
Rick Zullo:
Yeah.
Turner Novak:
Okay.
Rick Zullo:
Because I want it to feel like actually you're getting together with friends that you can actually have real conversations and not be accosted by 50,000 different vendors and not have to go and pay a ton of money, which every emerging manager is broke, even if they're projecting that they're wealthy, they are broke as hell. And so just making it easy on everyone that, and then solving for some of these power dynamics, which I've been to conferences where the balance of GPs to LPs is like 10 to one. And then you have a guy from UTIMCO off in the corner with a bunch of $5 million funds around him, and the reality is that's a shitty experience for both of them. UTIMCO couldn't merge all those funds together and write a check small enough to meet their needs. And the reality is they're looking for someone who can write a 250 to 500K check, not a $50 million check, but when you balance that power out and actually have GPs equal to LPs, you can find people and everyone's much more relaxed.
And because it's off the record, no media, I felt we could have real conversations and each year we've had a mighty solicitor cry, which I think is like, hey, me getting billionaires to cry is... I sound more and more like a hedge fund guy when I say that, but I do think that is where else are you going to see people share that type of stuff, which is pretty cool. So it's been an important thing to me. And every LPs why I do it, and I said, "If we're going to have hobbies, that might as well be one. That's a better hobby than me doing-"
Turner Novak:
There's worse hobbies.
Rick Zullo:
There's certainly worst hobbies that I could have.
Turner Novak:
How do I get invited if I'm not somebody on the like... is there an email list? Is there a website? You've talked with the Slack group.
Rick Zullo:
There is a website. If you know someone in the group, that's the best way to get in. So we do have an application for the group and we have an application for the summit. So we do not market the summit broadly, and you can't buy a ticket. So the only way to get in is if you're part of the group.
Turner Novak:
You always tell me invite only, do not add people. There's a waitlist.
Rick Zullo:
Yeah. So I think we had about 1,500 people apply for what were 150 GP slots last year. We had about 350 LPs apply for what were about 150 LP spots. We like to keep that one-to-one. And I just think we never have any desire to make it big. I'm not an event promoter. I'm not trying to make money on a conference. Tickets are free.
Turner Novak:
Free?
Rick Zullo:
Yeah, yeah. So every event that we do is free. I think that's important to make sure that we're not profiteering off this. It is investment that we are making as a firm in building stronger communities. We do the same thing in Climate. We had 5,000 people apply for a Climate Capital summit. We let 350 at attend. We had a trillion dollars of capital on stage while we're there. And CEOs of a hundred billion dollars worth of company, we're doing that insurance. I think we'll have like 250 billion of insurance, private equity on stage, couple probably a hundred billion of CEOs as well, renewing commerce. Then we'll do our Climate Capital again. So I'm gradually becoming an event promoter even though I don't want to be. But I do think in person, especially post-COVID, just in real life experiences, especially when it's intimate, it doesn't feel like a sales pitch that an introvert like me can actually have a real conversation and get to know someone. I really value those things.
Turner Novak:
I feel like there's almost this room to your point of conference for some, there's a lot of conferences out there. There's a lot of conferences I maybe go to where I felt like it wasn't worth it. But I like the EMC. I think I've gone to everyone since post-COVID.
Rick Zullo:
I'm like a total natural introvert. No one believes me in it in that. I go to one of these conferences and it's like 5,000 people, I'm like, "This is too much."
Turner Novak:
[inaudible 01:38:38] command a room I'm like a-
Rick Zullo:
Put my AirPods in, go to my computer and wait for someone I see. That's more my style, despite me seeming more verbose than I am.
Turner Novak:
Yeah. Well, this has been a lot of fun. Thanks for taking the time to do this. I think this is-
Rick Zullo:
Awesome, man. Thanks for having me.
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