Interview: Sheel on Random Walk
Random Walk sits down with Sheel Mohnot, for a long and winding tale about what makes a good VC, mistakes venture capitalists make, what a fintech investor should care about and who would win at Survivor, venture capitalists or hedge funders?
Table of Contents
- Steeltown is Sheeltown
- Becoming an investor and making ADD a superpower
- The secret recipe for early stage investing
- Pedigree matters less than you’d think
- VCs don’t know what makes a good VC
- The VC value-add v. the VC product
- Productivity hacks, the unbearably lightness of being VC, why Goldman fails, and beating hedge funds at the Amazing Race
- Mistakes were made
- Into the future, Gen Z, and the next great tech hub
- Where does VC go from here, and other looks into the Crystal Ball
- Burning Man is underrated
Steeltown is Sheeltown
RW: I usually like to start with a little bit of background. Where did you grow up, what did your parents do?
SM: I grew up in a suburb about 30 minutes from Pittsburgh. My dad was a chemical engineer and my mom mostly stayed at home, although she had jobs off and on.
RW: Did you go to high school in Pittsburgh too?
SM: Yep. I actually also went to college there too at Carnegie Mellon University. And then I actually lived there for four years after college.
RW: What's your take on Pittsburgh generally?
SM: Great city, really good people. Not great weather, but I think there's actually a great culture of engineering. Carnegie Mellon and Pitt are both there. So a very active community of entrepreneurs. There are some tech IPOs—Duolingo and Aurora—that got multi-billion dollar outcomes in the last year.
RW: Are you a Pittsburgh sports guy?
SM: I grew up as a diehard Steelers and Penguins fan, but I was never really into the Pirates. I just found baseball boring.
RW: And of course the Pirates have stunk for the past . . . forever.
SM: They were good. I'm 40 and when I was a young kid they had Bonds and Bonilla and all that. But the Steelers are always a contender. Penguins are always good . . . so I have a very soft spot in my heart for Pittsburgh Sports, but I'm not an active watcher anymore.
RW: How did you decide to go to Carnegie Mellon?
SM: I graduated pretty young from high school, so the idea of staying close was nice. And then also it’s just a great school. I really enjoyed my time there. I studied business and human-computer interaction.
RW: What is human-computer interaction (other than the obvious)?
SM: It’s a combination of design, psychology, and computer science. So like designing interfaces, that sort of thing.
RW: Interesting. What did your parents want you to do?
SM: I mean, they still probably want me to be a doctor.
RW: At what point did you realize you weren’t going to be a doctor?
SM: Before I got to college. But they still thought I should try.
RW: What guided you towards something like interface design?
SM: I liked the idea of combining psychology and design with computers. I thought that was cool. By the way, I have no sense of design anymore or, or maybe I never did. But I thought it was a cool idea.
Becoming an investor and making ADD a super-power
RW: Design has advanced leaps and bounds in fairly short periods of time. When did you become inclined towards other technology companies or VC generally? Before you were an investor, you were an operator, right?
SM: I guess since I was a kid, I've been dabbling with stupid ideas, from being a DJ to fixing computers . . . all sorts of stuff like that. But then the first sort of full-time foray was ‘08-‘09 when I was consulting in Chicago, for BCG, primarily serving financial institutions. A guy I worked with at BCG was leaving to start a payments company and I joined him. So we built a payments company (FeeFighters) for a couple of years and then got acquired. It was a modest, but successful acquisition. It was a really fun journey and that group is still very close. We have a Slack group that posts regularly, including today.
RW: When was this?
SM: 2012. So it’s been a decade. I am really old.
RW: So what was FeeFighters like? What was the edge? What was the innovation?
SM: We were a marketplace for payments. So if you wanted to get a merchant account to accept credit cards and you're a small business, you could go to your bank, you could go to your cousin Sal who has a business that does this or whatever. It was a pretty messy process. So we started a company that helps merchants compare options for payment processors on an apples to apples basis and get the best deal for themselves.
RW: So it was kind of like a like a NerdWallet, but for payment rails?
SM: It's really funny that you say that. That's exactly what it was. Back then NerdWallet was just getting started and people would compare us to them often, I think in TechCrunch as well. So you nailed it.
RW: Fantastic. I strive for “nailed it.” So when you left BCG to join a startup, were you at any point thinking “this is crazy”?
SM: I was relatively open to taking risks. I knew there was always someone who'd be willing to pay me more money than I needed because I've lived a very low budget lifestyle, so I think that helps.
RW: So you could fall back to your status quo ante, even if it failed–that didn’t even feel that risky.
SM: Yes, exactly.
RW: Were you technical at the time? Were you writing code?
SM: No, I mean I could write very bad code, but barely. I was doing more business stuff. So business development, marketing strategy, that sort of stuff.
RW: Did you have a super power on the founding team?
SM: It was probably the hustler. If other folks were product and tech, then I was more of the hustler type.
RW: Is hustler in this case code for generalist? As in, you kind of knew the most about the most things and could have the most crossover ability?
SM: Yes, a generalist that does a lot does a lot of random stuff. But BD, marketing, strategy, is probably where I spike.
RW: When did you start thinking about becoming an investor?
SM: At FeeFighters I was involved in the fundraising. We were in Chicago and I was coming out to the Bay Area to fundraise with Sean and meet with investors. And I always thought, “Oh, hey, like, I like what's going on on the other side of the table, and I should consider doing this in the future.” In general, I was looking at companies at the time, and you would see the YC list or whatever, and I was like, “Oh, I like that company. I like that company too, etc.” But I didn’t have enough money to really invest. After we got acquired, I started doing some investing and I really enjoyed it.
I liked helping companies at the earliest stages getting my hands dirty a little bit. I loved all that, so I decided to do it full time.
I liked helping companies at the earliest stages getting my hands dirty a little bit. I loved all that, so I decided to do it full time. I was like, “Okay, maybe I should apply for a job at VC funds.” So, I talked to a couple, but I don’t think any were interested at all in hiring me.
RW: Why is that?
SM: I don't think I had the profile. It was a very modest acquisition and I don't think I was the right person, but I ended up investing my own capital. I also ended up starting another company, an auction company, which got acquired in 2015, and so I had a little more money to invest, and so I did.
Eventually, 500 startups—a VC fund that had invested in my first company—asked me to join them. Originally I was just mentoring companies and then I said, “Hey, I like mentoring, but let me also invest alongside you guys on anything that we do together.” Eventually that approach turned into a fund, which I started with my own money, but pretty soon thereafter I raised external capital too.
That’s also around the time that I met my partner Jake Gibson. Jake had cofounded NerdWallet, which—as we talked about was similar to my first company and was a company that I always looked up to. So after I met Jake, I asked him to join me in mentoring these early stage companies, which he did, and over the course of the next few years we eventually became partners and now run the fund together.
RW: You’re making it sound easy, right? You had two successful exits in under 10 years. Why did you stop?
SM: Mmm, well, I should caveat by saying that they were successful exits, but not crazy. By Silicon Valley 2022 standards, they were barely exits at all. I don’t really know though. I like building stuff, but I don’t need to build only one thing, and if I had the opportunity to work on multiple companies at the same time, I found that very appealing.
So venture seemed like a good way to do that. You have to be relatively intelligent and relatively personable, and you have to love this stuff. I think it’s a good fit for me.
RW: That definitely resonates with me. How would you rank order the following attributes from most to least important: skills, networks, smarts, and focus.
SM: I would flip it around. Every VC has their own style and some are phenomenal but with no networking skills and others who honestly aren't very smart, but have amazing networking skills. So I don’t think any of those attributes are most or least important. Personally, I don’t think I'm world-class in any of them. I think overall I’m a generalist, I do a little bit of everything, and it’s worked well and I enjoy what I do.
Every VC has their own style and some are phenomenal but with no networking skills and others who honestly aren't very smart, but have amazing networking skills. So I don’t think any of those attributes are most or least important. Personally, I don’t think I'm world-class in any of them. I think overall I’m a generalist, I do a little bit of everything, and it’s worked well and I enjoy what I do.
I work hard at it. I think my founders will tell you that they can reach me anytime day and night. One of our LPs spoke to all of our founders recently and they joked that we must have built an AI because whenever they ask a question, I respond in a minute, no matter what time it is. And I was like, “Yeah, I think that’s just what we do. It's what we're in business for.”
The secret recipe for early-stage investing
RW: It’s funny though, because if an operator came to you trying to raise money and said “I have a hard time focusing on any one particular thing,” would you write them a check?
SM: Probably not. Well, I don't know, but you have to choose the things that make your ADD a superpower, right? So when earlier you asked “What do you spike on?” and the answer is “no one thing. I spike on being able to do a lot of different things.” That’s an ADD superpower and it’s helpful to investing, especially when you’re investing in a bunch of different companies. Earlier today I was working on a fintech decisioning company and then later a truck fleet payments card, and so on.
RW: Wide but not deep, but still pretty deep when the time comes. It's still funny to me that you the VC probably wouldn’t invest in you the founder, because as an investor, you’d prefer that your founders have a lot of focus.
Another question along similar lines: everyone knows that most startups fail, but if a founder came to you and said “we’re probably going to fail” or otherwise acted (correctly) as though failure was the most likely outcome, you wouldn’t cut them a check either, right? So what does that say about the kind of founders you are looking for? Are they irrational? Highly skilled liars? Or is it just an elegant dance where you both need to pretend that you’re unaware of the most likely outcome? How does that make any sense?
SM: The thing we look for most is a clear articulation of their vision, and then, of course, we ask if we like that vision. If the founder is able to clearly and succinctly articulate their vision then that's a big chunk of their responsibility right there because selling is one of the most important aspects of the CEO’s job. They need to sell to customers, they need to sell to employees and they need to sell to investors.
The thing we look for most is a clear articulation of their vision, and then, of course, we ask if we like that vision. If the founder is able to clearly and succinctly articulate their vision then that's a big chunk of their responsibility right there because selling is one of the most important aspects of the CEO’s job.
It’s highly unusual that we’d be the last money into a company, so we’re dependent on the CEO’s ability to attract more capital down the road. Likewise when it comes to talent, I think the best founders are just phenomenal at recruiting talented people to join their mission.
RW: Are there many former salespeople who are founders?
SM: No, but when I say sales, I don't mean sales in that sense. I mean like vision sales.
RW: I understand. They have to be able to tell a story that resonates with people—both talent and money, the two things that make it go. Do you think that’s a skillset that you can identify in a founder very quickly? Is it binary yes/no?
SM: Yes, I think so. It's like a gut feel more than anything else. There's no easy way to put it. There are some types of businesses we just will not invest in and, and some that we really like, but a lot of that is instinct.
There is an ethics boundary that's really important to us. We want to invest in ethical founders (and fintech), but beyond that, we're flexible. I think our lens on the world is definitely a “does this make the world a better place” sort of lens. I mean that genuinely. That’s not to say we’re a so-called “impact investor” and we definitely expect our companies to make money, but being “better” is important to us. We're called Better Tomorrow Ventures. We want to build a better future.
RW: Put yourself back in the founder’s shoes for a moment. What would be a red flag from their perspective when it comes to VCs? What would be a thing that if a founder saw, you would say “run, run, screaming from the hills!”
SM: There’s a big component of founder-investor fit that people overlook. From my perspective, it’s really critical to find somebody that you get along with that you feel like will be able to tell you the truth about your business. And also be empathetic at the same time because most of the time things don't work out, and along the way there are different types of interactions you can have with an investor.
So the way I think about it is at Seed you want a, ideally a former founder, somebody who's an expert in the field because you need the most guidance early on in the business. At Series A you want a strong brand because that is going to help with recruiting and all that sort of stuff. And then series B and beyond, generally speaking, just go for price and you know, if you missed any of those things along the way, you can make up for it in the later round.
RW: So in other words, you're saying that if you missed a good mentor at Seed, you could find that at A.
SM: Yes.
Pedigree matters less than you’d think
RW: Do you care much about educational pedigree or even resume pedigree? How much do you care that a founder went to Harvard or Princeton or Stanford or something like that?
SM: I think most of the time I don't even know. The only time it would be in there is, for example, if the founders met at some university, then that would be in the notes. I’m trying to think of the most highly valued companies we've invested in, and I couldn’t tell you where the founders went to college.
Now I’m curious, so I’m going to check.
RW: While you're looking it up, do you think then that college is overrated?
SM: No, I think college can be very important and obviously a school like Stanford selects for a smart particular type of person and there's no reason you should overlook that. It’s a good filter, but it's not the only filter. But sure, I trust my own filter more than I trust some random admissions person that made a decision 20 years ago.
RW: What is your filter? In-network?
SM: No. My filter is, “is this person a lifelong learner?” Do I enjoy talking to them and learning from them.
RW: OK, but how do they even get in front of you? I'm sure there the ratio of people that want to talk to Sheel relative to the number of people Sheel actually wants to talk to is probably fairly skewed in one direction.
SM: So there's a bunch of different ways. I would say a lot of folks get to us through other VCs. They ask other VCs for intros and that's how they get to us.
RW: Got it. So maybe they looked at somebody's college degree, you’re just relying on their intro.
SM: Possibly. Okay. I looked it up and this is actually pretty interesting. So our number one company (in terms of valuation), the CEO didn’t go to college. Number two company, the founder went to Penn State. Number three company, the founder went to Johns Hopkins, and number four, it looks like the founder also may not have gone to college, or it's not in his LinkedIn. That’s from the most recent fund.
So our number one company (in terms of valuation), the CEO didn’t go to college. Number two company, the founder went to Penn State. Number three company, the founder went to Johns Hopkins, and number four, it looks like the founder also may not have gone to college, or it's not in his LinkedIn.
Before that, the number one company, the CEO and his co-founder went to Grinnell College. The number two most valuable company, the founders both went to Columbia University, the one after that, University of Chicago, and the one after that, some college in Australia.
So anyway, I did not know this, but presumably it says something about fancy college degrees.
RW: Do you think that’s typical of most VC portfolios?
SM: No. I think I probably care about it a little less than most.
RW: How much significance do you assign to the fact a VC has passed on a deal?
SM: I don't really care that much. Some of my best performing companies were really picked over and not invested in by other VCs—I can think of one example where another VC passed on it, made the introduction to me, and then we did the deal, and it’s going great.
There’s definitely some signal there, but not too much. We also get some FOMO too, like “ooh, everyone wants this deal, so let’s win it.” On the whole, I think we’re pretty good about forming our own view of things.
Plus, there are a lot of reasons that a VC could pass that aren’t “this isn’t an investable company.” It could be timing, it could be competitive concerns with a preexisting portfolio company, it could be stage or allocation—there are just lots of different reasons that have nothing to do with the quality of the company.
VCs don’t know what makes a good VC
RW: Shifting gears to the VC industry as a whole. Is there a type of person who you’d say “you’re definitely not a good fit for VC.”
SM: Again, there’s a lot of different ways of being a successful VC, but to break in, it's ideal if you're a personable person and like to spend time with people and like to think about things a lot. So if you're cranky, it’s probably not a great idea.
RW: What's an incorrect assumption that people make about you? Do they underestimate you or put you in a certain box that’s not quite right? What do they get wrong about Sheel?
SM: Good question. I wish I had thought about this or had an answer, but I think I genuinely care, and people find that hard to believe.
RW: Going back to what you originally said about no VC hiring you, and I’m thinking to myself “they clearly got it wrong. Sheel is obviously very good at VC.” So how do you explain that? Are you an outlier on the normal distribution of “good VC”? Are VC just not good at hiring other VC?
SM: I just wasn't a good fit at that time. Sure, over time, as people have gotten to know me, they might have been more interested in me.
But you know, I’m not even sure I would have hired myself at the time. What was I really bringing to the table? I'm probably more entrepreneurial and better off doing my own VC fund than joining someone else’s because I’m not a great cog wheel, but I'm probably good at—and I’m struggling with the analogy a bit—being a good wheelmaker.
I’m not even sure I would have hired myself at the time. What was I really bringing to the table? I'm probably more entrepreneurial and better off doing my own VC fund than joining someone else’s
That’s what’s been great about having Jake as a partner, because we work together really well. Our skills are complimentary.
The VC value-add v. the VC product
RW: Is it harder to raise money from VCs or from LPs?
SM: For any first time fund the process of raising is a lot longer. For my first fund, nobody wanted to give any money for about a year and a half. The second fund took about a year and the third went relatively quickly.
RW: It’s funny to me that LPs put an enormous premium on track record when they are selecting VCs—who will then deploy that cash on companies with zero track record.
SM: It’s true.
RW: The other related point is that VC invests in moated, differentiated opportunities, but their product—money—is the most fungible of all.
SM: Right? We’re selling a commodity. So even though that’s true, it’s not entirely true, because we’re not competing at an auction. If we were competing at an auction, then everyone’s money is the same.
RW: So is VC just an arbitrage on liquidity? Arbitrage isn’t quite the right word, but VCs get into deals simply by showing up with liquidity in an otherwise illiquid market? Do VC add value in some other way than that? Board seats?
SM: Board seats are not driving value. Maybe a little, but it’s the founder who is building the company, not the board members. At the end of the day, the founder has to choose the investor, and especially at the early stages, an investor can add a lot of experience and value, especially when they’ve been an operator in the same space. At later stages, it’s more about price.
Board seats are not driving value . . . it’s the founder who is building the company, not the board members. At the end of the day, the founder has to choose the investor, and especially at the early stages, an investor can add a lot of experience and value, especially when they’ve been an operator in the same space. At later stages, it’s more about price.
In many, if not most cases, we were not the highest bid in our portfolio companies. The founder chose us and, in one case, they chose us at almost half the price of their other offers. In other cases it's been like 30%.
RW: Do you think there should be more sub-venture scale technology companies that have $100M upside instead of $1B upside?
SM: It's a great question. Why doesn’t that happen? For us, it comes down to math. Let’s say we own 10-15% of the company—an $100M outcome is worth $10-15M. Obviously that’s nice to have, but if we’re deploying $150M, then $10-15M just doesn’t move the needle much in terms of overall fund returns. You would have to win a lot—and that’s not the risk profile for venture—to make that work. And that’s the sad reality. There could be a better solution—debt perhaps—but for the kind of investing we do, it doesn’t make sense.
RW: It's interesting. Even if the return multiples are strong, say 10X, the real dollar numbers just aren't big enough. And as the old saying goes, it takes as much work to write a $50 million check as it takes to write a $5 million check.
SM: Exactly.
RW: Basically there are limitations on scale. You could certainly run a great fund earning $5-$10M per investment, but you’d have to cut many many checks to make that work.
SM: It would just be a different type of investing than what we want to do.
Productivity hacks, the unbearable lightness of being VC, why Goldman Sachs fails, and beating Hedge Funds at the Amazing Race
RW: Okay. Switching gears for a moment: what are your work habits? Are you very process-oriented? Catch-as-catch can?
SM: I’m not very regimented, but I live by my calendar. I certainly have free time to explore, which is, you know, awesome.
RW: You’re pretty active on twitter (@pitdesi)—why? What value do you see there?
SM: It’s such a fun time.
RW: How do you manage your information mixed generally? Do you read a lot? Sell side reports? Any data that you rely on? Blogs?
SM: I read very few of those things directly. Most of them through a filter, which can be Twitter or Hacker News or stuff that gets sent to me.
RW: What’s a thing you believe is true that most people believe is false?
SM: I don’t really care if someone has a degree in a thing. If the person worked hard and put in the time to study whatever it is, then I’ll take their opinion or expertise seriously. Their educational background doesn’t really matter to much to me. I like lifelong learners.
I don’t really care if someone has a degree in a thing. If the person worked hard and put in the time to study whatever it is, then I’ll take their opinion or expertise seriously. Their educational background doesn’t really matter to much to me. I like lifelong learners.
RW: Sounds like you’re pretty underweight official credentialing institutions. Another question: you’re a fintech domain specialist. Why is Marcus (the Goldman Sachs consumer fintech app) losing billions of dollars?
SM: I think it was doomed from the start. They've hired way too many people, and paid them ungodly amounts of money, and now they have a massive team. Also, Goldman is an investment bank trying to do consumer banking, and that’s not a thing you can just decide to do. They’re running it like a big company would run anything and that’s poorly.
RW: But they’re very smart people, right? They must have thought some of this through.
SM: Smart people fail out of sphere.
RW: Who would win a battle of wits: hedge funders or VCs?
SM: Look, you have smarties and dummies on both sides. I tend to look up to hedge fund guys. I think there’s a lot I can learn from them, especially the macro guys.
RW: Who would win Survivor: hedge funds or VCs?
SM: I definitely would win, whether or not all VC would. One thing we didn’t talk about in my background is that I lived on a dollar a day for a year. I travel a lot, and actually one of my best friends won the Amazing Race, so I feel like I’d be good at that by proxy.
RW: If you had to build a team comprised exclusively of CEOs or exclusively of investors, who would you pick?
SM: I would take the CEOs. Pretty much every time.
RW: Why? Do you think they're just better at executing? Better at getting a long? I think personally I’d be concerned there would be too much Alpha “top dog” in the room and not enough “role player.”
SM: Could be. I just think less of investors relative to CEOs.
Mistakes were made
RW: I like it. On your homepage, you have a quote from Laird Hamilton (the surfer), about the importance of failure, the appreciation of honest critics and endurance of the betrayal of false friends. So my question is: have you been betrayed?
SM: Good question. I don't think I’ve had to earn the appreciation of honest critics and endure the betrayal of false friends. I do however look at everything with a rose color lens, so it's possible that I have, but I can't think of anything.
RW: What are you bad at? What are your blind spots and have they evolved over time?
SM: Oh, yeah. Where do I even begin? Organization and procrastination—I’m horrible at both. Fortunately I have a partner who keeps me on track.
RW: What about blind spots?
SM: I probably over-index to failure. If you look at companies that you’ve been involved with that failed, you start to assume that no one can succeed in that category, but that’s really not necessarily true.
I probably over-index to failure. If you look at companies that you’ve been involved with that failed, you start to assume that no one can succeed in that category, but that’s really not necessarily true.
RW: What are the worst decisions that you’ve made?
SM: I've invested in founders without doing enough homework on them, and they turned out to be not great.
RW: What kind of homework would you have done?
SM: I think I needed to spend more time with them, and in some cases, get a few more references.
RW: What about the recent market downturn? Were you in front of that?
SM: We definitely talked about how crazy everything had gotten by late ‘21, early ‘22. But no, I didn’t really see it coming. We got caught up with everyone else. Fortunately, we didn’t invest too much at crazy prices, but I definitely wish I had sold more than I did (in secondaries).
RW: Is there anything you’ve done like done a complete 180 on? Something you believed to be true and now think is totally false or vice versa?
SM: I probably stick to my guns now more. For example, I was pretty down on retail trading apps because I thought they were enabling behavior that wasn’t necessarily very good, so I passed on the Robinhoods, etc. But then $GME (Gamestop) happened, and I thought “maybe this is fun and I was wrong about passive v. active investing, retail, etc.” Now I’m pretty sure that I was right all along.
RW: It’s funny that you mention enabling behavior that wasn’t necessarily good, because when I hear generally about products that optimize for engagement, or products that “delight” I immediately think “slot machines.” Is that a fair analogy? Do we think hard enough about “technological addiction at scale.” I’m not sure that it’s clinically the right word, but there is this massive industry of talented people dedicated towards giving us little bits of digital dopamine, right?
SM: Totally. I think you’re absolutely right and I don't know what we can do about it. I don’t think regulation is the answer. I do think that some people have an addictive personality and it comes out in everything they do. Look, I'm addicted to my phone. I probably have some sort of addiction to social media too, particularly. If somebody told me how often I look at it, I'd probably be embarrassed to print that number.
RW: And it breaks your brain. It shortens your attention span. It becomes harder and harder to read anything longer than tweet-length.
SM: Totally. So I'm gonna look it up. It looks like I averaged 7 hours/week on twitter. That’s actually not so bad.
RW: So are you then persuaded by the Marc Andreesen “time to build” stuff, that we’re too invested in bits and bytes, and not enough in Atoms? Elsewhere you’ve said that being capital efficient is super important, but building in the real world is pretty capital intensive, right?
SM: I think this asset class is built for capital efficient businesses. I think people have made mistakes trying to apply venture capital to capital-heavy businesses. Even if you look at “good” companies, like Uber—it has a market cap of what? $50-60B? And it raised $25B in venture capital? So 2:1 ratio of market cap to VC funds raised? There are more capital efficient businesses where the ratio is closer to 50:1, or 100:1.
I think people have made mistakes trying to apply venture capital to capital-heavy businesses. Even if you look at “good” companies, like Uber—it has a market cap of what? $50-60B? And it raised $25B in venture capital? So 2:1 ratio of market cap to VC funds raised? There are more capital efficient businesses where the ratio is closer to 50:1, or 100:1.
RW: Speaking of which, I was looking at your portfolio and, as a fintech investor, you unsurprisingly have a decent bundle of Insurtechs: Kin, Hippo, ClearCover, etc. Public markets haven't been very kind to insurtechs (even before the recent pullback). Why do you think that is?
SM: I think some of these companies are, in the end, consumer businesses and have needed more capital than we thought they would. Growth is more expensive than we thought it would be when we invested 6-7 years ago.
RW: But why insurtechs specifically? Isn’t that true of all consumer fintechs—and insurance isn’t all that different from lending? It just seems like that category got punished more so than others.
SM: You're absolutely right that insurance plays out similarly to lending. I’m not really sure why the category has struggled as much as it has. I will say that we do have other insurtech companies that are growing profitably tremendously well. Kin, for example, isn’t burning that much money, has a really positive LTV:CAC and has figured out a few things on the distribution side.
RW: There’s also some inside-baseball stuff specific to insurance that investors may or may not be aware of, especially in a hype-cycle. For example, certain markets—Texas, Florida—or certain categories (e.g. Trucks)—are just hard to underwrite and most traditional insurers stay away, which makes it relatively easy for start-ups to enter those markets and show a lot of growth. But it’s a bit illusory, because they are writing premium that incumbents deliberately leave on the table.
SM: Right, so you definitely have to understand the business model and believe in the opportunity to do better where traditional insurers have failed. For example, I don't believe in telematics for auto insurance, or a company like Root. They would test your driving for a couple weeks with your smartphone—see how hard you’re breaking, how quickly you’re driving, where you’re driving, etc.—and then price you based on that. I just never thought it made sense given the conversion challenge.
RW: If I remember correctly, they were also giving lower entry rates and then would just crank it up later on the hope that it wouldn’t churn and burn the customer. I don’t know how that played out, but probably not well.
SM: Auto is just a really tough category. It’s hard to find a reason to invest, unless it was truly differentiated and I haven’t seen that.
RW: Why is that?
SM: Auto is much more of a commodity than anything else. Underwriting is what it is, and it’s very price competitive. Home is a little different because risk is a bit more heterogeneous and you can select the risk you want to take.
RW: Makes sense to me. There's a reason why Geico, Prudential, Liberty Mutual, etc. invest tons of money into stupid animal commercials, right? They’re trying to differentiate on brand, not product because the product is basically the same.
SM: Right, so if I’m going to bet on a company, I’d rather not be making a bet on brand because that costs a lot of money and time.
RW: Venture probably overestimated how much alpha could be picked up in underwriting and pricing. Incumbent insurance companies have a lot of data and actuaries—they’re really good at that stuff.
SM: Completely true.
RW: What’s a thing you know now, that you wish you knew then? Define “then” however you’d like, but something like “when you started investing” etc.
SM: I think it relates to being over-indexed to certain failures. I have two great investments that I would never have invested in had I known how often people failed in those spaces. So I would say that I was helped by my ignorance.
One is a consumer finance app, which again, if you asked me now, I’d say “stay away from the segment” but at the time I was really impressed with the founder and the investment has turned out great, so my ignorant “then” was right, and my wizened “now” is wrong. We also invested in an African payments company, which with the benefit of hindsight, is also a space that’s just rife with “tried but failed,” but we had already agreed to make the investment, so we went ahead with it, and we’re happy that we did because it’s gone great.
RW: So in some ways, the learning is “bet the jockey” and less so the thesis or the company?
SM: Totally. I’m a big believer in that.
Into the future, Gen Z, the next great tech hub
RW: What’s your take on Gen Z as a present and future consumer? Do you think about that much?
SM: I recently spent a week in Mexico with our team. We have 4-5 people that are in the 24-32 range. They have their own lingo, they have their own everything. It was really fun though. I take what they say, and what they bring up seriously. Could there be a different world in the future where people are, I don’t know, paying for dinner with Tesla stock? Could be. I haven’t really wrapped my head around it.
I take what [Gen-Z] says, and what they bring up seriously. Could there be a different world in the future where people are, I don’t know, paying for dinner with Tesla stock? Could be. I haven’t really wrapped my head around it.
RW: Dig into that a little bit more. In what sense is it a different world for them? Is there any sense that you think we’re wrong in our forecast for the future specifically because we misunderstand Gen Z?
SM: I think they have a different way of operating. They are more social, and more active socially in certain ways. They catch on to trends much more quickly than we ever did.
RW: So their attention spans are even more broken than ours, is that what you’re saying?
SM: Perhaps.
RW: Another crystal ball question: current VC AUM is ~$2T. What’s AUM for 2025?
SM: It's all bullshit, right? Because what constitutes VC changes—there are $20B funds that call themselves VC, but in reality they’re growth equity. So will it be bigger? I think it'll probably be about the same in 2025.
RW: OK, how about this: after the .Com crash, money stayed away from venture for a while. Venture is taking a beating now, do you think money will stay away or come right back?
SM: I think we'll be back in a few years. My very soft prediction is another year and a half of this, but then we’ll be back.
RW: What about office occupancy? Will that be back to pre-pandemic levels?
SM: I don't think so. Across the board? No. No chance.
RW: What are the most likely or interesting second order effects of work from home?
SM: Nothing profound. Real estate at home changes. We need less office, we need less central business district office space. It will play out significantly over the coming decade. It takes time, obviously for these things to fully play out, but people need more space at home.
RW: Miami, Austin, Salt Lake City, and the next new tech hub is . . .
SM: Whew. I'm assuming New York is not a good answer because it’s already a hub? What about Boston? It certainly used to be one, but it’s had quite a fall from grace.
RW: Why is that? Why is Boston struggling as tech hub?
SM: It developed a reputation for having difficult investors. Also, not being as great a place to live as these other cities, and yet just as expensive. I don’t know. What do you think?
RW: I guess some part of me just feels like Boston is just not a very dynamic place, but that’s a gut thing. It should be a tech hub, right? It’s got great universities, a mature business community with plenty of finance, insurance and corporates, etc. It’s not as dense as NYC, but neither is SF.
SM: SF has better weather and hiking at your doorstep, but sure, other challenges as well.
RW: I want to go back to the reputational point—that Boston VC have a reputation for being difficult. I wouldn’t have thought that VC was quite so local. If you’re a founder living in Boston, can’t you just call up a VC in NY or SF? There are no shipping costs for money.
SM: I still think there's a difference between San Francisco VCs and other VCs. I also think the real moon shots are funded from Silicon Valley. We can also see some of the differences in the term sheets. So geography still matters.
RW: OK, so not Boston, then where?
SM: There’s probably not one next great hub. I think Pittsburgh is pretty great. They had like two or three IPOs last year. Duolingo, Aurora, maybe another. It’s underrated. It's a very small city, but punches above its weight class.
RW: What about Ohio? Isn’t Kin from Ohio?
SM: Chicago actually.
RW: Chicago is another market that doesn't generate a lot of startups relative to what you might expect.
SM: You’re right. For insurance though, the Midwest is like the place to be. Kin, ClearCover, Root, Vouch, etc.
Where does VC go from here?
RW: Do you think that there are more VC backable companies than there are VC dollars to back them or vice versa (i.e. more dollars than backable companies)? Or is supply-demand in relative parity?
SM: It feels like we’re getting closer to relative parity. A lot of people are talking about how much dry powder is out there, but that won’t necessarily increase the velocity of investment, so much as extend the life of those funds, although it’s of course a bit of both.
RW: OK, but more simply: are there venture backable companies out there that should be getting funded but aren't—perhaps because capital is too expensive or because LPs still haven’t allocated enough money? Or alternatively, there is just a fundamental supply constraint on how many actual capable founders are out there, and more money sloshing around to find that won’t change a thing (other than price)?
SM: It’s hard to say. It feels like there is enough money out there to fund the good deals. That said, in 2021 we funded a company that had been trying to raise for 6 months, and then just a year after we invested, the company really started to hit its stride and the valuation went up 40X. That’s not to say we did something there, only that there are obvious dislocations—good companies that (even in 2021) struggled to raise, but once they got a bit of funding, they really took off.
It feels like there is enough money out there to fund the good deals. That said, in 2021 we funded a company that had been trying to raise for 6 months, and then just a year after we invested, the company really started to hit its stride and the valuation went up 40X. That’s not to say we did something there, only that there are obvious dislocations—good companies that (even in 2021) struggled to raise, but once they got a bit of funding, they really took off.
RW: Right. There’s also something of a chicken-egg problem. A founder needs money to get the concept up and running and prove it out, but also needs to get it up and running and prove it out before raising money. So someone has to take that first leap.
What about markets outside the US? Are you investing globally?
SM: We’ve invested globally. We're in companies from Africa, Israel and Asia. But I think some of the trend is to stay closer to home. As rates rise, international companies are going to find it harder to raise—when investors come closer in on the risk curve, they tend not to extend their reach as much. It’s somewhat self-reinforcing because it means these companies are more dependent on local capital markets for follow-ons and exit, and it's unclear those markets can support those kinds of things. I think there will be a lot of these companies with high valuations that never live up to those expectations in those markets.
RW: So is the unlock for these international startups more mature capital markets or is it something about the actual ability to build and scale products? When I think of India, it’s one of the few massively industrializing countries that's still relatively young demographically, as opposed to Europe, the US and even China. Africa is also a huge and growing market that’s in the early stages of coming online. Personally, I feel I lack the context to really evaluate investments in those markets—it’s hard enough to grapple with the nuance when it comes to US companies, so adding a whole other layer of difference just makes the unknown unknowns that much greater. But, putting that aside, just from a sheer opportunity set, it has to be massive.
SM: Yeah, there is a huge opportunity set. Particularly, in India. The other thing exciting thing about India is they're building for the world and they’re doing a good job. Some of these vertical SaaS companies in India are doing phenomenally well. It is interesting that India seems to be able to build enterprise companies for the world and China seems to build consumer companies for the world, but there are very few Indian consumer companies for the world, and very few Chinese enterprise companies for the world.
It is interesting that India seems to be able to build enterprise companies for the world and China seems to build consumer companies for the world, but there are very few Indian consumer companies for the world, and very few Chinese enterprise companies for the world.
RW: Why do you think that is?
SM: I really don’t have a good answer, but I haven’t spent enough time thinking about it. Obviously an easy observation is that China banned foreign social media, so they had to build one themselves. But there’s probably more to it than that.
RW: Do you use TikTok? Would you let your future kids use TikTok?
SM: Yeah, I think so, although I do think TikTok should be banned here. It’s completely crazy that such a big deal was made of Russian interference via Facebook, while China actually controls the number one social media app in the country. It doesn’t make any sense.
RW: Right. The most important thing is that we acknowledge all the cookies and click-through to tracking. Meanwhile, TikTok continues on unabated.
SM: Yes, exactly.
RW: Are there any specific macro or secular trends that you care about or track? Birthrates? Debt:GDP?
SM: Birthrates and demographics is definitely something we think about. China for example is going to have a harder time replenishing their workforce with immigrants than we will, and it could look like something closer to present-day Japan. India, as we talked about, has a vibrant young workforce. The same is true in Nigeria.
In general, aging and elder care is another area of interest. This is semi-related, but we just did an investment in a Neobank for seniors. Part of the research that we found while we were doing our diligence is that people retiring today are just as digitally savvy—using metrics like smartphone penetration and computer knowledge—as people 20 years their junior. So from a digital native standpoint, seniors are an underserved market. Plus they have a lot of needs, and frankly a “decumulation” process that’s going to be a huge undertaking with a lot of opportunity to service that need.
. . . people retiring today are just as digitally savvy—using metrics like smartphone penetration and computer knowledge—as people 20 years their junior. So from a digital native standpoint, seniors are an underserved market. Plus they have a lot of needs, and frankly a “decumulation” process that’s going to be a huge undertaking with a lot of opportunity to service that need.
RW: If you had a magic wand to change any law or policy, what would you do?
SM: It's funny, somebody just asked me last week and I had a good one, but I can’t think of it now. [NB: Sheel remembered and his magic fix was for price transparency on hospitality–no hidden cleaning fees. Apparently, Sheel’s magic wand actually works because AirBnB did just that.] I guess I would ban loud motorcycles. Just do noise pollution. Get rid of anything that wakes me up at night. I hate that.
RW: Just wait until you have kids.
Speaking of motorcycles, Bird and Lime: what in god’s name were investors thinking? Or were you tempted at the time?
SM: I actually looked at them at the time. I thought there might be something interesting and I couldn't get there for reasons that probably were right in hindsight—maintenance costs, for example. I just didn’t believe the things would last as well as they had. Also, as a fintech investor, it felt a bit outside my domain.
Plus, there was a Chinese bike sharing company—I don’t remember if it was Ofo or Mobike, or both—that had already fallen apart a bit when Bird and Lime were raising these massive rounds, so I couldn’t really understand why did Sequoia put all this money into Bird when they already saw all this money evaporate in China?
RW: It’s a bit of mystery. My first experience with Lime etc. was in Austin, where there were just piles of unused scooters in some locations, and zero scooters in other locations, and there were people—employees presumably—just kind of loitering at each location, maybe shuttling bikes back and forth, but also just loitering? It seemed like the pieces weren’t connecting as smoothly as they should be, which isn’t the most sophisticated take, but these are big, chunky, expensive pieces of hardware looking dangerously close to junkyard piles, and well, it seemed bad to me.
SM: Yeah, exactly. And that's before you run into the regulatory stuff, and all that.
Burning Man is underrated
RW: OK, time for the Tyler Cowen segment: over- or underrated.
First: Burning Man
SM: Burning Man. Okay. Good question. You know, it's rated so differently by different people. I hate to be the guy who’s like, “If you've never been, you don’t get it, man.” But that’s sort of where I’m at. I listened to the All-In podcast on Burning Man and it was pretty cringe, but there are so many different aspects to it that I’ll go with underrated.
I hate to be the guy who’s like, “If you've never been, you don’t get it, man.” But that’s sort of where I’m at.
RW: Psychedelics
SM: Hmm. I think they’re highly rated on the coasts, but not really mainstream elsewhere. In San Francisco where I live, everyone I know does psychedelics. I can't think of a friend I have that doesn’t. People are probably overrating the ability of psychedelics to cure their problems. I think you only hear about the “good” experiments.
But overall I think they’re underrated and that we'll see a lot more psychedelic use in our lifetime the same way that marijuana use has grown—which, in my childhood, was considered the worst thing ever and, and a gateway drug to everything else. I think psychedelics probably will have a similar evolution.
RW: Would you invest in a psychedelics company?
SM: I would’ve to learn a lot before making an investment. I’d probably buy something like an index of the category, but I don’t know enough to make an individual investment.
RW: Crypto, even with the benefit of hindsight, over/underrated?
SM: I think it’s probably still overrated in that there’s a lot of things people seem to think crypto will solve that it won’t actually solve. It’s not that there are no use cases, it’s that there aren’t as many as its most vocal advocates seem to think. We get pitched on crypto stuff and we ask “how is this better than what’s out there?” and that's why we haven't done a whole lot in crypto in our fund, even though some of our FinTech peers have done a lot more.
RW: Do you have a bull case for crypto?
SM: I think the bull case is that as the world becomes more digital, there’s a need for an immutable database of sorts, or databases. That’s not a good bull case though.
RW: I think it is. To me, it’s some version of “we trade tons of things—money, stuff—everyday. There’s a huge amount of custodial work, ledgering, clearing, etc. that goes into that. If you can make some or all of that more efficient, through open sourced or ‘trustless’ mechanisms, then that seems pretty valuable.” The quip I’ve heard before that I like is “what’s the use case for spreadsheets?” and of course the answer is almost “everything.”
SM: I think that's true. It’s important to separate the use case for blockchain v. specific crypto currencies, especially when their value is tied to some protocol that just doesn’t have a lot of utility. There will be pain there.
RW: And of course, there are plenty of bad actors.
SM: Tons of bad actors. It’s an open invitation to bad actors—the wild west always is.¹
RW: VC too, right? Not to throw them specifically under the bus, but crypto was an opportunity for early monetization events, right? Instead of that really long venture hold period, investors could monetize their stakes fairly quickly by buying coins and flipping them at launch or shortly thereafter. That creates some perverse incentives for the hype machine.
SM: Completely. We definitely had the opportunity to attach ourselves to a [crypto] project, put up none of our own capital, and get free coins and sell out, but we didn’t do it because . . . let’s just say we don’t want to ruin our reputation and brand, and well it’s a shitty thing to do, but unfortunately that didn’t stop a lot of people.
We definitely had the opportunity to attach ourselves to a [crypto] project, put up none of our own capital, and get free coins and sell out, but we didn’t do it because . . . let’s just say we don’t want to ruin our reputation and brand, and well it’s a shitty thing to do, but unfortunately that didn’t stop a lot of people.
RW: Amazing. OK, next. First impressions: over/underrated?
SM: Under- or properly-rated. They matter. Once I have a first impression, it’s unlikely to change. Or at least, it’s hard.
RW: Fair enough. What about sleep?
SM: Ooh I sleep less than most people. I think that’s fine, but everyone says I don’t sleep enough, so I suppose sleep is overrated.
RW: Investment bankers
SM: Overrated. Now, I'll give you one thing I've always thought is strange. Nobody believes in using bankers at early stages of venture (myself included), but if you’re paying for help in so many other things, why not that? The reason most people do Y-Combinator is to raise more money at a higher valuation, and YC helps with that, but it costs a lot of equity. So why wouldn’t you work with a banker for something similar?
RW: It’s a good point. What about crossover funds?
SM: Overrated. I think it's a different skill set, and I think particularly how early some of these funds have gotten where you have public market investors leading seed rounds now. I’m talking up my own book, but I really don’t think they know what it takes to be investing that early or how to be helpful.
Also, the way these crossover funds are investing, they’re just indexing the internet, right? They’re not alpha, they’re beta. And if you take their money, you’re just part of that beta. It doesn’t sound that appealing to me, if I’m a founder.
RW: This was amazing. Thanks very much for your time.
SM: You’re very welcome.
- The interview took place before the FTX meltdown.
