VC Opportunity Fund Best Practices

By Jeff Weinstein and Luke Skertich


Early-stage venture capital has undergone a seismic transformation over the past decade as companies stay private longer, raise more capital and exit for larger magnitudes. (NB: the SPAC mania of 2020 may alter this trend, but for now these phenomena still hold)According to SVB, the average VC-backed company at time of IPO in 2018 raised $184M across six rounds, up from $60M across four rounds in 2010. And the average length of time from founding to IPO doubled to 12 years. Meanwhile, valuations have increased accordingly, with 22 $1B+ valuation tech IPOs in 2020 to-date, up from 3 in 2010.

With startups staying private longer and growing larger, Seed and Series A venture investors have come across an interesting dilemma: with limited reserves to follow on across multiple financing rounds, what should they do with their pro ratas in their breakout portfolio companies?

Enter the opportunity fund: a new fund structure soaring in popularity among early-stage GPs that offers an elegant solution to this problem. Done properly, an opportunity fund — sometimes known as a “select fund”, “follow-on fund” or “growth fund” — offers fund limited partners (LPs) the prospect of doubling down on emerging winners in a fund’s portfolio. Per Pitchbook, there have been over 300 “opportunity funds” or “select funds” raised since 2010. However, some LPs have pushed back on this structure, feeling that it serves as an easy way for general partners (GPs) to gather AUM and a distraction from their job of managing a Seed-stage portfolio.

At FJ Labs, we currently angel invest from one fund across different stages, and we have been studying whether it makes sense to silo our investments into an early stage (Pre-Seed-A fund) fund and a Growth/opportunity fund. My research partner Luke and I were shocked by the dearth of available literature on the subject; virtually no one has published any articles or papers on opportunity funds, perhaps because of how new they are. So we embarked on a journey to interview some of the premier early-stage fund managers who have pioneered these vehicles and the LPs who evaluate and invest in them. We surveyed over 30 venture capital managers ranging from Seed stage to pre-IPO, and LPs ranging from family offices to fund of funds to state retirement plans. We left with a thorough understanding of best practices in structuring growth/opportunity funds and reached a high-conviction conclusion for how we should structure our next fund(s).


We approached this like a research project. We began by reading ~50 blogs, academic papers & research articles. We made it a point to understand divergent schools of thought regarding portfolio construction — spray and pray, algorithmic, concentrated — because it helps underscore why VCs and LPs alike have focused their energy on opportunity funds. Our reading ranged from early-stage investment best practices to Abe Othman’s amazing posts using AngelList data to growth equity best practices. This research culminated in an understanding of who we wanted to interview and what questions we would need to have answered.

We laid a foundation by benchmarking fees and returns and layered on an understanding of follow-on investments, conflicts of interest, and capital allocation. Next, we dove into why firms created their opportunity funds, how LPs viewed them, and how they’ve performed.

Finally, we created a functional fund model, utilizing FJ’s current portfolio to inform it. We’ll share a more simplified and generalized model, below.

General Context

So, what are GPs and LPs saying about opportunity funds more broadly? We’ve gathered a select handful of quotes to set the stage…

“LPs don’t love opportunity funds. They want true seed risk.” — GP

“We are more time-constrained than cash-constrained. We can’t invest in 2x the number of companies, so this is a way to cram more dollars in companies we’re excited about.” — GP

“Generally speaking, we try not to do opportunity funds.” — LP

“Some opportunity funds have outperformed their core funds!” — LP


Portfolio Construction

“Most opportunity funds are more concentrated because you’ve had a filter or two against the investment set.” — LP

While there are differing opinions on optimal portfolio construction at the early and growth stage, there is consensus that opportunity funds should consist of six to ten unique positions. The number of investments is informed by the number of prior investments across funds for each GP. In other words, an opportunity fund is a mechanism for GPs to double down on the top 5% of their investments. Likewise, LPs obtain access to the best investment opportunities and benefit from their GPs’ insider information on their portfolios.

Why not raise a bigger fund?

Separate funds enable GPs to write larger checks in their emerging, later-stage winners without diluting their early stage portfolio. However, writing large checks from one fund may lead to LP concerns regarding style drift (“We invested in you as a Seed fund manager”). Providing LPs with two tightly-defined products with specific risk/reward profiles can more effectively cater to their needs.

Additionally, some LPs can’t evaluate individual co-investment opportunities and would prefer to participate in a “best of” style opportunity fund. In effect, LPs get access to all follow-ons, rather than select investments via SPVs, and from a GP perspective, this is far more convenient to administer than ad hoc SPVs.

While there is precedent for Seed-to-IPO funds like Insight Partners and NEA, trying to expand beyond the early stage requires a change in firm strategy. This is not the case with opportunity funds, which are typically more passive, follow-on vehicles (as we’ll discuss below, opportunity funds should not lead, running counter to multi-stage fund strategy). If you plan to remain an early-stage investor, the opportunity fund is the right vehicle for you to double down on winners. If you want to create a franchise that invests across all stages, then it makes sense to explore a multi-stage fund.

Fund Economics

“We invest for 20% IRR regardless of the asset class. A good opportunity fund is 2X net, 20% IRR. — LP

“If you can return 2X net to your LPs w/ 20% gross IRRs, you can raise capital forever” — GP

Our survey confirmed that venture investors and LPs target a 3X net fund return across early-stage, growth stage, and opportunity funds. However, we also learned that if VCs can achieve at least 2X MOIC returns or 20%+ IRRs, they will be able to keep raising funds for years to come. Opportunity funds are measured against the same benchmarks. However, given how new these vehicles are, we don’t have comprehensive data on their performance.

While return expectations are the same, fee structure differs by fund type. We did not come to a consensus on fees and carry for opportunity funds. That said, there is agreement that whatever your fees and carry on your early-stage fund, you should take less on the opportunity fund. Otherwise, LPs will feel that you are taking advantage of a new vehicle to increase AUM. Perhaps this is why it is seen as best practice for GPs to only take fees on invested capital from the opportunity fund (vs. on committed capital for traditional funds).

Follow-ons and Leading

“Only invest in companies that are outside-led growth rounds that are growing 2X a year.” — Opportunity fund GP

“If I could go back to the beginning of my career, I’d say the one thing to know is the magnitude of exit will get bigger by another standard deviation.” — LP

Follow on strategy begins with doubling down on winners. Best practice indicates that GPs should not use opportunity funds to protect existing investments, should not lead investment rounds with their opportunity funds, and should create systematic rules for which fund (early-stage vs. opportunity) gets pro rata rights.

Most commonly, use of pro rata rights is separated by investment stage. For example, an early-stage fund may invest until Series B, at which point an opportunity fund invests in Series C+. This cutoff can be delineated by round size, valuation, or some combination. It is wise to have clearly defined rules around selling secondaries, down rounds/pay to play mechanisms, bridge rounds, incubator/accelerator companies (if your firm has one), etc. Often, managers will consult with their Limited Partner Advisory Committees (LPAC) for edge cases or complex scenarios.

LP Preferences

“Managers often ‘staple’ funds together: if you want access to a Seed fund, you have to invest a ratable amount in that manager’s opportunity fund. However, it is important for VCs to only do this practice with new LPs.” — GP

“Ultimately, a lot of these get raised on how sexy the GP is.” — LP

We found that LPs don’t like being stapled but often don’t mind insomuch as they are granted early-stage fund exposure. Some firms use formulas to give larger / more loyal LPs higher allocations in early-stage funds. Interestingly, while LPs are thought to hate opportunity funds, we did not observe overwhelming distaste for them among our interviewees. Rather, we found that the jury is still out until we can see widespread data from the past ten years.

Nor did we come to a firm conclusion if LPs preferred individual co-investment opportunities versus an opportunity fund that aggregates them. Some more nimble LPs such as family offices like to participate in direct co-invests, while other, slower-moving institutions prefer for the manager to do by follow-on investing via an opportunity fund.

Additionally, LPs had differing opinions on participation in opportunity funds, depending on the risk/reward profile they were looking for. Institutional LPs will typically view opportunity funds more favorably, as will any LPs looking for a shorter time to liquidity.

Fund Model

We mentioned earlier that the opportunity fund model is informed by prior fund construction. We simplified and generalized our model to demonstrate this:

In this case, we wanted to end up with an opportunity fund that supports two 30-company early-stage funds. Assuming that the top 10% of companies across these funds will be breakouts, that implies a portfolio of ~6 companies. You can adjust the inputs to tailor the fund construction given your portfolio makeup and investment pace. You can also back into the correct check sizes (for each stage) by examining your pro-rata rights and ownership across the portfolio. You should raise this fund with certain portfolio company high-flyers in mind, but do not advertise your fund as if you will have guaranteed allocation.


Opportunity Funds allow LPs to titrate their risk exposure and for GPs to provide more tightly-defined products to effectively cater to their investors’ needs. They are easier to administer and capture more value than ad hoc SPVs, which run a higher risk of losing LP capital and have to be spun up one-by-one. If investors separate funds, they can write large checks at later stages without diluting their early-stage investments.

Opportunity fund LPs are typically satisfied with returns of 2X Net MOIC and 20% IRR. Opportunity funds typically focus on existing portfolio companies and are run by existing investors, whereas growth funds are typically run by separate teams and focus on new investments. There is an expectation that opportunity funds carry lower fees and run a more concentrated portfolio than early-stage funds.

Unfortunately, there is not enough public data to evaluate their returns to-date, but judging from their proliferation and the expansion of venture capital as an asset class, we suspect opportunity funds are here to stay.

Jeff Weinstein is a Principal at FJ Labs, an early-stage venture fund and startup studio that invests in and builds online marketplaces. Jeff co-heads the fund’s 500+ investments which have included Alibaba, Flexport, Rappi, Betterment, Fanduel and Delivery Hero, and also manages FJ’s external fundraising efforts. Jeff was previously a Senior Associate at Lux Capital, and prior to that worked at a fund of hedge funds. Jeff is in Class 24 of the Kauffman Fellows.

Luke is an MBA candidate at the University of Chicago Booth School of Business with concentrations in Finance, Entrepreneurship, and Strategic Management. In addition to his work with Jeff at FJ Labs, Luke is an Associate at M25 in Chicago, where he focuses on investing in early-stage startups. He previously worked as a Product Manager at three B2B tech start-ups in Chicago, spanning the benefits administration, fintech and human capital management spaces.

Episode 14: A Conversation with Christian Angermayer

Christian is the rare breed of polymath Renaissance Man operating in a world that rewards specialization. We had an extremely broad and far-ranging conversation covering:

  • Whether you should always pursue your passion
  • The relative importance of focus
  • How to make the most of the opportunities presented to you
  • Spirituality
  • Happiness
  • Psychedelics: why they are improperly maligned, our respective journeys, and how he turned a moment of self-discovery into a billion-dollar business
  • The latest findings on longevity and metformin
  • The importance of sleep
  • The role of Bitcoin as a store of value in a world of increasing asset prices driven by low interest rates
  • His involvement in film and desire to create optimistic stories
  • How to reinvigorate the West and competition with China
  • Christian’s two must-read books
  • Three technology trends we are excited about in the coming decade

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

2020: When Life Gives You Lemons, Make Lemonade!

The best-laid plans of mice and men often go awry. As you may recall, I ended 2019 intent on selling my New York apartment and renting an apartment March 2020 onwards. The idea was to live a hybrid life where I split my time between New York and Turks & Caicos.

I wanted to spend every other month in New York intellectually, socially, professionally and artistically stimulated beyond my wildest dreams, meeting countless extraordinary people, hosting intellectual dialoging salons and enjoying all of New York’s entertainment options. Then I wanted to head to Turks & Caicos to work during the day, kite, and play tennis, and really take the time to read, be reflective and recharge my batteries.

As you might suspect, the year played out rather differently. The year started out as expected. I went heliskiing in Canada. I went to the fantastic Upfront Summit in LA. I hosted FJ Labs’ bi-annual brainstorming retreat at my place in Turks & Caicos. I went to check out the gorgeous Sanctuary in Utah. I had been inspired by their manifesto and jumped at the opportunity to experience it firsthand. I love their vision and they built the most beautiful contemporary chalets I have ever seen. However, it helped me realize that ultimately Revelstoke in Canada pulls at my heart strings and would make a better winter base as the mecca of extreme winter sports with its renowned steep and deep tree skiing. Not that I have decided to implement that vision yet, but it is nice to dream.

As February wore on, I started pondering the potential impact of COVID-19. I wrote an article in February suggesting COVID-19 could be the black swan causing the next global recession. I sent a message to my friends in early March telling them that staying in a high-density city like New York during a pandemic made no sense. I invited them to join me in Turks & Caicos. Eleven of them responded to the call. We became a pandemic family.

We were quite the motley crew as we were the random assortment of the first eleven people who decided to join me. I had distributed the invitation widely so many of us did not know each other that well before quarantine. We were all in different stages of life including 4 kids ages 12 through 14.

Despite being the most unexpected of groups, I could not have hoped for a better outcome. We all took turns doing tasks in the house and brought our varied skills, passions and energies to bear. We also realized how privileged we were to both have each other at a moment during which many were isolated and alone, and to have the opportunity to enjoy the outdoors and practice sports or find alone time when most could not leave their homes.

It was a really nice change of pace not to travel for five and a half months and lead a more domestic existence. Like most people, I typically only do important or urgent things on my to do list, but rarely get to the “nice to do”. With urban life on hold, I took advantage of the opportunity to tackle those. I redesigned my blog. I redid the website of my villa in Turks and took control of its marketing such that most rentals now come directly rather than through Luxury Retreats. I started a live streaming show, Playing With Unicorns, to share everything I wish I knew when I started out as an entrepreneur. I read and wrote more than ever before. I improved at kiting. I built the first padel court in Turks and Caicos and spent countless hours practicing.

Come late August, I was itching for a change. I decided to go camping in Yellowstone. It was a fun weeklong trip off grid with no cell reception where you carry everything you need including your tent, sleeping bag and food in your bag pack as you go from camp site to camp site. It was gorgeous and refreshing. A freak August snowstorm reminded me that the best stories are born of adversity. It was a great complement for a trip to the Aman in Jackson Hole.

In the fall, I also went camping on Governor’s Island, went to see the foliage change in Lake Placid, and reconnected with the FJ Labs team in New York.

I was also able to bring my extended family together for the holidays. It is something my grandmother Francoise used to do yearly. However, it is a family tradition that had dissipated since she passed. With the help of my cousin Nalle, I was delighted to be able to restart the tradition. We were especially lucky to be able to get together in Covid times when many are separated from their families. We all got PCR tested before spending 19 days together in Turks & Caicos and were able to stay safe while having an amazing time. I was elated to be able to spend time with my parents, cousins, brothers and uncle for the first time in over a year!

FJ Labs continued to rock. 2020 was our most prolific year ever. The team grew to 28 people. We deployed $57M. We made 146 investments, 97 first time investments and 49 follow-on investments. We had 27 exits, of which 15 were successful including the IPOs of Wish and Airbnb, the IPO of OpenDoor via SPAC, the IPOs of Meliuz and Enjoei on Brazil’s B3 exchange, the acquisition of Postmates by Uber and the acquisition of Fanduel by Flutter Entertainment.

Since Jose and I started angel investing 22 years ago, we invested in 655 unique companies, had 218 exits (including partial exits where we more than recouped our cost basis), and currently have 603 active investments. We had realized returns of 61% IRR and a 4.8x average multiple. In total we deployed $320M of which $120M was provided by Jose and me.

I came to realize that my willingness to participate in panels or give keynote speeches grows dramatically if I do not need to travel for them and I gave more speeches and appeared on more podcasts than ever before. To avoid redundancy, I tried to cover different topics and content and ultimately used a lot of this content for various Playing with Unicorns episodes including FJ Labs’ Investment Thesis and FJ Labs’ Startup Studio Model.

The keynote I am most proud of and did the most research on is my case for technology-led optimism despite the pandemic, populism, climate change, policy failure, social unrest and social injustice. It is worth watching in full and I am including the slides below for your reference.


Most of my writing was professional in nature this year largely driven by all the content I needed to create for Playing With Unicorns. My best blog posts were:

I continued to be a very prolific reader in 2020. It is probably worth mentioning that most of what I read is fiction and most of that is science fiction though I dabble in every genre. My favorite non-fiction books of 2020 were:

In general, I do not read “business books” as I find them simplistic. Loonshots is the exception to that rule. It blew me away. It mixes compelling personal narratives of entrepreneurs like Edwin Land (Polaroid) and Juan Trippe (Pan Am) with observations from physics and history to weave a very compelling narrative. I also had the pleasure of having its author, Safi Bahcall, on Playing With Unicorns for a fun and wide ranging conversation.

From a macroeconomic perspective, COVID-19 brought the longest expansion on record to a screeching halt with the lockdown leading to levels of unemployment and economic contraction not seen since the Great Depression. As I predicted, the second order economic impact of the pandemic was more damaging than the first order costs of treating infected people or lost wages from people not working because they are sick. Also as predicted, governments and central banks threw everything including the kitchen sink at this problem.

Given the curtailing of economic activity due to restrictions, the greater short-term risk is deflationary. In the near term historically low interest rates are making the record levels of debt manageable. However, the massive debt overhang will require delicate macroeconomic management to avoid a massive financial crisis.

Record low interest rates are also fueling asset price inflation across most asset classes and a full-on bubble in SPACs. Outside of commercial and residential real estate in major cities, it feels like we are in the late stages of a low interest rate fueled “everything bubble” with extreme frothiness across most asset classes. It may very well continue for a while as there is increasing optimism about the end of the pandemic. However, at some point the harsh reality of weak underlying economic conditions may very well temper today’s frothiness and excessive valuations. I will not be so foolish as to pretend I can predict when the bubble will pop, but I would not be surprised if it happened in 2021.

Historically crisis have accelerated underlying trends and been a source of innovation. The 1930s saw the greatest increase in productivity growth in the US as necessity is the mother of invention. Likewise, the most defining companies of the last decade, Airbnb, Cloudflare, Github, Pinterest, Slack, Square, Stripe, Uber and Whatsapp, were founded during the financial crisis of 2008-2009. Uber and Airbnb grew dramatically as individuals’ personal financial difficulties led them to consider renting their apartment to strangers or becoming part time drivers for the first time.

The most interesting companies of the coming decade will likely have been created or come of age in COVID times. This past year has seen a rapid increase in online adoption across most categories. Some sectors such as online food and grocery delivery, telemedicine, online education, and remote work exploded, while others such as ecommerce, online gaming and video grew significantly from already large bases.

Given that online experiences are more convenient and less expensive than the alternative, this increase is here to stay. While some sectors might give back a bit of the growth, in general, there has been a step change in penetration, and they will grow from this increased base.

I am extremely grateful for the year I had, surrounded by loved ones in a safe place and privileged to be able to work remotely in a sector that has benefited from COVID. I am excited that human ingenuity led to the creation of a new class of vaccines in record time. I am hopeful that by the second half of the year we will be able to return to a semblance of normality and put an end to the personal and economic suffering this crisis has caused.

Happy New Year!

Episode 13: What’s the deal with SPACs?

SPACs have been one of the hot topics of 2020. Jeff Weinstein, who co-heads investing at FJ Labs, and our resident venture capital nerd, joins to talk about all things SPAC.

He covers:

  • What are SPACs?
  • How do they operate?
  • Why are they hot in 2020?
  • What’s in it for sponsors, institutional investors, the companies merging into them and retail investors?

Interestingly he concludes that while we are in a bubble, SPACs are here to stay and will become a legitimate way to go public once the dust settles after the upcoming, inevitable crash.

For your reference I am including the slides Jeff used during the episode.


If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 12: Pandemic, Populism and Policy Failure – The Surprising Case for Optimism in 2020

Given the omnipresent doom and gloom of 2020, I took the time to reflect objectively on where things stand and where the world is heading. My deep dive across so many industries and technologies left me inspired and awe struck by the opportunities open to us. We will address the two fundamental issues of our time: climate change and social injustice / inequality of opportunity.

In turn I cover that:

  • We are constantly bombarded by doom and gloom
  • During the past 200 years we have seen lots of progress in the human condition
  • Lots of issues remain in terms of social injustice and inequality of opportunity with consequences permeating through every sector: education, health care, cost of living, real estate, income disparities, decreased mobility, access to capital etc.
  • Climate change is becoming an existential threat
  • The political system is incapable of dealing with these issues which has led to the rise of populists
  • Technology and entrepreneurs can and must solve these issues
  • With regards to climate change, the ever-decreasing cost of solar and improvements in storage will help us transition to carbon free energy emission sooner than most people realize even if we do not get fusion (and we may see a breakthrough in fusion as well)
  • We are seeing a clear trend towards electrifying transportation and radical innovation in manufacturing and food production which will make the economy carbon free by 2100 and perhaps as early as 2050
  • Carbon removal technologies are also emerging
  • Once we get to a world of free marginal cost of energy lots of other wonderful things happen
  • Startups, especially marketplaces, are emerging to address many societal ills seeing bad user experiences, discrimination, and high costs as an opportunity
  • Amazing companies are emerging to democratize housing, finance, and education
  • A combination of dark kitchens, robotization, autonomy and density will revolutionize food ordering and delivery providing high-quality low-cost food to all making it cheaper than making it on your own
  • Healthcare and public services are finally moving online with better user experiences
  • We are still at the beginning of the technology revolution and are making great strides in everything from nanosatellites, robots, 3D printing, augmented reality, mind reading, self-driving, drones and much more
  • We will tackle the challenges of our time and build a better world of tomorrow, a world of equality of opportunity and of plenty that is ethically conscious and sustainable

For your reference I am including the slides I used during the episode.


If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 11: Loonshots with Safi Bahcall

I had the privilege of running into the same social and intellectual circles as Safi Bahcall for the past 20 years. When I heard he wrote a book on how large organizations could continue innovating despite their scale, I was intrigued and decided to check it out.

In general, I do not read “business books” as I find them simplistic. Loonshots is the exception to that rule. It blew me away. It mixes compelling personal narratives of entrepreneurs like Edwin Land (Polaroid) and Juan Trippe (Pan Am) with observations from physics and history to weave a very compelling narrative.

To date Playing With Unicorns taught something specific every week. However, I thought a conversation with Safi would be fun and wide ranging, so I invited him to be my first ever “traditional” live stream / podcast guest. It was great and through many non-sequiturs discussed:

  • His transition from academia to running a private biotech company
  • The transition from being a private company to a public company CEO
  • Thinking through what you really want to do in life versus what society expects of you and how pursuing his curiosity led him to Loonshots
  • What the core learnings from Loonshots are
  • Why he is currently fascinated by “Why Markets Crash” and “How organizations can pick the right strategy” (e.g., why, and how did Amazon beat Google in the Cloud market so far)
  • Much more!

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 10: Validating Your Startup Idea

Last week we covered how to come up with great startup ideas. This week I present how to evaluate if the idea is worth pursuing. I detail which hypothesis you need to validate and how to go about providing or disproving them.

Vivian Graves, an entrepreneur in residence (EIR) at FJ Labs, joins to share how she evaluated whether to pursue a temporary veterinarian labor marketplace idea.

For your reference I am including the slides Vivian used during the episode.


If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

2020 Holiday Gadget Gift Guide

It is that time of the year again, so I am sharing my recommendations for all gadget lovers of the world to be happy this holiday season.

Notebook: LG Gram 17

The past few years I recommended super powerful MSI gaming notebooks, especially the GS series. They are amazing, but they run ridiculously hot, the battery life is extremely limited (under 2 hours), and they are bulkier than I would like. This year what I really wanted was a 17” notebook that was insanely light with a super long battery life.

Only one notebook fits the bill, the LG Gram 17. It weighs less than 3” which is a first for a 17” notebook. The power adapter is also exceedingly small and light. I regularly get over 10 hours per charge and feel like I never need to charge. It has a 1Tb SSD which is sufficient, and it is powerful enough to play Age of Empires 2: Definitive Edition.

My only gripe is that the graphics card is underpowered, and I cannot run my weekly live streaming show, Playing With Unicorns, on it.

Notebook Bag: eBags Pro Slim Laptop Backpack

It is hard to express how much I love the eBags Pro Slim Laptop backpack. The compartments are perfectly sized and logically placed. The notebook section can accommodate two 17” notebooks. There is a little middle sleeve for my iPad and Kindle. It is followed by another compartment for whatever else you may want to carry and then a small front section for passports, keys etc. I also love the separate notebook power supply section below the front of the bag.

Drone: Skydio 2

I love the Skydio 2. It is by far the best self-flying drone in the market. It is significantly improved on the R1 and is the best at navigating trees. It’s still not perfect as it can take a while to navigate tight trees and if you are going too quickly it will lose you, but it has the best auto-tracking features by far putting the DJI Mavic 2 Pro to shame.

It supports winds up to 25 mph and I have been incredibly happy with its performance following me kitesurfing.

Note that getting the Beacon is an absolute must as it will allow the Skydio to track you even if it cannot see you while you are in the trees. I would also strongly recommend having at least one extra battery.

My only gripe is that when I have someone controlling its altitude, distance, angle etc. with their phone is that they keep losing the connection at a rather short range regardless of whether I am using the beacon.

I have not tried the remote control for it yet, but just ordered it perhaps it will help with the range in case I need to bring it back if it loses and is out of range.

Video Games: Age of Empires 2: Definitive Edition & Among Us

It is funny that I am recommending a 20-year-old game, but Age of Empires 2 was my favorite game 20 years ago. They re-released it a year ago with much improved graphics and gameplay mechanics and I fell in love with it all over again. It has been a lot of fun play online with my friends and replaced Company of Heroes 2 and Starcraft 2 as my go to real time strategy game. Note that I would not recommend Age of Empires 3 Definitive Edition which was just released as I do not like a lot of the gameplay elements and the competitive community is sticking to Age of Empires 2. The community is thriving. The game keeps breaking audience records on Twitch and attracting ever bigger prize pools. I am also noticing ever more players online. I am hoping Age of Empires 4 will be epic when it comes out and have high hopes as it is being developed by Relic, making of Company of Heroes 2 under the guidance of Forgotten Empires which is taking great care of the community.

Among Us has also proven to be the perfect game to play in 2020. It is an online version of Werewolf / Mafia / Resistance, that requires no real gaming skills, but observation, deduction and/or deception. It is super fun to play with friends you know well either with all of us on Discord or even better in person. I am sure it is a harbinger of simple social fun games to come.

I love third-person action adventure games. This year my great hope was Last of Us 2, but I found the story overly violent and disappointing. What Naughty Dog attempted to do by showing us the world from the two antagonists perspective is creative and perhaps even courageous, but I felt a huge let down relative to the story telling heights reached by the original Last of Us. Fortunately, I am taking great joys in finishing Fallen Order. I am eagerly awaiting Grand Theft Auto 6 in the genre, though I suspect it is many years away. In the meantime, I will keep my eyes peeled for a fun coop third party action adventure game.

As a sidenote, I am excited to see the film adaptation of Drake Uncharted, featuring Tom Holland in the role of Nathan Drake.

You might be surprised that I am not recommending the Xbox Series X or the PS5. Undoubtedly, I will get both, but I have not received them yet (and are hard to get) so I do not feel comfortable recommending them just yet especially as there are no “must have games” for either out right now. That said, I am sure they will feature prominently in my 2021 holiday gadget recommendation list.

Fitness Tracker: Fitbit Charge 4

I considered switching to the Apple Watch Series 6, but the limited battery life was too much of a turn off. I do not see myself switching over until they get at least 3 days of battery life. I really use my fitness tracker both as a physical activity tracker and sleep tracker. Also, I do not like interruptions. I always have all notifications off, so the extra features of an Apple Watch are wasted on me. The last thing I want is to see incoming calls, emails, or messages. I am happy to just track my steps, calories burnt, heart rate, sleep quality (and to be able to see what time it is).

The Fitbit Charge 4 is perfect for this. I regularly get over 5 days of battery life despite doing 15-20k steps of exercise most days. The Charge 4 is also proving to be way more durable than the Charge 3. I gave up on the Charge 3 after breaking 9 of them in one year. It was supposedly waterproof yet kept getting water damage. It was covered by the warranty, but it was still a pain to get it replaced continuously. I have been using the Charge 4 since it came out. I regularly swim and kite surf with it and I have never had an issue with it.

Computer Monitor: LG CX 48

This is the first time I recommend a TV screen as a computer monitor. Historically you would get much better performance by using PC monitors, but the LG CX 48 is an amazing PC monitor. It is G-Sync compatible, has a 1ms response time and supports 4K at 120Hz through HDMI 2.1.

Note that by default it is not a good PC monitor., but once you tweak the settings it is amazing. I first followed the following instructions to set it up as a monitor.

Then I tweaked them with this Reddit post.

Networking: Eero Pro 6

I have been renting houses and apartments all around the world for the past few years. Very often Wi-Fi coverage is spotty and inconsistent throughout the places I rented. Enter the Eero Pro 6. I got a 3-pack and got amazing Wi-Fi coverage everywhere including huge multi-level ones. I especially recommend it if you have an exceptionally large space.

Home Video: Optoma CinemaX P2

The Optoma CinemaX P2 is the best sub-$4k ultra-short projector on the market. It is easy to setup. It is very bright and can even be used with a fair amount of ambient light. If you have a 120” wall for it, you can create an amazing home cinema for a fraction of the cost of much smaller 90”+ TVs. There are amazing ceiling mounted projectors, but they are a pain to install. I am using the CinemaX P2 as a replacement for a ceiling mounted projector that kept dying because of the salt and moisture in the air in Turks and Caicos. Now we just bring the projector out when we want to use it and bring it back in the AC when we are done.

Note that to get an amazing picture quality, you should use special paint. I recommend you install Goo’s Acrylic Base Primer as the undercoat  and using the Goo 2.0 High Contrast 0.85 paint on top.

Fun Watersport Toys: Lift E2 eFoil, Yamahah SeaWing II, Traxxas Spartan

Back in February when I started worrying about COVID, I decided to escape the high-density urban environment of New York, for the beaches of Turks & Caicos for the duration of the quarantine. As I envisioned spending an extended period of time at a beach destination for the first time, I decided to try out a lot of watersport toys especially for low wind days when I could not kite or foil.

There are three that I recommend. The Lift E2 eFoil is perfect for no wind days and for non-kiters to experience the thrill of foiling. I recommend the 5’0 Sport board with the 170 Wing as it’s a good compromise between being easy enough to learn on yet maneuverable enough to be fun once you get good. I am particularly impressed by the battery life as you can get nearly an hour of riding on a single charge. Note that it is not quite the same as foiling with a kite which is way nimbler, but it is still a fun approximation for low wind days. Once caveat is that I would only recommend getting it if you have a flat-water spot. It is extremely hard to learn if it is wavey or choppy.

I swam with Sea Bobs in the past and found them super fun and all the kids staying at my house lobbied for me to get some. However, I balked at the $9 – 17k price points. I looked online for alternatives, but they were all super slow going 3 mph to the Sea Bobs’ 8-13 mph. Enter the Yamaha Seawing II. At $849, it is much cheaper than the Sea Bobs while still going 5 mph. They were probably the most popular water toy we had seeing use for swimming in the pool and ocean, snorkeling and scuba diving by adults and kids alike. My only gripe is that they break rather easily. It became rather obvious rapidly that we should rinse them with fresh water and leave them in the AC after use (which turned out to be true of all our water toys which do not love salt water).

I have been racing RC cars forever, especially the Traxxas eRevo 1/10. This year I tried out the Traxxas Spartan and it is shocking how it seemingly flies above the water. It can reach exceed 50 mph. At that speed, the smallest ripple can send it flying so we had to be super careful given that I run it on the ocean which is rarely perfectly flat. Like with the Lyft eFoil, I only recommend getting it if you have a flat-water spot. Also, if you are running it in salt water (as I am), the electronics will eventually fry. Rinse it with fresh water every time and oil it.

Streaming Gadgets: El Gato Stream Deck XL & Ring Light

Since I started streaming Playing With Unicorns, two gadgets became indispensable: the El Gato Stream Deck XL and the El Gato Ring Light. With the Stream Deck XL you can setup a fairly large number of preset views and switch quickly and efficiently between them without needing to fiddle with your mouse. For instance it is easy to launch the intro, switch to a scene with a guest and I, one where one of us is presenting, one where the camera is only on the guest with or without the comments from the audience. It lends an era of professionalism to what is essentially a self-produced show. BTW if you balk at the $249 price point, you can simply use the Streamdeck app on your phone or tablet for $2.99 / month.  

I also rapidly learned the importance of great lighting. In one of the shows I ended being a bit backlit and you could barely see me. After that episode I bought the El Gato Ring Light, connected it to the Stream Deck and have had much improved image quality ever since. They are a must for all self-respecting streamers.

Episode 9: Coming Up with a Startup Idea

Many aspiring entrepreneurs struggle to come with compelling startup ideas. I detail the four sources of startup ideas:

  • Observed pain points
  • Geographic arbitrage
  • Business model or approach arbitrage
  • Verticalization

I discuss how to quickly determine whether the idea is worth pursuing further. I also share tips and tricks on ideation and early validation.

Arne Halleraker, who co-heads investing at FJ Labs, joins to share the startup ideas he came up with for our most recent FJ Labs ideation session this past August.

For your reference I am including the slides Jeff used during the episode.


If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 8: The Business of Venture Capital

Most entrepreneurs merely see venture capitalists as a source of capital without understanding how venture capitalists operate. Jeff Weinstein, who co-heads investing at FJ Labs, and our resident venture capital nerd, joins to explain the history of venture capital. He details how VC firms operate, how they are funded, and shares his take on the future of the industry. The episode is a must watch for aspiring venture capitalists, prospective investors in venture funds, and entrepreneurs raising from VCs.

For your reference I am including the slides Jeff used during the episode.


If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 7: FJ Labs’ Startup Studio Model

Last week we covered whether first time founders should build a company on their own or join an accelerator or a venture studio. As a follow-up, I wanted to present the specifics of the FJ Labs startup studio model. Anthony Valente, Andrea Xu, and Charles Gorra join to describe their experiences at the various stages of our program.

For your reference I am including the slides I used during the episode.

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 6: DIY vs Accelerator vs Studio

This week we cover whether first time founders should build a company on their own or join an accelerator or a venture studio. Nancy Dong, our first ever guest on Playing With Unicorns, joins to share the framework she used to decide whether she should join FJ Labs as an entrepreneur in residence (EIR) after stints at Uber and Harvard Business School (HBS).

For your reference I am including the slides Nancy used during the episode.

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 5: Ask Me Anything

Given that I was in Lake Placid looking at the foliage change without my multi-screen setup, I tried a “Ask Me Anything” session for the week. It was a resounding success with very varied questions.

We covered:

  • The impact of antitrust laws on the venture ecosystem
  • The differences between being an angel and running an early stage fund
  • How we acquired the first customers at OLX
  • Whether marketplaces should start by building supply or demand
  • How to build your brand in VC
  • How to prioritize your time as an entrepreneur
  • How foreign startups can succeed in the US
  • Whether we are in a tech bubble
  • Whether startups should be hyperlocal, national, or global
  • My thoughts on impact investing relative to philanthropy and traditional venture investing
  • Whether hunting unicorns is the only viable path for entrepreneurs
  • The state of startups in Africa and whether once could build a unicorn via a rollup
  • Whether business plans are worth the paper they are written on
  • Whether it is essential to be in less competitive markets to succeed
  • What company I would have loved to have founded
  • Whether I will operate another startup in the future
  • The role debt can play in financing startups
  • Whether investors in the pre-seed / angel round should also invest in seed rounds
  • Whether YC is correct to focus on user and revenue growth rather than other metrics
  • What my guiding philosophies have been over the year
  • Whether macroeconomic considerations should be relevant when building or investing in a startup
  • Which investment gave me the best return
  • My perspective on Bitcoin
  • My thoughts (or lack thereof) on the stock market
  • The pros and cons of learning to code as a founder
  • The use of a single vs. multiple KPIs as objectives for teams in startups
  • Why VCs invest where they are located
  • How useful is a college education to an entrepreneur?
  • What helps me stay open and creative
  • My thoughts on The Social Dilemma

I stand by all my answers, but I should complement one of them. With regards as to whether tech is in a bubble, I explained why the low interest rate environment was leading to frothy valuations, but not (yet?) a bubble. However, I should have mentioned that the SPAC world is in a bubble. There are lots of SPACs chasing a few good companies leading to significant adverse selection. The best companies are IPOing outright. The mediocre companies are SPACing. Also, SPACs have historically underperformed the market. Of the 313 SPACs IPOs since the start of 2015, 93 have completed mergers and taken a company public. Of these, the common shares have delivered an average loss of -9.6% and a median return of -29.1%, compared to the average aftermarket return of 47.1% for traditional IPOs since 2015. Only 29 of the SPACS in this group (31.1%) had positive returns.

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Angel investing at scale

I had the pleasure of being interviewed by Pankaj Jain, the host of Invest Stream. We discussed how being an entrepreneur led me to becoming an angel investor then went in depth on how to be a good angel investor.

A few takeaways:

  • Have an area of focus: you will make better investment decisions and be more value added by focusing on an area of expertise. In turns this lets you create a brand in the category which leads to more and better deal flow and ever better decision making.
  • Have a diversified portfolio. Venture investing follows a power law with a few startups generating most returns. The larger your portfolio the better you do. Ideally have at least 100 angel investments.

Episode 4: FJ Labs’ Investment Thesis

In the third episode, I described how VCs evaluate startups by using a combination of the team, business, deal terms and whether the idea fits with their thesis to decide whether to invest or not. In this episode, I present FJ Labs’ Investment thesis.

I start by covering why we focus on marketplaces, then detail:  

  • Our current marketplace theses:
    • Verticalization of horizontals
    • Transition to supply pick marketplaces
    • B2B marketplaces
  • The Future of Food
  • The Future of Work
  • The Future of Real Estate
  • The Future of Lending

For your reference I am including the slides I used during the episode.

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 3: How VCs evaluate startups

In the first episode I covered how and when to fundraise. In this episode, I describe how venture capitalists (VCs) evaluate you once you are in front of them to help you refine your approach and pitch.

I explain how VCs use a combination of the team, business, deal terms and whether the idea fits with their thesis to decide whether to invest or not. I also detail:

  • What are unit economics
  • Expected traction and valuation at various stages
  • That venture capital follows a power law
  • How various VCs weigh the different investment criteria based on whether they are playing “Powerball” vs “Moneyball”

For your reference I am including the slides I used during the episode.

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 2: Build a MVP for less than $20k

I start by covering the theoretical do’s and don’ts of building a minimum viable product (MVP) before giving an in depth and specific example of how I would go about building a mobile golf application allowing golfers to find partners to play with at their handicap, in their region and/or club, with the same availability.

I cover how to use various tools and services such as Balsamiq, Awesome Screenshot and Upwork.

For your reference I am including the do’s and don’ts slide I used during the episode and embedding links to the PowerPoint presentation I used as well as the PDF output of the Balsamiq flow.



If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 1: Fundraising

Given that it’s episode 1, I start by explaining why I am creating this show before covering everything there is to know in terms of fundraising for venture backed startups:

  • Common mistakes when fundraising
  • The unwritten rules of venture capital
  • How and when to approach venture capitalists
  • Much more!

For your reference I am including the two slides I used during the episode.

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Announcing Playing With Unicorns

Playing with unicorns is a new weekly live streaming show on startups, entrepreneurship, and venture capital. I will be streaming every Thursday at 12 pm EST on LinkedIn, Facebook, YouTube, Twitter, and Twitch. I will post the video to YouTube after each episode and the audio to the podcast section of Spotify and iTunes. I will also post every episode on my blog.

I was asked to create a live streaming show and podcast many times over the last few years, but I was not inspired. Almost every show has a host interviewing amazing guests, with the same guests making the rounds on every show in their category. I did not want to be redundant with those efforts. On top of that, running FJ Labs is all encompassing. I did not feel I would have the time to put together an amazing roster and do a great job.

Instead, as readers of my blog probably noticed, I became a guest on a wide range of podcasts and live streaming shows. It was fun and interesting, but with enough experience I realized that what was missing was a distilled version of the content. This was reinforced by the fact that most entrepreneurs and aspiring entrepreneurs I meet have a common set of questions that I find myself answering repeatedly: how to fundraise, how VCs evaluate startups, how to come up with a good startup idea etc.

As a result, I thought it would be most valuable to cover a specific topic every week. I will share my perspective before opening it up to questions from the audience. This is not to say I will not have guests on the show, but when I do, it will mostly be for them to present something practical (e.g. how to test customer acquisition channels for a pre-launch idea to estimate customer acquisition cost), rather than a traditional interview where they share their story.

The objective of this show is not to be mass market, but to help Internet entrepreneurs understand how to build scalable venture backed startups. I will try to be educational, even for those with limited experience in the startup world, when covering broader concepts like fundraising. However, I will also be more technical and detail oriented when doing deep dives on specific topics like “the future of food”, “how to match supply and demand in marketplaces” or “how to decide which business model to pick.”

To have diversity in the content offering, I imagine that some weeks I will host “ask me anything” sessions, organize quick pitches that I react to, or just comment on happenings in the tech sector. I will also cover topics and ideas suggested by viewers. If some entrepreneurs are up for it, I would love to stream a company evaluation where I assess one of the startups pitching FJ Labs for funding.

I expect the show duration to vary between 10 minutes and 1 hour. Note that this is unscripted, unedited, and self-produced, so do not expect high production values with jazzy effects. Instead, I will focus on providing valuable information to startup founders.

I do not know how many episodes I will end up creating, but this should be a fun experiment and I cannot wait to see what comes of it. The first episode is Thursday, September 17 at 12 pm EST. I will cover fundraising.

In the meantime, enjoy in introduction video for the show.

My friends and family are the best!

A few years ago, for my 40th birthday, they put this fantastic video together to celebrate our love and friendship. It was one of my favorite gifts ever.

This year, I thought no one could top the present I bought myself of a padel court in Turks given my love of padel.

But my friends are not to be underestimated. A few hours later they surprised me with this touching tribute video.

Then they presented me with this huge, loving birthday card.

I was felt so loved I had tears of joy. Thank you I love you all!

How FJ Labs gets its deal flow

FJ Labs gets deal flow from 4 sources:

1. Other VCs
2. Entrepreneurs in our network
3. Cold inbound messages
4. Outbound outreach

It is my understanding that many VCs, particularly junior ones, spend most of their time reaching out to startups they may want to invest in. They run scripts on LinkedIn to identify tech companies whose employee count is growing rapidly, have associates attend meetups and cold call startups that sound interesting.

We are very privileged that we do not have to do this. We are once again helped by our focus on marketplaces. Given our domain expertise, most entrepreneurs who are building a marketplace want us involved in their startups. As a result, most of our work is reviewing inbound deal flow. Every week we receive around 100 deals and review around 50 of them. In 2019 for instance, we evaluated 2,542 companies which averages out to 49 per week. 32% of the deals we review come from other VCs, 32% comes from our entrepreneur network, 32% from cold inbound messages and only 4% from companies we reach out to directly.

1. Deal Flow from other VCs

48% of the deals we invest in come from other VCs, highlighting the higher quality of this deal flow source in general. The reason we get so many deals from other VCs stems from FJ Labs’ investment strategy. We do not lead or take board seats; we write small checks and have no minimum ownership requirement. As a result, we do not compete with VCs for allocation. Instead, they see us as friendly, value-added investors given our specificity and expertise when it comes to marketplaces.

We do deal flow sharing calls with around 100 VCs every 8 weeks covering almost every stage and geography. We have a tailored approach where we present the right VCs to the right startups. The VCs love this because they get differentiated, tailored deal flow. The entrepreneurs love this because they get curated meetings with top VCs. We love this because the startups we care about get funded. Those VCs also invite us to co-invest with them in the marketplace deals they are evaluating, not only to get our perspective on the opportunity, but also to help the startup once the investment is made.

2. Deal flow from entrepreneurs in our network

At this point we have invested in over 600 startups with 1,400 founders. These founders frequently come back to us when they raise money for their next startups (always a good sign that we are friendly, helpful investors), and introduce us to their friends and employees who become entrepreneurs.

This is also part of the reason we offer FJ Labs founders the opportunity to co-invest alongside us in our Entrepreneurs Fund, a micro fund that we manage on AngelList. Our founders can diversify their exposure across the FJ Labs portfolio and are further incentivized to bring us their great deal flow in the process because they can share in the upside.

This is the deal flow source that leads to most of our non-marketplace investments because if you were a successful entrepreneur for us in the past, we will back you regardless of what you build. For instance, this is how we ended up investing in Archer, an electric VTOL aircraft startup. We previously backed Brett Adcock and Adam Goldstein in their labor marketplace startup Vettery which was sold to Adecco. We were excited to back them in their new startup despite our lack of domain expertise in electric self-flying aircraft.

3. Deal flow from cold inbound messages

I suspect that for most VCs, cold inbound emails are auto deleted or sent to a black hole where they are never reviewed. We take the time to review all messages sent to us and review deals that are appropriate.

In full transparency, this is the typically our lowest quality deal flow channel, and accounts for most of the difference between the 100 deals we receive every week and the 50 that we review mostly because we are sent many deals that are potentially compelling but completely out of scope for us: biotech, hardware, even offline investment opportunities.

The real number of “deals” we get is over 100, but unless you put enough information in your message to us to evaluate if we want to review the deal, we cannot even consider it as an opportunity. It is shocking the number of weekly messages we get that just say: “I have a great startup; do you want to review a deck?”

But the reason we continue to keep this channel open is there have been diamonds in the rough that have led to some phenomenally successful investments. A surprisingly high 24% of our investments come from cold inbound outreach by the founders. Amazing companies such as SmartAsset and Meliuz (which seems to be considering an IPO) came from cold inbound messages.  

Most cold inbound deals come to my Linkedin or email, but I also receive a fair amount on Facebook, Instagram, and Twitter. We used to have a startup submission form on my blog, but I pulled it down because the quality was too low.

We are not that hard to get an intro to, but if you want to reach out to us cold, the best way is to contact me on LinkedIn or by email. Make sure you tell us what you are building, how much traction you have and attach a deck.

4. Outbound outreach

Because we are drinking at the firehose of our inbound deal flow, we do not spend much time reaching out to startups. Our outreach emanates from the brainstorms and deep dives that we do. Twice a year, I invite my FJ Labs colleagues to my house in Turks & Caicos to think through ideas that do not exist that we should create or convince entrepreneurs to build. On average we come up with over 100 ideas each time (over 200 ideas per year!). Also, during the year different team members do sector analysis in line with their interests: logistics, proptech, etc. These exercises uncover a fair number of startups we were not aware of and reach out to.  


This post is more for your information to share how we operate rather than meant to have a specific so-what. However, it should be helpful for entrepreneurs thinking about how to reach out to us. Likewise, if you are a new venture capitalist, my recommendation would be for you to build a brand around a certain sector or category such that people want you in those deals so you can allocate less of your time to outbound outreach.

How to build and invest in marketplace startups with Grace Gong

Grace Gong invited me to her podcast. We discuss:  

  • Creating a better marketplace platform 
  • Making better investments in marketplace platforms 
  • Mastering your investment thesis as a VC, selling your company to (other) investors 
  • Taking 1 action will make your life better 

In addition to the embeded player, you can also listen to the podcast on:

FJ Labs’ Investment Strategy

FJ Labs’ investment approach stems from its roots (read The Genesis of FJ Labs). FJ Labs is the extension of Jose’s and my angel investing activities. We scaled our activities and processes, but we did not change the strategy.

Most venture capital funds have very well-defined portfolio construction. They invest the funds they raised over a specific period, in a specific type of company, in a specific number of companies, investing a specific investment amount, at a specific stage, in a specific geography. These funds lead rounds and the partners take board seats. They reserve a certain amount of capital for follow-ons and typically do follow-on. Fund rules are such that subsequent funds cannot invest in the companies from the prior fund. The fund does extensive due diligence and invests in less than 7 deals per year.

A typical $175 million dollar VC fund may look like this:

  • US only
  • Series A focus
  • B2B SAAS companies only
  • Invests $5-7M Series A lead checks
  • Targeting investing in 20 companies over a 3-year period
  • 40% of the capital reserved for follow-ons
  • Follow-on in most of the portfolio companies
  • Partners take board seats
  • Investments take 2-4 months from first meeting

FJ Labs does not operate this way. As we did when we were angels, we evaluate all the companies in our pipeline, and we invest in those we like. We decide whether we invest or not based on two 60-minute calls over the course of a week or two. We do not lead, and we do not take board seats. In other words, you could say we invest at any stage, in any geography, in any industry with extremely limited due diligence. Those are the very words that scared away institutional investors and made us think we would never raise a fund.

Given this “strategy,” you might expect that our portfolio composition would vary dramatically over time. In fact, it has been very consistent over the years. There are several reasons for this.

  1. The number of deals we evaluate weekly has been remarkably consistent over the years

I will detail how FJ Labs gets deal flow in a subsequent blog post. But to give you a sense of scale, we receive over 100 investment opportunities every week. However, we do not evaluate all of those. Many are clearly out of scope: hardware, AI, space tech, biotech, etc. without a marketplace component. Many others are too vague: “I have a great online investment opportunity; do you want to receive a deck?”

If you do not make the effort to realize we focus on online marketplaces and include enough information for us to evaluate whether or not we want to dig further into the deal, we will not reply or follow-up.

On average, we evaluate 40-50 deals every week. In 2019 for instance, we evaluated 2,542 companies which averages out to 49 per week.

2. The percentage of deals we invest in has been largely constant

There is a lot of specificity that goes into “we invest in companies we like.” We have extremely specific evaluation criteria and investment theses that we keep refining. I will detail those in subsequent blog posts. While we invest in every industry, in every geography and at every stage, we do have a specificity: we invest in marketplaces.

Over the years we have been investing in around 3% of the deals we evaluate. In 2019 for instance we made 83 first time investments. In other words, we invested in 3.3% of the 2,542 deals we evaluated.

3. The distribution of deals we receive is not random and consistent over time

In general, there are many more pre-seed and seed deals than Series A and Series B deals. In turn there are more Series A & B deals than later stage deals. On top of that, because we are known as angel investors who write relatively small checks, we receive disproportionately earlier stage deals that later stage deals. As a result, most of our investments are seed stage or earlier though the number of Series A has been increasing in recent years.  

4. While we evaluate deals from any country, we have specific preferences

While we are global investors, we are New York based and most of the marketplace innovation is coming out of the US. As a result, most of our deal flow comes from the US and most of our investments are in the US. At the same time, Jose lives in London and I am French, so we get a lot of European deal flow. Given OLX’s global footprint, I am also very visible in many emerging markets.

While we evaluate deals in all countries, when we look at startups in emerging markets, we focus on large markets that have more robust venture ecosystems and financial markets. These days this mostly means Brazil and India. That is not to say we will never invest in smaller markets. We invested in Rappi in Columbia, Yassir in Algeria and Lori Systems in Kenya for instance, but the bar to us investing is a lot higher.

The main issue in smaller emerging markets is the lack of Series A & B capital and the lack of exits. There are rich locals that will angel invest in almost every country in the world. Also if you break out, which typically means over $100 million in revenues and $100 million in valuation, US global funds like Tiger Global will find you to invest (at what would typically be a Series C) wherever you are located.

However, most smaller markets do not have Series A & B investors making it ridiculously hard for companies to get from seed to breakout status, especially if the domestic market is small. Worse there are few exits for those companies, even the successful ones, because the countries they are in are not in the priority list for the large global acquirers.

To date 58% of our investments have been in the US and Canada (mostly the US), 25% in Europe, 6% in Brazil, 2% in India and all other countries combine account for 9%.

Beyond this, we have a few other guiding principles.

A. We focus on marketplaces

My fascination with marketplaces stems from my early fascination with economics. I discovered Adam Smith and David Ricardo in my teens. Their work resonated with me because it explained how the world was structured better than anything else I encountered. This is why I studied economics at Princeton, which further grew my interest in market design and incentive systems.

When I graduated in 1996, I did not think it would lead to anything practical. As a shy, introverted 21-year-old I went to work for McKinsey for two years. Even though I wanted to be an Internet entrepreneur, I felt McKinsey would be the equivalent of business school, except they paid me. Two years later I felt I had learned what I came to learn and was ready to venture into the world of entrepreneurship.

As I started thinking through ideas of companies I could build, I realized many were not appropriate for an inexperienced 23-year-old. Building Amazon-type companies required managing complex supply chains. Etrade type companies required obtaining brokerage or banking licenses. Most ideas were also massively capital intensive. When I ran into the eBay website, it was love at first click. I immediately recognized the extraordinary amount of value that could be created by bringing transparency and liquidity to the previously opaque and fragmented markets for collectibles and used goods that were mostly traded in garage sales offline. I also realized how capital efficient the model would be as it unleashed powerful network effects with ever more buyers bringing every more sellers who in turn bring every more buyers. Moreover, I knew I could build it. Building a site like eBay has its own complexity in terms of solving the chicken and egg problem of figuring out what to start with and how to monetize, but it was the type of complexity that I felt perfectly suited to deal with.

I founded Aucland, a European online auction site, in July 1998. I ended up building it into one of the largest online auction sites in Europe before it merged with a publicly traded competitor, QXL Ricardo. Funnily enough they were much later acquired by Naspers (as OLX would eventually also be). While running Aucland, I was introduced to a group of Harvard and Stanford grads by a McKinsey colleague. I confirmed their belief they should launch an eBay-like site in Latin America and agreed to provide them with the technology and business plan to do so. Deremate was born and became one of the leading auction sites in Latin America until it merged with MercadoLibre prior to its IPO.

I loved building Aucland. I loved the nuance of matching supply and demand on a category by category basis and building a real community of users. After the Internet bubble popped, I built Zingy, a ringtone company, because I wanted to be an entrepreneur and felt I could build a profitable and successful startup in a world with no venture capital. However, it was not true love. It was a means to an end. I made it profitable, grew it to $200M in revenues before selling it for $80M. I could now return to marketplaces.

In the intervening years I had seen both the rise of Craigslist and the first vertical marketplaces like Stubhub and Elance (now Upwork). I was excited to build OLX. It was the company I was meant to build. It’s what Craigslist would be if it was run well: mobile first with fully moderated content, no spam, scam, prostitution, personals and murders, catering to women, who are the primary decision makers in all household purchases. It now serves over 350 million users every month in 30 countries in mostly emerging markets where it is part of the fabric of society. It allows millions of people to make a living and improves daily lives while being free to use.

OLX allowed me to further my craft and further fall in love with the beauty and elegance of marketplaces. As I was busy running OLX with its hundreds of employees around the world, I decided to focus on marketplaces as an angel investor as I felt uniquely positioned to make rapid investment decisions.

This specialization created its own network effect. Becoming well known as a marketplace investor improved my deal flow in marketplaces, improved my pattern recognition and allowed me to develop more robust thesis and heuristics. As FJ Labs evolved from Jose and my angel investing activities, we simply kept going down the marketplace path we were already on.

In 2020, marketplaces remain as relevant as ever. We are still at the beginning of the technology revolution and marketplaces will have a significant role to play in the decade to come and beyond.

B. We decide quickly and transparently

As an entrepreneur I always hated how slow the fundraising process was and how time consuming it was. Weeks go by between meetings with venture capitalists if only because they use time as an element of due diligence. Entrepreneurs must be very thoughtful about running a tight process in order get term sheets at the same time to create the right amount of FOMO. Entrepreneurs rarely know where they stand. VCs who are not interested may just ghost them or be terribly slow rather than outright pass on the investment to preserve the optionality of changing their mind.

It drove me nuts as an entrepreneur and I decided to do the opposite as an angel. I opted for radical transparency and honesty. Because I was so busy running the day to day operations of OLX, I devised a strategy to evaluate startups based on a 1-hour call. On the 1-hour call or meeting I would tell the entrepreneurs if I was investing and why. In 97% of the cases I passed on the opportunity and would tell them what would need to improve to change my mind.

We did not change the process much for FJ Labs, though we refined it in a way that allows us to evaluate more deals and be more scalable. Most startups are first reviewed by a FJ team member who presents their recommendation on our Tuesday investment committee meeting. If warranted Jose or I take a second call after which we make our investment decision. In other words, entrepreneurs get an investment decision after at most 2 calls over 2 weeks. If we choose not to invest, we tell them why and what would need to change for us to change our mind.

If I am on the first call, I still often make the investment decision at the end of the meeting to the shock of the entrepreneur. I find it normal. After all we have clear investment heuristics and strategy and stand by our beliefs. I love clarity of purpose and thought.

C. We do not lead deals 

As angels we did not lead deals. When we started FJ Labs it never occurred to us to become traditional venture capitalists and to lead deals. We prefer meeting entrepreneurs, hearing their crazy ideas, and helping them realize those dreams. This allows us to avoid the legal and administrative work that comes from leading deals.

Moreover, as angels we always saw VCs as our friends. We established strong relationships with many of them and started organizing regular calls to share deal flow. Our approach was super successful, and it did not make sense to change it. Leading deals would mean competing with VCs for allocation. There are many amazing deals we would not be able to participate in or be invited to. No one in their right mind would pick us over Sequoia if we were the type of VC that led deals. The beauty is that with current approach entrepreneurs do not need to pick. They can get both the lead VC of their choice and us. Right now, we invest in almost every company we want to, and we love it!

D. We do not take board seats

In a way not taking board seats is the natural consequence of not leading, but we have fundamental reasons for not wanting to sit on boards. Objectively an investor cannot be on more than 10 boards effectively which is not compatible with our highly diversified approach. Worse, I observed that the companies that are failing end up needing way more work and time. In other words, you end up allocating all your time to help the companies going from 1 to 0  and almost none of your time on the companies that are doing the best and are going from 1 to 100. Instead you should be ignoring the companies going from 1 to 0 and spending your time thinking how to create the most value for your rocket ships.

There is also a certain formality and rigidity to board meetings that prevent them from getting to the heart of the matter. Both as an entrepreneur and an investor the most meaningful strategic discussions I ever had were informal 1 on 1 coffee chats rather than formal board meetings. I have been told countless times that the conversation I had with an entrepreneur was the most meaningful they ever had.

Note that not taking board seats does not mean we are merely passive investors. The value we provide takes a different form.

E. Our main value add is to help with fundraising, with offline advertising and to think through marketplace dynamics

Many funds with billions of assets under management have fully fledged platform teams with lots of venture partners. They have headhunters and experts in various areas to help portfolio companies. We do not have the resources to do all those things. Instead we decided to focus on three differentiated ways of helping.

First and foremost, we help startups raise. We either help them complete their existing round or raise future rounds. Ultimately, FJ Labs is not setting the terms of the round. We just want the companies we love to get funded. We do deal flow sharing calls with around 100 VCs every 8 weeks covering almost every stage and geography. We have a tailored approach where we present the right VCs to the right startups. The VCs love it because they get differentiated tailored deal flow. The entrepreneurs love it because they get meetings with top VCs. We love it because the startups we care about get funded.

Prior to the entrepreneur going out to market, we try to do a catch-up call to give them feedback on where they stand and review their deck and pitch. When we feel they are ready, we make the relevant intros.

We can also help think through marketplace dynamics. Should you start with the supply or demand side? How local should you be? Should the rake be 1%, 5%, 15% or 50%? Should the rake be taken on the supply side or the demand side? Should you provide extra services to one side of the market? We see so many marketplaces that we have developed a lot of pattern recognition and can help think through core strategic issues.

Lastly, we can help portfolio companies with their offline advertising, especially TV advertising. William Guillouard, one of our Venture Partners was Chief Marketing Officer at OLX where we spent over $500 million in TV advertising. We developed methods to run TV campaigns the way we run online campaigns with attribution models and LTV to CAC analysis. In several cases, we successfully scaled companies rapidly though TV with better unit economics than through Google and Facebook. Obviously, this only applies to a small subset of portfolio companies which are mass market, have good unit economics and enough scale to justify trying TV, but for those companies it can be game changing.

F. We have set check sizes by round

We do not want to be competing for allocation with traditional venture capitalists. We see ourselves as a value-added small co-investor alongside them and we want them to want to invite us to their best deals. This puts maximum check sizes we can deploy at every stage, especially seed stage. In a typical $3M seed round, the lead invests $1.5-2M. To be right-sized relative to the lead, we currently invest $390k at seed. We could probably deploy a bit more capital at each stage and might slightly increase our check sizes in the future if our fund gets a bit larger, but our investment size will always be small relative to that of the lead.

In pre-seed there are often no funds investing. Rounds are often made up of a group of angels. In this case, we may very well be the largest investor with our $220k investment, but we just consider ourselves to be one of the angels rather than a real lead.

We also invest $220 “fliers” in companies we find compelling but are not comfortable investing our standard allocation. We do this for a variety of reasons. Perhaps the valuation is a bit high, the unit economics not quite proven or the startup is in a business we find interesting but do not know much about.

You can find our current standard allocations below.

G. We evaluate follow-ons on a standalone basis

The clear Silicon Valley motto is you double down on your winners regardless of price. We take objection to the second part of that statement. We have always been thoughtful about valuation and it has served us well. As I will  detail in a subsequent blog post on FJ Labs’ evaluation criteria if we feel a startup’s valuation is too high relative to traction we do not invest even if we love the entrepreneur and business they are in.

We evaluate follow-ons as though it was the first time we were investing in the business. To keep the evaluation objective, a different team member from the one who made the original investment recommendation does the analysis. The question we try to answer is the following: knowing what we now know about the team and business, would we invest in the company at this valuation?

Depending on how strongly we feel about the answer to that question we try to do super pro-rata, pro-rata or merely pass on the investment. In the last few years, as more funds moved to later stages, we often felt our best companies became overvalued and we did not follow on at those later stages. To date, we followed on in 24% of our investments.

Also, given our fund size, we often cannot afford to do our pro-ratas as they would represent most of the capital deployed. Worse given our small ownership percentage as the companies become later stage, we start losing information rights and no longer have visibility into how well the company is doing. As a result, when we feel the price is right, we sometimes sell 50% of our position in secondary transactions, typically selling to the lead VCs when a round is happening.

In a way we are doing the exact opposite strategy of Silicon Valley: we sell our winners rather than double down on them. This explains why our realized IRR is so high. Part of the reason we seek secondaries is driven by our business model. Contrarily to large funds, we do not live from fees. We just reached our break-even point with FJ Labs. After years of having to subsidize our cost structure with millions of out of pocket investment, the management fees we collect now cover our expenses. However, we still have a way to go. Jose and I are not paying ourselves or reimbursing our expenses.

Our business model is different. We make money from exits. We need the capital from successful exits to keep investing in new startups because we represent such a large percentage of the capital deployed. To date we represent $114 million of the $284 million deployed. We cannot afford to wait a decade for the final exit because we want to continue investing at the rate we have been investing.

As you can imagine such secondary exits are only available in the absolute best companies. No one is interested in buying out positions in companies that are not doing well. Even in the best companies, we can only sell because we own small positions and are not on the board. There is no real signal coming from our willingness to sell other than our need for liquidity. In fact, we are often asked to sell as a favor rather than us seeking to sell. For instance, Andreesen, Greylock and Sequoia may all want to invest in a company at the Series B. The entrepreneur loves all 3 and does not want them to fund a competitor. The funds want at least 15% ownership each. The entrepreneur does not want 45% dilution. They do a primary round for 30% and organize a secondary for the rest. They ask us if we would mind selling part of our position in the secondary as a favor to get the round done.

We thought long and hard about how much we should sell in these situations. In the end we opted for selling 50%. It provides us with liquidity and a great exit, while preserving lots of upside if the company does amazingly well. Our fund multiple would be higher if we held until the end, though our IRR would be lower. However, considering we essentially redeploy all the capital that we obtain from the exit into earlier stage companies where we feel there is more upside, our real multiple and IRR is higher when we pursue the secondary when you consider the return we get from the redeployment of the capital.

H. When the fund runs out of money, we just raise the next fund and follow-ons happen from the next fund

We do not follow traditional portfolio construction. The portfolio is just the sum of the individual investments and follow-on investments we make. The construct is completely bottoms-up. We just deploy the capital we have and when we run out of capital, we raise the next fund. We do modulate the investment sizes to make sure each fund is deployed over 2 to 3 years, but that is the extent of it.

Given that we do not know whether we are going to follow-on, and we only follow-on in 24% of the cases, it does not make sense to reserve capital for follow-ons. Also, many of the follow-ons fall outside the 2 to 3-year capital deployment range of a fund. As a result, we told our LPs we would do follow-ons from whatever fund happens to be investing when we make the follow-on investment decision. We also tell them to invest in every fund to have the exact same exposure we do.

Note that we would not sell the position from one fund to another. There is only one investment decision: we are investing, holding, or selling.

I. If you were successful for us in the past, we will back you in your new startup even if It is not a marketplace

We stick by the founders who do right by us. At this point we backed around 1,400 founders in 600 companies. 200 of them had exits and half of them were successful. Many of the successful founders went on to build new companies. For instance, this is how we ended up investing an Archer (, an electric VTOL aircraft startup. We backed Brett Adcock and Adam Goldstein in their labor marketplace startup Vettery which was sold to Adecco. We were excited to back them in their new startup despite our lack of domain expertise in electric self-flying aircrafts.

In summary, while we do not have a set number of deals, stage or geography we intend to invest in every year, things play out such that we end up having an investment strategy that can be summarized as follows:

  • Pre-Seed / Seed / Series A focus
  • Set investments sizes per round that average to $400k
  • Marketplace focus (70% of the deals)
  • Global investors but with most of the deals in the US, followed by Western Europe, Brazil and India respectively
  • 100+ investments per year
  • Investment decision 1-2 weeks after the first meeting
  • We evaluate follow-ons on a standalone basis and follow-on on average in 24% of investments
  • We do not reserve funds for follow-ons. We invest from whatever fund we happen to be deploying at the time of the investment
  • We do not lead rounds
  • We do not join boards
  • We help portfolio companies fundraise

To give you a sense of scale, our latest $175M fund will probably have over 500 investments. What is interesting is that while we did not do any modeling or portfolio construction, this highly diversified strategy seems to be by far the most effective. There is a very thoughtful paper by Abe Othman, head of Data Science at AngelList that suggests that at seed the best strategy is to invest in every “credible” deal. It’s born out by Angelist’s performance analysis for LPs that clearly finds that “having investments in more companies tends to generate higher investment returns. On average, median returns per year increase 9.0 basis points and mean returns per year increase 6.9 basis points for each additional company that an LP is exposed to.”

Our returns lead credence to the theory. As of April 30th, 2020, we invested $284 million in 571 startups. We had 193 exits with a 62% realized IRR. I suspect that diversification works well for several reasons:

  • Venture returns follow a power law rather than a normal Gaussian distribution curve. It is essential to be in the companies that generate all the returns. Investing in more companies increases the probability that you hit the winners.
  • Investing in more companies increases your profile as an investor, which in turn improves your deal flow. This is further strengthened if you establish a brand as the must have investor for a given category as we have in marketplaces.
  • Evaluating more companies gives you more data to build pattern recognition to improve your investment criteria and thesis.

The beauty of our strategy is that it is organic and bottom’s up. We evolve it over time as we observe conditions evolving whether they at the macro level, the venture capital industry or in technology specifically. For instance, a decade ago, we used to invest a lot in Turkey and Russia. After Putin invaded Georgia and annexed Crimea, and after Erdogan was elected in Turkey, we stopped investing in both countries as we correctly surmised that venture capital and exits would dry up. Likewise, before February 2018, we did not invest in pre-seed, often pre-launch companies. However, venture capital firms kept increasing their fund sizes. To deploy larger amounts of capital, those funds moved to later stages pushing up valuations at those stages as more capital was chasing the same number of deals. We felt it made sense to be contrarian and to move to earlier stages where capital was drying up. After seeing an increasing number of B2B marketplaces where the marketplace picked the supplier for the demand side, we evolved our marketplace investment thesis.

It is going to be interesting how our strategy is going to evolve in the coming years. For instance, I can imagine a future where we differentiate our early stage strategy from our later stage strategy and create separate funds for those opportunities. Time will tell, all I know is that it is going to be fun!

BOLD Series: The Future of Marketplaces

I was invited to share my vision on the future of marketplaces for the BOLD Awards.

I cover:

  • Why we are still at the beginning of the technology revolution
  • Why marketplaces are amazing
  • Why we are still at the beginning of the marketplace revolution
  • Our 3 online marketplace theses
  • Trends in food
  • Trends in real estate
  • Trends in cars
  • Trends in labor marketplaces
  • Trends in construction and home services
  • Trends in online lending
  • Q&A

20 Minutes from the Future

I had an interesting conversation with Andrea Dusi. We discussed:
• The role of startups during the pandemic.
• Why don’t we invest much in Italy and in general in smaller markets?
• What can governments do to foster a successful startup ecosystem?
• Why now is an amazing time to start a startup?
• What are the most promising sectors to create a startup now?
• The future of food
• Why FJ Labs’ IRR is so high?
• Prospects for climate tech
• How to reform education to foster entrepreneurship?

The Genesis of FJ Labs

I was about to start a series of posts on marketplaces covering how FJ Labs gets its deal flow, how we evaluate startups and our current investment thesis when I realized I had to start with the genesis of FJ Labs and our investment philosophy as they are intricately related.

I have always been both an entrepreneur and an angel investor.

FJ Labs is a hybrid venture fund and startup studio that allows me to scratch both my entrepreneurial and investing itches. It is not a given that entrepreneurs should also be investors, especially at the same time. Somehow that has always been true for me. It started back in 1998 when I built my first venture backed startup. By virtue of being a visible consumer Internet CEO, other entrepreneurs started approaching me for advice and investment.

I wondered if it would be distracting from my core mission to be investing in other startups, but I realized I was meeting many entrepreneurs to try to help them anyway and this only aligned me with them. I was literally putting my money were my mouth was. Besides, I loved hearing their ideas and struggles while trying to be helpful. If anything, I felt it made me a better entrepreneur as I kept my fingers on the pulse of the market and understood the latest trends and approaches.

Given that I was pressed for time and had little capital and experience, I used the same selection criteria I used at that time for myself to evaluate their businesses simply layering on my perspective on the entrepreneur and the deal terms.

Early angel investing

In the 1998-2000 period, I invested in 7 startups. One failed after a few months. In 2001, if you asked me how the portfolio was doing, I would have told you all were bound to fail. I was shocked years later to be contacted by an investment banker asking me for my banking information because one of them was going public. Eventually I had successful exits on 6 out of the original 7! I had gotten lucky thanks to the grit, tenacity and staying power of this original batch of founders.

I did not invest again until 2004. My original startup had not been the success I expected it to be and tech entered a nuclear winter where no capital was available. I had to reserve what little capital I had for my second startup, Zingy. I started investing again after I successfully sold Zingy in 2004, especially as I was itching to get back to marketplaces.

Unique angel investing approach

As OLX started growing in traction and visibility, other entrepreneurs started once again reaching out for investment. Given how busy I was running OLX, which at that time had hundreds of employees, and hundreds of millions of unique visitors a month in 30 countries, I decided to focus on marketplaces as I felt I could evaluate them rapidly. I came up with a strategy to evaluate startups based on a one-hour call and started investing.

I opted for radical transparency. On the 1-hour call or meeting I would tell the entrepreneurs if I was investing and why. In 97% of the cases I passed on the opportunity and would tell them what would need to improve to change my mind.

As an entrepreneur I hated that VCs never told me where I stood. Many times, they knew they did not want to invest, but did not want to say so to preserve optionality. I also hated how they dragged out the investment decision process both to see how we performed during that time and to get consensus within their firm. I also abhorred how they would take weeks to reply to emails if they deigned replying.

I am sure this frustration is related to my personality type. I hate indecisiveness. It drives me crazy when people hedge when they talk. I love clarity of purpose and thought. If an entrepreneur and idea resonate, I owe it to them to invest and not drag the process.  

In that period, 2004-2012, I did not have an investment thesis. I did no outbound. I did not have a specific number of investments I wanted to make. I merely reviewed all the inbound deals and invested in whatever struck my fancy. On average I tried to invest $100k in each startup, but I did not have a minimum ownership threshold. If less was available, I invested less. It led to a large variation in the number of investments as some years I was more inspired than others, but in general I was investing in 10-25 startups per year so rapidly became known as a “super-angel.”

It is funny that most people saw me as an investor rather than an entrepreneur because my name would more often be associated in the press and Techcrunch with investments I made rather than the company I was running.

My hatred of administrative work

In the process of making the investments I came to realize I loved talking to the entrepreneurs and talking through their startups but hated all the administrative work around it. From lack of interest and time, I decided not to review any of the legal docs ever sent to me. I had my assistant auto-sign everything automatically for my first 100 investments. This includes auto signing all subsequent docs entrepreneurs wanted signed without ever reading any of them. It goes to show that the vast majority of people are honest as it worked out great in the end.

As you can imagine I also did no real due diligence beyond my evaluation of the entrepreneur and their business during the 1-hour conversation. To be honest I never really understood why due diligence took so long. Most of the companies were so young there was not much to diligence and I was not about to ask for bank records or access to their Stripe account to verify that the gross sales numbers they were telling me were real and not fabricated. I took the entrepreneurs’ word for it.

Likewise, I realized that reference checks on founders often gave the wrong signal. Some of the absolute best entrepreneurs had horrible references from their former employers because they were bad employees. They were independent thinkers who talked back and often were working on heir future startups on the job. I stopped doing reference checks. I am not sure doing them would have allowed me to catch the one case of misuse of funds we had in the 600 investments we made to date, but it would certainly have slowed down our investment process and led to worse investment decisions.

Getting a partner

As you can imagine my hatred for all thing administrative and bureaucratic extend to every element of my life including my entrepreneurship side. It would have served me well to have a partner during my first startup. I hated dealing with lawyers, stock purchase agreements, legal agreements, formal employee reviews and the like. When I decided to start OLX, I partnered with Alec Oxenford. I met Alec in 1999, while I was running my first venture backed startup. He was introduced to me by a former McKinsey colleague who told me of this amazing team of entrepreneurs from Harvard and Stanford who were thinking of launching a startup in Latin America.

I met Alec and his many cofounders in June, confirmed their belief they should launch an eBay-like site in Latin America and agreed to provide them with the technology and business plan to do so. On a handshake deal we launched them out of our servers in Paris before helping them transition to their own platform.

I reconnected with him after he sold Deremate. On paper Alec and I looked similar as we were both ivy-educated former management consultants who had been CEO of online auction sites. We never discussed responsibility splits but found a balanced partnership. We both had an equal say in strategic decisions. I ran product while he ran operations. It just worked.

While I was working with Alec on OLX, he re-introduced me to one of his Deremate co-founders, Jose Marin. I must admit I did not really remember Jose. He had been one of many co-founders at Deremate. We only interacted a few times in the decade since the original 1999 meeting. Given his look and accent, I just had the impression he was a Latin playboy without much substance.

On the behest of Alec, I started spending more time with Jose and realized I was unfairly prejudiced. There was depth and substance behind the look. It turns out Jose was a successful angel investor and entrepreneur in his own right. He had specific expertise in real estate and travel was building a successful startup studio in Brazil.

As he was busy building his startup studio, he was happy to partner on angel investing. For the sake of scale and efficiency, we decided to pool our activities starting in 2009. It helped me significantly improve my deal flow while adding expertise in key verticals. As an added bonus, it turns out he was a super detail oriented master negotiator who took real pleasure in making sure all the i’s were dotted and the t’s crossed and that we had important investor rights: preemptive rights, information rights, tag along etc. 

The genesis of FJ Labs

After I left OLX in December 2012, it was not obvious we were going to create FJ Labs. As you can read in step 3 of my framework for making important decisions, I tried many things. I aspired to run Craigslist. I tried to buy eBay Classifieds. I applied to run a special economic zone in Cuba. I tried many other ideas. They all failed, mostly because they required other people’s approval. By contrast it took no one’s permission to invest or start new startups. We kept doing it while I was pursuing other ideas and it just kept scaling.

As our profile as investors grew, our deal flow kept increasing and the number of investments we made kept increasing. As we yearned to remain entrepreneurs, we also started building 1 or 2 new startups every year. While we scaled both our startup studio operations and our angel investing activities, it was still not a given that it required the creation of a venture fund. We do not lead rounds as we do not want to compete with traditional VCs. Instead we want them to see us as valuable thought partners and a source of differentiated deal flow. This puts a rather low maximum check size we can invest in any given round. 

After back testing our model, it looked like we could deploy $100M per year without changing our strategy. Given that we were not successful enough to deploy anywhere near that amount of money, we considered raising external capital. Despite the performance we had to date with 62% realized IRR on our exited investments, we failed to raise capital from traditional institutional investors who were horrified by our investing approach. I must admit I hated the process of trying to fund raise for FJ Labs. It was slow, repetitive, and boring. It also made me realize I would hate the reporting and bureaucratic processes that would come along with having traditional external investors.

Our first fund with external capital

We considered dropping the idea of having external investors altogether when we were approached by Telenor, a Norwegian telecom operator with a large presence in South East Asia and 174 million subscribers. To my great chagrin, Telenor had funded Schibsted in its war with OLX which is ultimately what led me to sell OLX to Naspers. That said, OLX’s merger with Schibsted in Brazil and other markets was very profitable for Telenor and gave them direct ownership of several classified assets in South East Asia. Given Telenor’s digital and marketplace ambitions, they reached out to us to see if they could invest in us in order to have a looking glass into the future by having exposure to US tech trends to either defend against them or bring them to their markets.

It was a win-win partnership. They got visibility into marketplace trends while making attractive returns, and we got more investing firepower and a small fee base to start building a real team. FJ Labs was formally born in January 2016 with a $50M investment from Telenor complementing our personal capital and the small entrepreneur’s fund we run on Angelist.

As the relationship proved successful all around, we agreed to scale up the partnership and open it to other strategic investors and family offices. Our second institutional fund should close in the coming months with $175M of external capital.

Interestingly having external investors strengthened my relationship with Jose as I realized I would not have a fund without him. Auto-signing legal docs without reading them is fine when you are managing your own money but is not appropriate when you are the custodian of other people’s capital. He has worked hard to make sure we are both professional and reactive. Likewise, he enjoys the type of interpersonal relationships and socializing that I see as a burden.

This has allowed us to get FJ to where it is today. As of April 30th, 2020, we invested $284 million, of which $114 million was provided by Jose and I, in 571 startups. We had 193 exits with a 62% realized IRR. We started 13 companies and we are a team of 32.

We are still at the beginning of this journey and I cannot wait to see what comes next! 

Transcript of All Things Marketplaces

My conversation with Erik Torenberg was so rich that I decided to transcribe it for those who did not want to listen to a 75 minute long podcast. I will use this transcription as the starting point on a series of posts on marketplaces covering:

  • How FJ Labs gets its deal flow
  • How FJ Labs evaluates startups
  • FJ Labs’ current investment thesis

In the meantime here is the transcription.

Erik Torenberg:

Hey everybody. It’s Erik Torenberg, co-founder of Village Global, a network-driven venture firm. And this is Venture Stories, a podcast covering topics relating to tech and business with world leading experts. I’m here today with a very special guest and friend of the firm, Fabrice Grinda. Fabrice, welcome to the podcast.

Fabrice Grinda:

Thank you for having me.

Erik Torenberg:

Okay, Fabrice, you’re here to talk about marketplaces. You’ve been building and investing in marketplaces for over two decades now. Why don’t we start with sort of a backdrop and introduction? And I’ll start by asking you to sort of chronicle the evolution of marketplaces as you’ve seen it over the last couple decades. I know it’s a big question. You wrote a post about this in 2014. And, of course, even since then a lot has changed. But how has building and investing in marketplaces changed since you started doing it two decades ago?

Fabrice Grinda:

The first marketplace I came across was eBay and that was in the mid to late ’90s. It was love at first sight. As an economist by formation (it’s what I studied at Princeton), I loved the idea that you could use marketplaces to bring transparency and liquidity to fragmented and opaque markets. If you go to the garage sale across the street, you’re not going to find what you’re looking for. If you’re trying to sell something, it’s not likely you’re going to find a buyer. But if you create a national or international marketplace, transactions are way more likely to be successful. The marketplace unlocks a massive amount of liquidity.

That was the original marketplace, alongside Craigslist, but things have evolved dramatically. Especially in the last decade, there have been three major evolutions. The first evolutions that happened, which I described in the 2014 post, is the verticalization of marketplaces. People started realizing that on Craigslist or eBay, you could find a little bit of everything, but if you create a vertical-specific site that does the job better for that category, you’re going to have a much better experience.

The original example of that was StubHub. You could buy and sell tickets on eBay and Craigslist, but on StubHub you had the seating chart for the venues, integration with the e-ticket providers and verification of the authenticity of the tickets. It was a significantly better experience. The same was true for Airbnb. Subletting existed on Craigslist before Airbnb existed, but they didn’t have a calendar. They didn’t have payments. They didn’t have reviews. As a result, the user experience was really broken. It was full of fraud. Airbnb really expanded the category. On Craigslist it was sub $1 billion a year and now it’s tens of billions a year.

That verticalization has continued and it’s happened not just for products, but also for services. As mentioned eBay is being verticalized. You have a company like Reverb, a musical instrument marketplace, doing almost $1 billion a year in GMV (gross merchandise volume). They were acquired by Etsy last year. In services you have Thumbtack, Angies List or Home Advisor. They are being verticalized by companies like Block Renovation which created a much better experience for renovating your bathroom. You have companies like Upwork in the remote work category that allow you to hire remote workers for almost everything and anything that are being verticalized by companies like TopTal for programmers.

The definition I use for a horizontal marketplace is a multi-category marketplace that covers many different things. In the job space for instance Indeed or Linkedin would be horizontal sites. In products it would be eBay or Craigslist. In food, Uber Eats would be a horizontal player, given that they offer multiple types of cuisine. But even that is being verticalized. You have companies like Slice, a pizza food ordering app or Chowbus, in the Chinese food space that are doing very well.

What’s interesting is, if you ask me what is it that I believe today in 2020 that most VCs don’t believe, is that verticalization is only beginning. It’s in its infancy and it’s going to continue and the players in it are going to do well. Most investors think that these verticals are very niche. They can’t be very large from a market perspective but they are wrong. Pizza is a $43 billion a year market in the US, that’s more than enough.  Now, what else do VCs believe? Most of them are going to tell you, you have Uber Eats, Seamless, GrubHub, and DoorDash. It’s incredibly competitive. It doesn’t make sense to have a vertical. All of them are losing money, it’s a bloodbath; but that’s because they put themselves in the shoes of a consumer. If you put yourselves in the shoes of a Luigi, the pizzeria owner, you realize that his needs are not being met by the existing incumbents.

The way the pizza market is structured in the US, you have about a third that’s controlled by Domino’s, Pizza Hut, and Papa John’s. For them 85% of their orders come from online and they have big R&D budgets. But the 50 thousand independent pizzerias that are owned by the Luigis of the world, half of them don’t have a website. The vast majority don’t allow online ordering. So Slice creates their website, can pick up the phone, answer questions on Yelp and do all the support functions such that Luigi can focus on cooking pizzas. The future of work is one where people will do the job that are meant to be doing and everything else will be outsourced and done for them. Slice is a great illustration of both a vertical marketplace and the future of work. By doing so, they’ve created a business that now does hundreds of millions in sales.

In the same vein, we’re investors in a company called TCGplayer. It’s a Magic: The Gathering marketplace. When we invested many questioned how this could make sense. They felt the market was tiny. First of all, Magic: The Gathering is a lot bigger than you might think it is. What happened is that the founder owned a comic book store. And as an owner of a comic book store, he realized that the point of sales (POS) systems that were available didn’t manage all the different SKUs required for Magic as there are millions of SKUs.

He built his own and he uploaded all of his inventory. He considered building a SaaS business but charging $100 / month to all the comic book stores would have only been a small business. Instead he gave the software away for free and all the comic book stores started uploading their inventory. All of a sudden, he had all the inventory of all the comic book stores and he offered them to sell some of it on his marketplace in exchange for 10% if it sells. Low and behold, it’s nearing $100 million in sales.

These businesses may seem small. but If you provide an extraordinary user experience to at least one side of the marketplace – and ideally both – you can have much better economics and very low customer acquisition costs and end up dominating the category as you face little to no competition.

Slice doesn’t pay for the end-users who buy the pizza. They’re just existing customers who start  ordering online. You could be a large and massively profitable business this way. You are probably not going to build a $100-billion company, but you’re going to build extraordinary products with loyal, dedicated fan bases and amazing economics and you can usually expand from this dominant position into conjoint verticals addressing a larger TAM (total addressable market). That’s one big trend. Marketplaces have been verticalizing. They’re becoming ever more sophisticated and the user experience is ever-improving, which leads to the second big trend.

Managed marketplaces are all the rage. The issue is that the term has come to mean everything and anything. The type of managed marketplace place we love to invest in is one where the the marketplace picks the supplier for you. We call them marketplace pick models.

Imagine an old-school marketplace. I need a plumber. I go to Thumbtack and 300 of them apply. You need to sort through the plumbers. Or if I want to hire a PHP developer, I go to UpWork. Hundreds of them apply. I need to sort, review and select. From a marketplace design perspective, that methodology is called double commit. Both the supply side and the demand side need to interact with each other, pick one another, and agree on a transaction. It’s easy to have listing, but there’s a lot of friction in getting a transaction to happen. On Craigslist, you list an item. A hundred people contact you and then you need to meet in person, etc.

The marketplaces I love best these days are “marketplace pick” models, meaning the marketplace picks the supplier. The marketplace knows who has availability in your neighborhood, who would be the best match for you. Think of Uber: when you say you want to go from point A to point B, you don’t pick your driver. Uber picks the driver for you. It’s not the drivers who pick themselves. Uber sends a notification to a driver indicating this ride is available for them if they want it. It’s the marketplace that picks.

What do I believe that most VCs don’t believe? Most VCs believe the “marketplace pick” model is great for commodity-type jobs, like an Uber driver, but that this cannot work for high-skilled labor, like programmers.

I posit that this is not true. If a company has a selection process they use to select people, we can replicate it. In fact because we have more data and are doing a lot more recruiting in this specific vertical, we can do a much better job at it. For instance if a medium sized company needs to hire a SEO expert. It’s the type of hire they will only do once. However a company like Advisable will place many of them and will be in a better position to pick the right person for your needs than you are.

We’ve invested in many of these “marketplace pick” models. We’re investors in a company called Meero. It’s a photographer marketplace. Airbnb says, “I need a photographer at Erik’s place next Tuesday at 2 p.m. because he wants to list his place.” Meero picks the photographer.

Again, thinking about the future of work: what does a photographer want to do? He wants to take photos. What does he not want to do? Create a website, do marketing, find clients, do invoicing, do post-processing, editing, retouching, and sending the images. Meero will do all that for the photographer. Even though they have a 50% take rate, the photographer is happy as he makes more money than he would otherwise doing only the part he loves doing, Airbnb is happy, and Meero is, of course, very happy.

The same is true of a company like is a transcription marketplace. To transcribe our conversation today, you send the recording via their app and pay $1.25 per minute. You don’t pick the transcriber, picks the transcriber, then sends you the text. They take a high take rate, but because they provide tools to the transcribers, everyone’s happy. It also allows the transcribers to do their job better.

In this “marketplace pick” model, the marketplace picks everything. They pick your general contractor, your plumber, your Uber driver. This is a massive trend that we’re following and investing in. We’re still at the very beginning of it.

What people objected to in marketplaces was the amount of work it took. If you go on Amazon and you’re buying a product, everything works very beautifully, seamlessly in one click. Though, in many cases, Amazon is also a marketplace. So, if you do enough of the work and you can hide it effectively, you can create experiences for end users where it looks as though the marketplace is the provider of the service, even though it actually is a marketplace model. This way, you can build a company a lot faster.

The key success factor of these marketplaces is rather different than the key success factor in normal marketplaces: you need to highly curate your supply because you are picking the supply on behalf of the demand. You need to pick the very best providers and match effectively. That’s key. If you do it well, you’re doing a good job.

The third big trend, which is only emerging over the last four to five years, is B2B marketplaces. The internet took the consumer world by storm and we ended up having these extraordinary experiences and extraordinary sites, like Instagram, Google, Airbnb or Uber. When you look at the way most companies still transact, especially the large-scale companies, it’s still a lot of Rolodex and Excel spreadsheets and relationships. There’s no online pricing or online ordering. Nothing’s been automated.

We’ve been investing in B2B marketplaces that are either in the industry itself, for instance Knowde – a petrochemicals marketplace – or we’re investing in the supply chain of an industry. For instance, we’re investors in RigUp – an oil labor and worker marketplace where oil services companies and oil companies can hire contract laborers, like welders. In a way RigUp is the trifecta: it’s a vertical job marketplace that is marketplace pick and B2B. It’s all three of our current theses.

We’re still at the very beginning of these three trends. Last year, we invested in 124 startups and the vast majority of them were marketplaces. Many people thought, “marketplaces are all done”. It’s completely wrong. We are at the very beginning of the internet revolution. Only 15% of the commerce is online, the largest components of GDP have not been digitized at all: healthcare, education, public services, construction. In all of these marketplaces have a primordial role to play.  

I published on my blog an article in 2019 on the latest trends in marketplaces. You can watch the keynote or check out the slides there. Not only do I present these three theses, I also go through what’s going on in food, cars, real estate, labor, services and lending marketplaces.

Erik Torenberg:

Totally. It’s fantastic post. I will link that talk in the show notes.

There’s a lot to get into. To zoom out on and close the loop on  the historical perspective, you had a post where you said the different phases were: horizontal, then we went to vertical, then vertical transactions, then end-to-end vertical transactional.

Andressen Horowitz has a post where it says it went from listing era, to the unbundled Craigslist era, to the Uber for X era, to the managed marketplace era, to whatever’s next. Do you have commentary on either of those or how that’s evolved?

Fabrice Grinda:

Yes, the horizontals went from listing-based, where you put a listing on or Craigslist. Then transactional, where you can buy online – that would’ve been StubHub, eBay, Airbnb, to the verticals of those, then to the managed marketplaces, which meant they intermediated the transaction in some way, shape, or form.

But to me, they’re subcategories of the three theses that I’m investing in. It’s a correct historical analysis of how marketplaces evolved. Today, you have elements of all of these in the three theses that I’m following. When I’m describing marketplaces becoming marketplace pick, it means they’re mostly going listing-based to ones where the marketplace is picking the supply.

In fact, I could argue that there was an intermediate step between listing-based to demand pick. From the buyer picking his supplier to, now, the marketplace picking the supplier for you. I think all of these are correct but where are we today?

I think the verticalization is continuing and accelerating, including things that are considered niche, a la the Magic: The Gathering. The listing-based ones will have to evolve if they’re going to survive in a world of higher-quality experience marketplace pick verticals, but they are not going to disappear.

The reason they’re not going to disappear completely is they have a CAC (customer acquisition cost) of zero. Craigslist does not pay to acquire new customers, they come organically. For your marketplace to work, you need your unit economics to work. This means you need to recoup your fully-loaded CAC on a net contribution margin basis after 6 months and ideally triple your CAC after 18 months.

There are some categories where the average order value is so low and where the recurrence of transactions is so low that it probably does not make sense to have these beautiful, extraordinary, vertical marketplaces because you cannot make the economics work. It’s why Shyp didn’t do well.

For instance, a fire alarm system installation marketplace doesn’t make sense because the average order is low. It’s pretty expensive to acquire this supply and the demand, and you only need the installation once.

Horizontals are not going to disappear, but the highest-value categories where great experiences can be created will be verticalized. The market is evolving. If you look at Craigslist traffic, their traffic is down 30 – 40% over the last four to five years, though it’s partly because they’ve had to close down a number of their Personals categories.

Erik Torenberg:

You’re big on verticalization. Does that mean you’re dubious on building horizontal marketplaces today? Is it a matter of timing or are you just, in general, more excited about verticalization? Would you have passed on Thumbtack? Are you dubious on these types of horizontal businesses? Is it a timing thing or is it a structure thing?

Fabrice Grinda:

It’s more a timing thing. When Thumbtack was created, there was no horizontal to do this. It made sense. If you can win the horizontal, you create more value than if you win the vertical. So if you have to choose, you want to build the general horizontal marketplace. You get more users, you have ultimately a lower CAC. That’s a total natural monopoly, but once you have an incumbent that has liquidity and they have scale and network effects, it’s hard to break in. OfferUp and LetGo have been trying to break in the Craigslist business with that much success as might’ve been expected, partly because they’re competing against each other instead of being one company, but also because, despite its horrible user experience, Craigslist works. They have liquidity. At the end of the day, in these businesses, user experience is less important than liquidity. Because Craigslist has liquidity, people still use them despite the fact they don’t moderate content.

If the option is there, I want to build, own, or invest in a horizontal marketplace. That’s the biggest outcome. Also, if you’re a really smart player as a horizontal, you then verticalize.

OLX, which was the company I built, has five thousand employees and 350 million unique visitors a month in 30 countries. It’s really Craigslist 3.0 for the rest of the world. It’s what Craigslist would be if they were mobile, moderated all their content, didn’t have any personals, murderers, prostitution, spam, and scam, and actually cared about the outcomes for the users.

OLX has 350 million uniques a month and that’s extraordinary. The strategy there was: win the horizontal C2C (consumer to consumer) used goods transactions because people transact regularly and keep coming back to the site. Once we won that, we then launched C2C cars, which allowed us to launch B2C cars and win that category. Then we launched C2C real estate, then we launched B2C  real estate. Often we also launched either services or jobs.

Now, we didn’t win everywhere in every country. In countries like Russia, we ended up winning every vertical in addition to the horizontal. You start by horizontal then you use it as a launching pad because your cost structure or customer acquisition cost is much lower than any else’s. Since you’re in a category where people are using you every month, you can launch the verticals if you do a really good job.

In the US specifically, we’ve had two players that have been largely incompetent. You’ve got Craigslist, which has not improved their UX UI, has not verticalized, has not created better experiences. And eBay, which has been ineffectively managed because they’ve been trying to be an Amazon competitor even though everyone in the world knows they’re not going to beat Amazon. And yet they’re investing all this money in selling you goods. 80% of goods on eBay these days are new. That makes no sense. Sure, they offer long-tail, Chinese goods, that are somewhat differentiated from Amazon. But they strayed away from their original core and never verticalized properly.

In other countries around the world, the horizontals have totally gone vertical. The verticals are easier to build, but the network effects are not as strong, especially in the marketplace pick model, you have logarithmic network effects.

Let’s say you are calling an Uber in a given city and your wait time is 10 minutes. If you increase the supply enough that your wait time is four minutes, that’s a massive increase in value. But increasing supply more to go from a four-minute wait time to a three-minute wait time is not that much more valuable. And because you don’t need that many suppliers to cover any given market, the barrier to entry is somewhat lower.

Whereas in classifieds or auctions, it’s a total natural monopoly. You have one player that wins and has all the liquidity. It’s also relatively true in the verticals that are not marketplace pick, but it’s less true in these marketplace pick models.

To summarize: if I could own the horizontal, I would own the horizontal and then I would verticalize. I would rather be HomeAdvisor than Block Renovation. I would rather be eBay than Reverb. But, then you should be doing a good job at verticalizing, which these incumbents have not done. That said, I don’t see any obvious horizontals that I would launch now.

I was involved with a company that ultimately became LetGo. We tried to attack Craigslist with a lot of money and a much better product at every level. It has done well, but it’s not disrupting Craigslist. It has not had the outcome that we had expected when we launched.

Erik Torenberg:

Yeah. Do you see LinkedIn similar to Craigslist? I guess it just has such a first mover advantage.

Fabrice Grinda:

Absolutely. LinkedIn is a marketplace for jobs, essentially, and it’s horizontal. It’s interesting because it got there indirectly. It built a social network for business, that then became a job site. And being the repository of people’s profiles actually allowed them to become that.

Clearly, there’s a trend for job sites to verticalize. We’re seeing a lot of sites going after hiring developers, like Hired and Vettery. We’re seeing a lot of sites, especially in the staffing categories, that are going after the verticals. We’re in Trusted Health, a nursing marketplace. Of course, we’re in RigUp, the oil worker marketplace.

Staffing is unique for a variety of reasons, but it’s only a small percentage of overall employment in the US, at around 6%. Outside of staffing, job sites have not been great businesses. And obviously, you’re going to tell me, “Wait a minute, I’ve looked at the or Zip Recruiter’s P&L, and they’re doing really well.” The thing is, they don’t seem to have network effects because a business that has network effects is one where, over time, the more users you have, the more it attracts other users and your customer acquisition costs go down. But the problem with job sites is that, if they do their job well, they find you a job. And so you lose you as a customer and you need to reacquire you next time you are looking for a job.

Often, job sites look like outsourced marketing companies, meaning the large employer like Walmart or a small employer like Luigi’s Pizzeria could put their own ads on Google, Facebook, etc to attract candidates. However, they are no very good at doing this. The job sites do this better for them, but end up merely being arbitrage business. They are simply buying ads more effectively than their clients would and are reselling them the candidates at slightly higher prices. These businesses are good, but they’re not great. They don’t have amazing networks effects.

So, most of them have not built a LinkedIn. LinkedIn is great because they have true network effects. The only job site that really has network effects and is disproving my assertion that most job sites are actually outsourced marketing companies is RigUp. RigUp has become the defacto standard in oil. If you are in that industry, this is where your profile lives. It’s not on LinkedIn. This is where people look at your reviews, your experience, etc. It is doable, but it requires real deep sector expertise and in a category that’s large enough where it makes sense. Rigup is a great exemple of how to successfully attack and verticalize Linkedin.

Erik Torenberg:

If the idea is that every horizontal company should also then verticalize once they dominate, is it similar that every vertical company, once they own the verticals, should try to horizontalize?

Fabrice Grinda:

No, but they should go to adjacent verticals. TCGplayer – the Magic: The Gathering marketplace – is now in Pokemon. Pokemon, is now 30% of their GMV. Reverb started with guitars and later became music instruments writ large. In fact, Etsy bought Reverb, to enter another vertical. So I would say, go into adjacent verticals to increase TAM, but don’t go horizontal. That’s a recipe for disaster and losing your identity.

Erik Torenberg:

Totally. And so if the “why now?” for going vertical is that there are already a bunch of big horizontal incumbents, what’s the “why now?” for the marketplace pick strategy or the B2b approach? Why wasn’t the “why now?” in 2014 or in 2024 or 2025?

Fabrice Grinda:

In order to do marketplace pick, you need to have a matching algorithm that’s really good. You need AI to be at a point where you can actually replicate the recruiting methods of different verticals.

B2B should have happened 10 years ago, it’s just that businesses are conservative and move extremely slowly. But the “why now?” is, it’s a massive comparative advantage if you‘ve digitized procurement. If you digitize your online sales, your supply chain and your competitors have not, you can extract efficiency. You can source lower costs, and you now have the examples of it having happened in the consumer world.

Of course, it’s harder because you need to create a behavior change. And so the people, the type of entrepreneurs that succeed in these B2B marketplaces are people that come from the industry, but want to change it. They can get buy-in if they are connected well.

It’s less likely to be the 25-year-old Stanford grad who decides he wants to build a dump truck driver marketplace. It’s more likely someone who actually came from that industry.  And, we are, believe it or not, investors in a dump truck driver marketplace.  Until I spoke to the founder, I didn’t even know this market existed. It’s a $37 billion a year market!

The next “why now” is that many are mom-and-pop, family-owned businesses. They used to be owned by boomers, who are not very tech literate. But as these companies are now being handed over to the next generation – the millennials – they are completely tech-savvy. The idea that they’re going to be running a construction firm without having online ordering of underlying items, without having online visibility into project management, etc, is nonsencical. They’re tech-savvy and digital natives and they want to bring that digitalization to their companies.

This is true, whether you’re a millennial inheriting or coming into the family business, or whether you’re the next generation of leaders in the corporate world coming in. The number of CEOs in their 60’s, 70’s, and 80’s, who are still not dealing with email and who have a secretary bring their email to them and are not super tech-savvy is mind-bogglingly large. But as the leaders who are in their 30’s, 40’s or 50s are coming into leadership positions of larger companies, I think they’re absolutely going to start digitizing their companies. It’s astound how little has happened to date.

Erik Torenberg:

Totally. You’re a thesis-driven investor. And so what types of marketplace businesses are you not interested in looking at or not interested in investing in, even within your thesis? Even within the ones that are B2B marketplace vertical and ones outside that. I presume you’re doing some consumer marketplaces still, correct?

Fabrice Grinda:

Absolutely, we didn’t do TCGplayer that long ago. Three years ago, I talked to them for the first time and they were vertical, but they had no real tech. I said “great, but I don’t see a moat.” And to his credit, that founder went in, spent all his money, built an amazing product, and basically locked up the supply. Then he convinced me to invest. We still do a fair amount of consumer because I still think we can create amazing consumer experiences. For instance, in the vertical food space, we’re in Chowbus, a Chinese food ordering app and they’re doing really well.

Erik Torenberg:

What makes something that you would not invest in?

Fabrice Grinda:

To evaluate companies, we have four criteria. 

These four criteria are:

  • Do we like the team?
  • Do we like the business?
  • Do we like the deal terms?
  • Does it meet our investment thesis?

The first three need to be collectively true. If any of them is not true, we’re not going to do it. If you have an amazing business and amazing team, but the valuation is too high, we’re not going to do it. And if the team is amazing, the valuation is reasonable, but we don’t like the business, we’re not going to do it.

We are a bit less strict with the fourth criteria of meeting our thesis. 70% of what we do is thesis-driven, 30% is other things that we think are cool. That obviously evolves, over time. For instance there was a period where we were doing D2C brands. Also, if you are a founder who has been successful for us in the past, we will back you no matter what you do. Given that we invested in almost 600 companies and had 200 exits, many of these founders are at it again. We back them no matter what, and that leads to a number of investments outside of our thesis.

Now, the three evaluation criteria.

So one, do we like the team? Now, every VC in the world will tell you, “I invest in extraordinary talent and amazing teams.” The thing is, what does that mean? What’s an amazing founder? For us, it’s really someone who exhibits three traits. One, someone who’s an amazing storyteller. Storytelling skills are absolutely key because if you can actually weave a super compelling story, you’re going to attract more capital at a higher valuation. You’re going to get more PR and more business partnerships and you’re going to attract better talent to your company. But, that’s not enough because if that’s all you have, you may raise a lot of capital, but you many not build a very profitable, successful business.

Number two, we want people that are numbers-driven and who are quantitative. You’d be surprised that the Venn diagram of people that are numbers-driven and also great storytellers is actually rather small. There are amazing, numbers-driven people who understand their unit economics extremely well, but can’t tell a story, so they can’t raise money. And we really want both of those to be true.

And then three, we want to back people who have demonstrated grit and tenacity in their background. In the course of my one-hour conversation with a founder, I’m pushing really hard to see that they can actually hold their own and are willing to say that they don’t know as opposed to crumble. If you crumble, you’re not ready for the difficulties you’re going to face as a founder. Me questioning your assumptions is nothing relative to the difficulties you’re going to face.

So that’s one. Number two, do we like the business? Now, do we like the business has a number of variables. What is your total addressable market size? What is the business model? But there is one thing we care above all else: what are your unit economics?

For us, good unit economics are a business where you (a) recoup your fully-loaded CAC on a net contribution margin basis in the first six months of the business and (b) 3x your CAC after 18 months. Ideally, you don’t know what your LTV:CAC ratio is because you have negative churn. So maybe after 18 months, you’ve lost 50% of the customers, but the remaining 50% are buying more, and more, such that maybe your LTV:CAC is 10:1 or 20:1 .

We’re seed and pre-seed investors for the most part. We do every stage, but we’re 65% seed/pre-seed, 25% A/B, and 10% late stage. As a result, most of our companies have not been live for that long and some are pre-launch. So if you’re pre-launch, I want you to be able to articulate what your theoretical unit economics are going to be, but not just based on putting your finger in the air and guessing. Instead, you’ve done unit testing on a limited marketing budget and the CPC was $1 and 10% of the people who came to the site signed up saying they were interested. That’s a $10 CAC and we think 10% of those will buy. It’ll be $100 customer acquisition cost.

On the flip side, we know that the industry average order value is $300 and, we’re taking 20% and on that 20% we have a 66% margin. So 20% of $300, is $60, and you have a 66% margin, so you’re making $40. And we know from the industry average that people are buying this four times a year. So you’re recouping the CAC after nine months. And again, you better be telling me industry averages. If you’re trying to pitch me that you’re going to be way above the average for whatever reason, I’m less likely to believe you.

Now, there’s another case where I’m willing to back you, even if the unit economics are not there, if you have a compelling reason as to why, with scale, you’re going to get there. So maybe you’re telling me, “Hey, I’m currently doing one delivery per hour and my delivery guy is costing me $15 bucks an hour. That said, with scale, I’m going to be able to deliver three times an hour and that’s very reasonable because of XYZ which shows that this is something I’m going to reach very easily with a little bit more scale. Then my delivery cost is $5 bucks per hour, at which point my unit economics work.”

So either unit economics are there already, unit economics are going to get there with scale, or they’re theoretical, but they theoretically make sense and you could argue them very well.

I’m very unit-economic driven. If you launch and you don’t have a business model, you don’t know how you’re going to monetize, I’m not going to fund you. If you launch and you may have massive GMV, massive traction, etc, but if you don’t know your unit economics and you don’t know when you’re going to monetize, I’m going to pass. I passed on many companies that ended up doing really, really well. It’s just that, when they came to see me, they didn’t have that figured out.

If you invest in things that don’t have business models, most of them will fail and it’s not the way I operate. To date, we made money in around half of our investments because we’ve been very disciplined both on that and on valuation, which brings me to point number three: we want the valuation to be reasonable.

Obviously, “reasonable” means I have a model in the back of my head of what is an appropriate level of valuation from an appropriate level of traction. Now, there’s massive variation in the numbers I’m about to give you because if you’re a second-time founder and you’ve done really well the first time, you’re going to command a higher valuation. If you are growing faster than average, you’re going to command a higher valuation.

These days, for the most part, we’re seeing if you’re pre-launch and you’re raising a $1 million pre-seed round, the average pre-launch valuation is going to be $4-5 million for a first-time founder.

If you’re post-launch and you’re raising your seed round, you are typically doing $150K a month in GMV, for a business with a 15% take rate, and you raise $3M at a $8M pre money valuation. And with that, I expect you to get to $650k GMV in the next 18 months.

Then you’re going to raise your Series A and you’re going to raise $7M at $25M post. And with that, you get to $2.5M a month in GMV and you can raise your Series B at $20M on $50m, pre or $70M post.

This is the median. The standard deviation is really wide because for the best companies that grow faster than that, their A looks like a B. In that case, at your A you may raise at $30M.

There’s so much capital available in the later stages that if you are growing really quickly and have a compelling story, you might bypass some of these stages. However, this is the median for most deals, especially in the vertical marketplaces because many of the VCs don’t believe they can necessarily be big enough to warrant putting much capital into them. But all of these three things need to be true. You need to have a reasonable valuation, good unit economics, and an amazing team. And if that’s the case and you meet our thesis, we will invest.

We decide in, maximum, two one-hour meetings over the course of a week. If I am on the call, very often, after a one-hour meeting I will tell you on that very call whether we are investing and why.

Erik Torenberg:

And on the deal terms, is there any science behind those numbers? Or is it, “hey, that’s what market is and that’s what we think is fair?”

Fabrice Grinda:

We don’t lead deals. We just join other people’s term sheets. As a result we invest relatively small amounts to make sure other VCs don’t see us as competition. We want to be friendly with all VCs and share our deal flow with them at every stage. We make sure not to compete with them for allocation. As a result we have no minimum ownership requirements. We try to invest $250K at pre-seed, $500K at Seed, $800K at the Series A, $1M at the Series B, and $1.5 million at Series C. The deal terms I gave you are not our justification of why they should be that. It’s where the market is today in the categories that I’m investing in.

Erik Torenberg:

Yeah. And you mentioned the unit economics and you think a lot about that. How did you come to those sort of specific numbers in terms of your framework? And what mistakes do marketplace founders typically make, as it relates to unit economics?

Fabrice Grinda:

The mistake is easy. The mistake people make is they overvalue GMV growth, but they undervalue net revenue and unit economic growth. There are periods of time where there’s a lot of capital available and people value GMV growth. Uber would not have been funded had that not been true when they were fundraising and their unit economics were underwater for a long time.

But the problem is, if you’re growing negative unit economics, frankly, it’s easy. If I create a business where every time you give me a dollar, I give you two dollars, I can create a very big business very rapidly. But that’s never going to be profitable. So you need to really make sure that you have customer acquisition channels that are effective, scalable and profitable. Then you can, ultimately, at scale, turn this into a very profitable business.

Many of the companies we pass on, it’s a unit economic problem. The unit economics are too marginal and I don’t see how they get there, even at scale. Scale just makes the problem bigger. So the mistakes people make, they try to grow with bad unit economics too quickly. I’m a very big believer in nail it before you scale it. Launch a city, nail the city. Once the unit economics work for the city, you’ve created a playbook for owning a city, launch the second city. Make sure that your playbook works there, too, and keep going. Often, people think that it’s a land grab so they launch very quickly in many different places, but if you’re growing really quickly without a playbook, with negative unit economics, the only thing you’re doing is increasing burn. It doesn’t make sense.

Now, once you have a playbook that works, actually go for it. Put the pedal to the metal and go crush it, but I wouldn’t recommend doing that before you are ready otherwise you increase the risk of blowing up mid-air. If you have underwater unit economics, at some point, if market sentiment turns, you’re not going to be able to raise, especially if you raised too much money at too high a price. You’ve basically dug a grave for yourself. So that’s the big mistake that most people make that I would recommend avoiding.

Erik Torenberg:

And some people say it’s okay to have low margins, but what really is important is to focus on the payback period because you could make it up in different ways. Is that accurate?

Fabrice Grinda:

Well, your effective take rate and your effective margin are not that necessarily important. I do want you to be able to 3x your CAC in the future. But, yes. Payback matters a lot because I’m way more likely to believe that you’re going to have an LTV:CAC of 4:1 or 5:1 if you’re paying back in six months and then you’re doing 2x on your CAC in 12 months than if you tell me, “Well, I’m going to recoup my CAC in three years, but don’t worry. After that, it’s going to be a straight line to the moon and it’s going to be 100:1.” My belief of that is very low, but if you actually can recoup your CAC quickly and the channel you’re using is scalable, I definitely want to fund that. Then, I think there’s something there and we can grow.

As a VC, I like to fund growth. If you have a channel that works, with good economics, you nailed what you need to do operationally, and all you need is more gasoline to pour on the fire, that’s exactly what I want to invest in, regardless of stage. If you’re at seed, all you need to do is get to the numbers that get you to an A. So I want to fund you to go from that $150k to $650k / month in GMV. If you’re at A, I want to get you to your B. You need to get from $650k to $2.5M a month. And if you’re at B, then it’s different because you can create optionality. You can go for profitability or you can do a C to keep growing quickly depending on how big the market is and what makes the most sense for you.

Erik Torenberg:

Why is the six-month number important?

Fabrice Grinda:

The what number?

Erik Torenberg:

You said 3x CAC within six months. Is that what you said?

Fabrice Grinda:

No, no, no, no. That would be amazing, but that’s almost never the case. No, no. Recouping CAC in six months.

Erik Torenberg:

Oh, my mistake. My mistake.

Fabrice Grinda:

You recoup the CAC in six months, then you 3x the CAC in 18 months. In the B2B businesses, by the way, it’s a little bit different because sometimes they have a pretty long sales cycle and your salespeople cost a fair amount of money, but they churn very little. There, it’s okay if your time to recoup your CAC is longer, as long as your churn is low. If you can prove to me these people are almost never going to churn and, in fact, you have negative churn because you not only you lose almost no logos, your existing customers buy more and more, then I’m happy to have somewhat different numbers. So in the B2B businesses, I use slightly different metrics.

Erik Torenberg:

What did you believe that you no longer believe about D2C brands, in terms of when you were investing in it versus not anymore?

Fabrice Grinda:

Well, even in D2C brand investing, I was always numbers-driven. I always liked the subscription businesses better than the unique product sales. So I prefer a, say, contact lens subscription to buying a mattress. Mattresses have a high AOV (average order value) but you’re buying it once and it’s harder to make the economics work with a one-time purchase. That said, there are some things that are better suited for subscription than others. So if you’re telling me birth control, sure. Erectile dysfunction, not so sure. I mean, do you really need to take Viagra every day? I’m not so sure. Hair loss, absolutely as you need to use the product daily.

The problem is that the costs and complexity of launching D2C brands has gone down so much. In the grand scheme of things, that’s an amazing thing for consumers as you have more products available at a higher quality and lower price than ever before.

As an investor, though, often it becomes a race to the bottom on price and a race to the top of increasing CPCs on Google and Facebook and Instagram. Also there’s an amount of serendipity and luck in which brands hit. So it’s hard to make the economics work. And as a numbers-driven investor, there’s very few D2C brands that I think are compelling enough that they make sense to invest in because it’s just too easy to launch a competitor and too many of them get funded and the economics are not great.

Erik Torenberg:

Is it fair to say you only want to invest in businesses that have a high frequency or a high AOV?

Fabrice Grinda:

Absolutely. You need one of those two things otherwise the economics don’t work. If you have low frequency and low AOV, you’re just not going to be able to recoup your CAC and very few businesses can actually grow without paid acquisition.

Erik Torenberg:

Is this why a model like Homejoy didn’t work?

Fabrice Grinda:

Absolutely. Homejoy didn’t have enough recurrence and had a low AOV. There’s also another problem with Homejoy. So the ideal marketplace design is one where the demand side has a non-monogamous relationship with a supplier, meaning you have different suppliers every time you use them. For instance you have a different Uber driver every time you ride. Maybe the Uber driver would like to drive you everywhere, but the problem is that’s not what you want because he’s not going to be available when you want, at all times. However, if you have someone cleaning your house, it’s actually different because you need to trust them. If they do a good job, and it’s the same person coming over and over again, you’re more likely to disintermediate the marketplace and have a direct relationship, especially if the marketplace is taking 15% or 20%.

In the case of monogamous supplier relationships, the marketplaces need to have very specific and explicit value to avoid this disintermediation. In the end Homejoy didn’t provide enough value to either sides of their marketplace and had low AOV and too low recurrence.

Erik Torenberg:

How about when you look at Beepi and Sprig? Are there other companies who do those same things that will be successful, at some point? Or are those markets just too hard?

Fabrice Grinda:

Those are two different problems. Beepi was a prototypical example of founders thinking it was a land grab when it wasn’t. So they were like, “Oh, my god. There’s Carvana, Shift and Vroom. We need to go to all these different markets as soon as possible.”

Beepi was actually a really good business in the first three cities they were in; in LA and SF and Tucson or Houston. They were doing really well. They had good economics, but then they exploded their burn and grew too quickly out of control.

People loved the experience. There are a number of ways that the marketplace was designed that could have been better and more capital efficient, but it was a great product. The problem was a misreading of the tea leaves. I think they should have burnt a lot less money, grown slower, but kept nailing it and scaling it.

Also, they raised too much money at too high a price. They were priced for perfection. If you are an entrepreneur, especially a first-time entrepreneur, there’s a temptation to just raise the most money at the highest price possible. Let’s say a VC tells you, “Okay, I’ll give you $10M at $40M pre, $50M post,” and the other one will tell you, “I’ll give you $20M at $80M pre, $100M post.” And in both cases, it’s the same dilution. It’s 20% dilution. So you’re going to be like, “Wait a minute. I should always take the $20M at $80M pre, $100M post.” The thing is, if your intrensic value is a lot lower than that, you need to grow into the valuation. If for whatever reason, you do well, but you don’t actually grow into it, then you screw yourself. There are anti-dillution provisions in down rounds and most people prefer to avoid them so instead of a down round the company does not get funded and dies.

So Beepi was a combination of expanding too quickly with bad unit economics in many different cities, burning too much capital, and raising too much money at too high a price.

Sprig had a different problem. They created their own kitchens to deliver to you in 15 minutes, low-cost meals, which turns out to be an extremely expensive value prop. It’s capital intensive to build, you need quality control, you need your delivery infrastructure. At the same time Uber Eats started coming up and offering all these discounts in order to take share away from Seamless GrubHub and became a viable alternative even though the food was not delivered as quickly or as good.

Sprig, with that approach, was way too capital inefficient. And it’s not just Sprig that died. Maple died. But are there Sprig-like products that are going to exist in the future? Absolutely, with different startups taking care of different parts of the value chain. For instance, Travis’ CloudKitchens is creating dark kitchens on behalf of other companies. They aspire to become the Amazon Web Services (AWS) of the food space. Other companies are building brands on top of that infrastructure. We’re investors in a company called Mealco, which builds brands on top of dark kitchens. Because they use infrastructure built by third parties, they don’t need to spend hundreds of thousands of dollars per location to be able to launch, nor do you need to build their delivery network. They use Uber Eats, Doordash, Seamless Grubhub and the like.

In other words there will be brands created on dark kitchens in the future. It will be way more capital efficient and with better economics than existed or were possible in the Sprig days. Those brands will differentiate and compete on food quality, menu composition, etc. It’s going to accelerate the trend towards online food ordering.

The same thing is happening in the  catering space. We’re investors in a Canadian company called Platterz, which is absolutely crushing it. They’re an asset-light caterer. In food, we’ve probably made over 50 investments.

What I like about Platterz is that they select caterers in every major city and then provide a curated experience to their large corporates clients, like Netflix. They are asset light. Their job is doing the matching, making the menus, figuring out which caterer they are going to use on which day, negotiating volume discounts, making sure that the quality is great. They re really a marketplace. They are really an intermediary.

The early players were doing way too much of the work and were way too capital-intensive. It’s much better if you don’t actually need to be building any infrastructure and actually do the work yourself. Otherwise, you’re not really a marketplace. Sprig was not really a marketplace.

Erik Torenberg:

Totally. And do you prefer asset-light businesses as opposed to ones that are trying to own the entire value chain?

Fabrice Grinda:

You can own the entire value chain and yet be asset light, meaning you can provide an experience where it appears that you are the provider of the service to the end user, even though you’re a marketplace. And yes, I much prefer asset-light businesses.

Being asset heavy and intensive can be a massive barrier to entry. If you can raise hundreds of millions and other cannot, in a category that’s capital-intensive, that’s absolutely amazing. However, the problem is it’s a big if. You need the right entrepreneur, you need to be at the right point in time in the macroeconomic cycle, which may change for reasons out of your control. So on average, yes, I much prefer asset-light businesses, with the caveat that not everything can be built in an asset-light way.

Erik Torenberg:

Totally. And so let’s talk about building marketplace businesses. There’s the business model. There’s the chicken and the egg problem. There’s go to market. What are some core principles of building a marketplace business in 2020 that maybe have stayed the same or maybe are different from 2015 or 2010?

Fabrice Grinda:

99% of marketplaces are demand constrained. So you start with the supply. The reason is the suppliers are financially motivated to be on the platform. They want to sell and they want to make money. And so you can go to them and say, “Hey, I’m launching this new marketplace. Today, I don’t really have any volume, but I’m not going to charge you anything. You will only pay me if I successfully send you a lead or a client that pays you.” Most people will say yes to that. So make sure that you highly curate your suppliers. You pick the very best suppliers and get going with that.

Once you have that, find them a limited number of high-quality demand. Now, if you’re in a services or labor marketplace, you ideally want to represent, on an annual basis, 25% or more of the income of your marketplace. Do not go overboard if your supply. Because it’s easy to get supply, many marketplace founders have a tendency to say, “Okay, let’s get every single …” Let’s say you’re building a plumber marketplace. “Let’s get every single plumber in New York on the marketplace.” That’s a recipe for disaster because you’re not going to send them enough leads so they’re not going to be engaged and they’re going to churn out of your platform and they’re not going to respond to client inquiries.

Instead, in one neighborhood, in one zip code, get the very best plumber. Make sure he’s engaged. Make sure he has the app. Make sure that every time he has a request, he replies quickly. If you can send him a meaningful percentage of his business, he will be using you and be active. And once you’ve made that work, then you get another one, and another one, and another one. So you always want to match your supply and your demand very carefully. It’s very easy to overload your marketplace with too much supply that churns because they’re not engaged and they’re not active. And if they’re not active, your demand side when they come is not going to have a great experience.      

You want the first transactions to be amazing and to set the tone and standard for transactions going forward. Nail it before you scale it. Launch hyper-local in a zip code or neighborhood and take it from there.

Some marketplaces are innately national or global, in which case that’s fine especially since it’s cheaper to buy traffic and ads at a national level than a local level, but many businesses are local, in which case, really go hyper-local, like a neighborhood. Nail it there and then you go to the next neighborhood and then you go to the city. And then once you’ve gone to the city, you go to the next city.

Likewise it often makes sense to start in a very specific well defined sub-category of your vertical before expanding to adjacent categories. For instance for your plumber marketplace you might want to focus on one specific type of plumbing jobs that you can easily price and measure quality for.

Erik Torenberg:

Totally. In a business model, do you have any favorite approaches?

Fabrice Grinda:

Yes. My favorite approach these days is to charge a commission. On average, people take 15% from the supply side, but there is a lot of nuance. The reality is you should be taking the commission on the more inelastic part of the curve. You should test the elasticity of demand and elasticity of supply and then take your rake on the more inelastic curve and so you really need to check for price sensitivity. But on average, it’s going to be 15% from the supply side, maybe start at 10% and increase to 15% over time.

Another favorite trick of ours, especially these days, is to offer a B2B SaaS tool for free to lock in the supply or demand side. You offer for free a tool that others are charging for and build a marketplace on the back of it.

For example, we are investors in Fresha. Fresha is a MindBody competitor. MindBody is an OpenTable for hair salons, barbers, spas, etc. They charge the store a booking fee for each customer reservation, similar to the way OpenTable does it if you are getting a table at a restaurant. However, most small business owners hate being charged when their existing customers are making a booking.

So what Fresha decided to do is, “You know what? We’re going to give you the same product as MindBody, in fact, better and cloud-based, for free. We will not charge you for the customers that you send our way.” And instead, they said, “We will charge you when we send you new customers and we’re going to provide you a POS system that’s amazing and with lower billing fees than anyone else because we’ve aggregated the volume of tons of stores.” They’re now in the hundreds of millions of GMV per month using a non-traditional business model.

Giving away a free SaaS tool in order to lock in the supply is amazing. It’s what I described about TCGplayer for their Magic: The Gathering business. They created a POS system for Magic: The Gathering, which they gave away for free to all the comic book stores, which led them to have all the inventory. Slice has been doing the same in the pizza space. Most pizza owners want to cook pizza and not do all the administrative work around running their business. Slice does all the work for them. They pick up the phone, create their website, help with packaging. They become their phone, web and mobile pizza-ordering provider. As a result they have a CAC of zero on the demand side as they are converting existing clients rather than acquiring new ones. So, yes giving away a SaaS tool that is an amazing trick to grow a marketplace.

Erik Torenberg:

Totally. I want to run through a few different spaces and get your take. These are new marketplaces. So one is home school, two is childcare, three is therapists, and maybe even a non-trained therapists like a listener or a coach. And we’re talking about monogamous, non-monogamous. All of these have potential for people to find a person and go off platform, but how do you think about these spaces?

Fabrice Grinda:

We actually looked at a lot of these. We thought for a long time about creating a childcare marketplace. Ultimately, we couldn’t quite make the economics work. I think, if I recall correctly, you needed a premise where someone could take care of multiple kids for the economics to work.

We never got there. On the high end, there were people that would just hire the care directly or had it provided at work by their high end employers. On the low end, you’re competing with traditional daycare and there was no super effective way to create asset-light daycare or childcare. We’re like, “Okay, maybe we do it in people’s home, but for that we need to get them certified. How do we get them certified? Once they’re certified, do they need us?” And so we couldn’t quite crack the, how do we create a lock-in system and provide enough value after we certify them and find them clients.

So we couldn’t quite make that work. We looked at elderly care as well. We were investors in a few of them. They all died once the California legislation came into place. They worked from a business model perspective as 1099s, but they didn’t work as W2s and they all went under.

We also looked at different therapy marketplaces. For instance in physical therapy, there’s Kulagy out of LA which is doing reasonably well. For psychologists you have TalkSpace, which is absolutely crushing it, as far as I can tell, given that you can get a therapist remotely for cheaper and with more convenience than if you’re doing it in person. For therapy, the key success factor, if I recall correctly, is actually getting reimbursed by insurance or paid for by the employer. It’s too expensive at $100 or $200 per hour for many people to afford it out of pocket. You have to demonstrate the value of the therapy either to employers in terms of productivity or absenteeism or to insurance companies in terms of lower medical costs to get it paid for by one of them.

Note that we have not invested in any of the players in the category yet. We got close to a few, but we haven’t pulled the trigger. That said, I could see marketplaces working in the category if they find a way to get paid.

For homeschooling, it feels like a monogamous relationship on a go-forward basis to the extent you have one tutor for a child, especially at the early ages. If it’s multiple tutors, it’s less of an issue. I also don’t know how big the market is.

I suspect continuing education is the first place that’s going to be disrupted. It ridiculous that you finish college right after 22 or 23, and that’s it. You never get more education, even though the world is changing so quickly.

Having online courses in order to complement your learning makes a lot of sense. Imagine you were doing marketing at a startup in 2000, you were probably doing display ads. Later, you had to do search engine marketing (SEM) on Google. Then you had to do Facebook. Then you had to do Instagram. Then you had to do video ads on YouTube, etc. That world completely changed and is continuing to change and you need to keep updating your skillset. What Teachable, Udemy and Lynda are creating make tons of sense. It’s easier to disrupt than existing schooling.

Homeschooling is kind of a way of saying, “Okay, I’m not satisfied with the way the current K through 12 education system works. I’m going to create an alternative.” That said it has serious downsides. It’s harder for your kids to socialize. It’s also very expensive so I wonder how big that market ends up being. In order for the marketplace to work in that category, you probably want to provide a lot of value to the parent to make sure that the experiences that they’re getting from their tutor is on track with traditional schools. Despite the fact that it’s a monogamous relationship, if you can prove to the parent that the tutor is actually teaching in line with what colleges are going to be expecting in the future, then there is ongoing value, especially if you add other forms of tutoring on top. That said the monogamous relationship probably means your take rate has to be limited to something like 10%. You probably have to do payroll processing on behalf of the parent as well in order to increase your value. All things considered, I think it could work there, but I think I would have an issue with TAM. The real long-term solution, as a country, is to fix our K through 12 education.

Erik Torenberg:

Totally. And I’m curious what other spaces, you mentioned childcare earlier, that you’ve maybe considered incubating or got close to, but just couldn’t quite get there. I’m curious if you’ve looked at whether some of them might be in education or healthcare or public services, construction. What are some spaces you got excited about, but couldn’t quite pull the trigger on?

Fabrice Grinda:

As investors, we ended up investing a lot in the construction space because the user experience is really broken, both B2B and B2C. For instance we invested in a marketplace for architects to find contractors. We invested in Toolbx for contractors to order products to be delivered the same day. If you are at a construction site and run out of two by fours, Toolbx will go and get it for you. We’re in a dump truck driver marketplace. If you need to remove all the debris for your construction site Tread will take care of that for you. We are investors in Toolbox which connects skilled construction workers to construction projects.

Even though the experience has been broken for a long time, the “why now” is that many of the companies in the industry are family owned and are being taken over by millennials who expect to be able to transact online and are digitizing their businesses as a result.

Logistics has a similar profile and we have been very active in the category. We were early in Flexport, and we invested in Freightwalla, which is an Indian digital freight forwarder. We also invested in Leaf Logistics and many others.

We have been less active in education, healthcare, and public services. It’s harder to attack regulated markets because the regulator is very slow and they are not necessarily trying to optimize for either extraordinary outcomes or efficiency.

I liked disrupting education at the edges rather than the core because you don’t need to get approvals from the teachers’ unions or get public school to allocate budget to you.

The same applies to healthcare. We invested in Parsley Health. I like One Medical and Forward. More people are wearing Apple Watches and Fitbits, creating tons of data. However, it’s not currently being used by the medical profession. People are using the information themselves. This is especially true in our world of entrepreneurs and VC where everyone is bio-hacking. We’re all tracking our sleep, calories eaten, trying different diets and trying to improve our health outcomes.

I like this approach of doing it bottoms up, disrupting the category at the edges until the point that it has no choice but to affect the core. It doesn’t make sense that there’s so much pen and paper still in processes in medical offices. We consideredcreating a medical records encoding company to do it on behalf of doctors’ offices. Every time you go to the doctor’s it’s incredibly inefficient. You fill out all the same papers. They have multiple people at the front desk only to deal with all these papers, file insurance claims, send them to Medicaid. It’s ridiculous how inefficient the process is. Ultimately, we couldn’t quite get there for a variety of reasons, but I can’t wait for someone to digitize that.

Erik Torenberg:

Totally. Do you think it’s not too late to build a big company in the dating space? How have you reviewed that marketplace opportunity?

Fabrice Grinda:

I mentioned earlier I didn’t like job sites because their objective is to lose their clients by finding them great jobs, it’s the same reason I don’t love the dating sites because, if they do a good job, they find you a girlfriend or a boyfriend and then they lose you. And if you end up breaking up, they often have to reacquire you. I think the average lifespan of a user on a dating site is six months because they do a pretty good job. Around half of marriages come from people who met on online dating sites. As a result churn is very high. You can build a high revenue business and in the early days, you had interesting viral loops, but I don’t like the churn component of these business. I suspect the LTV:CAC is not great. You can build a billion-dollar business in the category, but I don’ think you can build a $20 billion business, let alone $100 billion business.

I like businesses where the better job the business does, the more their customers use it. For Uber, year one, you use it four times a month. Year two, you use it eight times a month. Year five, you use it 16 times a month, plus you started ordering on Uber Eats. So the revenue per user per month keeps going up, and up, and up. Who knows what the ultimate unit economics are? The problem with dating sites is, “Oh, I met someone I really liked and I got off the dating site.” Maybe you get back on it in the future, but the ultimate value they extract from you is pretty limited. It is a marketplace, but I don’t love it for kind of the same reason I don’t love the job sites.

BTW that’s why I like staffing businesses more than job sites. You keep finding people good jobs and then earning a percentage of their income on a go-forward basis as opposed to losing them forever or for multiple years, at least if you find them a full time job on a traditional job site.

Erik Torenberg:

In closing, what’s your request for job startups? Besides RigUp, are there verticals that you are excited about, despite your skepticism? Or what other spaces in B2B, or perhaps more broadly, that you want to invest in or see more entrepreneurs build it?

Fabrice Grinda:

For jobs, we’ve done a lot of the vertical staffing marketplaces. We’re in Trusted Health for nurses. In a way, Meero is a photographer marketplace. Frankly if you are building a marketplace, you should reach out to us. We are the premier global marketplace investors and it really doesn’t matter the industry, the category, or even the geography, though we do prefer typically larger markets.

Especially if you meet one of our theses, whether it’s a vertical or a marketplace pick model or a B2B marketplace, you should reach out. There is no specific industry or category we are looking at. We are business-model specific. If you are building a marketplace, we want to talk to you.

Erik Torenberg:

Awesome, that’s a great place to close. Fabrice, thank you so much for coming on the podcast. This has been a great episode. And for people who do want to talk to you, where should they reach out or where can they learn more about FJ Labs?

Fabrice Grinda:

We are very open and easy to find. You can find a lot of my thinking on my blog at You can see our portfolio at It’s probably easiest to reach out to me on Linkedin. Even if you send us a cold email, we will review it if you are building a marketplace.

Erik Torenberg:

Awesome. Fabrice, thank you so much for coming on the podcast. It’s been a great podcast.

Fabrice Grinda:

Thank you for having me.

COVID-19 – 11 Fabrice Grinda – Survivre : le seul KPI du moment

Discussion sympa avec Matthieu de Generation Do It Yourself sur COVID, l’economie, les startups

Pour ce 11ème épisode dédié aux entrepreneurs face à la crise du covid-19 (et deuxième réalisé en live sur LinkedIn), je reçois du très lourd. Fabrice Grinda c’est une légende de la tech, le plus gros business angel du monde selon Forbes, une tête tout droit sortie de Princeton avec les honneurs ! Un gros bonnet en somme. 

Fabrice, c’est aussi le mec qui a fondé OLX, le plus grand site web d’hébergement de petites annonces avant de se lancer dans FJ Labs, l’une des boîtes d’investissements les plus actives avec quelques 600 boîtes à son portefeuille dispersées aux quatre coins du globe, dont 500 où il est encore actif. 

Alors forcément, je me suis dit qu’il devait avoir un bon pouls de ce qui se passe dans cet univers. C’était clairement le cas. 

“Mon intuition c’est, qu’en septembre, la majorité des startups vont chercher des fonds. Donc, la concurrence sera accrue. Idéalement, il faudrait attendre septembre 2021 avant de chercher à lever de nouveau.”

Depuis son île des Caraïbes où il est confiné, Fabrice nous livre sa perception de la crise et nous raconte comment les entreprises de son portefeuille ont réagi. Il nous explique aussi comment, en tant qu’investisseur, il continue son activité, en faisant des bridges notamment. 

Dans cet épisode, Fabrice explique également comment survivre à cette période et vous livre ses conseils pour lever si vous êtes une entreprise ou, au contraire, pour investir. Il nous donne également les conseils exclusifs qu’il donne aux entrepreneurs qu’il côtoie en ce qui concerne la façon de continuer à fonctionner, sur la gratuité ou non des services et sur si c’est le bon moment pour se lancer. 

“Il faut absolument conserver les unités business et sales. Les grands groupes qui, en temps normal, refusent de parler aux startups viennent maintenant les chercher car elles sont désespérées à l’idée du faire du chiffre d’affaires. C’est le meilleur moment pour signer de nouveaux contrats.”

L’entrepreneur qui vit à New-York depuis plus de 20 ans raconte également comment la ville qui ne dort jamais s’est organisée et les mesures prises en place par le gouvernement de Trump, notamment pour soutenir l’économie. 

Enfin, Fabrice et moi, nous répondons aux questions que VOUS nous avez posées pendant le live. 

Un épisode passionnant, richissime en conseils et apprentissages ! 

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