42 Questions is a YouTube series exploring options for startups seeking venture capital funding. We interview leading active VCs from around the world, who share advice and shed light on their preferences and priorities — giving an inside track to startups who want to learn more about the personalities behind the funds.

Sean: We’re going to meet with Fabrice Grinda of FJ Labs, the famed angel investor, in an undisclosed location somewhere in the New York metropolitan area. Here we go.

Fabrice: Hi, welcome.

Sean: Hey, Fabrice, how are you? Great to see you.

Fabrice: Likewise.

Sean: Thanks for having us over for 42 Questions.

Fabrice: Thank you for coming.

Sean: Do you spend most of your time in New York? Do you spend most of your time traveling?

Fabrice: I spend four or five months here in New York, and then the rest is on the road for partly personal reasons. I love adventure travel, so last year, I went Heliskking in Greenland. I go ice climbing, I race cars, I go kite surfing in the Dominican Republic, and even though I don’t actually sound French, so my family is in Nice in the south of France, so I go see them reasonably regularly. And then I’m an investor in hundreds of startups around the world, so I also go see them and speak to conferences, et cetera.

Sean: And you also have FJ Labs here in New York as well, which is an office set up with some staff with those investments. Can you tell us a little bit about FJ Labs?

Fabrice: It’s a hybrid venture fund and startup studio where, every year, we invest in 50 to 100 startups, especially marketplace startups, kind of on a global level. It’s really 70% U.S., 70% percent seed, and 70% marketplaces.

Sean: As an investor, what is the scale of the businesses you’re looking to invest in very early? What sort of check sizes are you targeting?

Fabrice: So, these days, on average, we write $400K checks as seeds. Seeds these days means a $2-$3 million check that’s being raised. The company is typically live, and has been live for a little while, and is post revenue but low revenue. So, maybe $100K a month in GMV, or a $200K a month in GMV. They’re raising maybe two or three at eight pre or seven pre, and of that we will put $400K. Now, we’re rather different because we’re not leading, we’re not pricing, we’re not drawing boards, we don’t have minimum equity requirements, nor do we care if it’s a node, a safe or a price round.

If you don’t have a lead and we love you, we’ll help you find a lead. Part of the way we work is we actually work with and we share deal flow with many other VCs. Our real value add is threefold, because we think, you know, today we have made 400 investments. We’ve actually had over 110 exits, and on these 110 exits…

Sean: A hundred and ten exists.

Fabrice: Realize exits on foreign investments. And on these 110 exits, we’ve had a 67% net IRR, and an average 6X multiple including all the losses and all the zeros et cetera. And..

Sean: When you say net IRR, does that mean you’re managing other people’s money?

Fabrice: So, we started with almost only our own money. We do have two other little pools of capital. We’ve created a co-investment vehicle where when we put $100K, the co-investment vehicle equal puts $100K. And so, now, it’s not a traditional fund because there’s only one capital call upfront…and we don’t keep any money for follow-on apparatus, and whenever we run out of money, we just do the next one. In the last two years, we’ve done five funds. So we’re at fund five, but we already have about 40 million under management from these angels’ co-investment vehicle. Then we have one traditional fund with traditional LPs. One strategic LP, which is Telenor, a big Norwegian telco from Norway, is one of the largest mobile operators in the world. They operate classified marketplaces and businesses in Southeast Asia, and they kind of wanted a window in what was going on in the US, so they gave us a big pool of money to manage.

Whenever we write a check, it’s typically three vehicles. But last year, to give you a sense of scale, we deployed 52 million. Of that, 21 million was mostly my money. So, it’s still like 40% of our own capital, which in fact is kind of the only way this works, because if you’re really good at investing, you’re way better off having a one or two billion dollar fund if you want to make money from fees. If you’re investing from 100 million, I find, ultimately, you’re not really going to make that much money.

Sean: Even if you’re investing your own money.

Fabrice: It only works because we’re mostly investors, or largely investing our money.

 
Sean: You’re now starting to invest in other areas. You mentioned, I mean, one of the reasons we’re working together on some deals is we’re doing some things in the hardware and life sciences area. What do you think are the interesting areas going forward?

Fabrice: We are thesis-driven. At this point in time, there two main thesis we’re investing against. One is bringing all of the best practices of what’s happening in the consumer world to the B2B world through a marketplace one. We like marketplaces because it brings liquidity and transparency to previously opaque markets, and fragmented markets where you had no liquidity. So this year we’ve invested in marketplaces for scrap metal, marketplaces for petrochemicals, marketplaces for logistics like Flex Corp, marketplaces where restaurants order for farmers. And all of these have the right dynamic, meaning they’re fragmented enough, have high average order value, high margin, high recurrency, and they’re really great businesses. And often, everything is still done by Rolodex and Excel, or e-mail.

Sean: There’s so much automation that can benefit their consumers.

Fabrice: We’re at the very beginning of the tech revolution. I mean, if you look even just e-commerce, is like 12% of overall commerce in general. But if you look at healthcare, there’s a negative productivity. In education, there’s a negative productivity. In public services, there’s a negative productivity. And so, all of these various industries are at the cusp of a massive productivity revolution, part of which will be driven by marketplace.

Now not everything is marketplaces. We usually prefer to invest not in the technology itself, but in the application of the technology. So, less in the hardware, but someone using the hardware to do something cool. The other trend or thesis we have right now is we’re seeing businesses move from horizontal platforms which are kind of a jack-of-all-trades, but require users to do a lot of work, and where the Net Promoter Score, ultimately, is not that high.

If you look at Craigslist, or eBay, or Upwork, or Thumbtack, the net promoter score of these businesses are not great because as a user, you need to do a lot of work. So, if I wanna redo my floor here, I go to Thumbtack, I say…

Sean: I don’t think you need to redo your floor.

Fabrice: I don’t need to, but if I wanted to, and I say, “Will you redo my floor?” I get a whole bunch of bids from a bunch of people. I’m really not qualified to evaluate them, but then I still am going to pick someone, and then they’re gonna overbill me by 30% and deliver it three months late. And I’m not going to be happy with the experience. And so, instead, we recently backed something called Renoviso, where, essentially, you take a picture of your floor, you say your square footage, and they will pick the supplier for you. You just pay them, and they manage the entire process.

And so, doing these kind of managed marketplaces or supply pick marketplaces, where it looks to you the consumer as though the marketplace is the provider, even though it actually is a marketplace, it leads to much higher net promoter score. And we’re doing this in every category like re-doing your windows, redoing your boiler, finding a plumber. But you can also do it for…in the Upwork business, for finding developers, or finding a customer care agent, or whatever.

Sean: Are you also looking in any other areas besides those kind of platforms, those kind of marketplaces? I mean, you mentioned having an interest in looking at some of the like science revolution that’s coming down the road. Is that sort of where you’re doing a deal by deal, but not really a theme for you yet?

Fabrice: There are a number of developing themes we’re considering. Like, for instance, in food, right now we’ve only reinvented, or used technology to reinvent food ordering, and to some extent, food delivery. And even then, like only the basics of it because it’s like people delivering. But in food automation, on the ordering side in restaurants, for instance, is something we’re interested in. So, we didn’t invest in pizza, but it would be the type of thing we’d be interested in. We invested in company called Zume Pizza where they used robots to cook the pizzas. And so, you no longer have venues, you no longer have people, and whenever you order the pizza, the truck drives to you, cooks a pizza on the way. So, they have higher quality ingredients that comes out of the oven fresh, and gets it to you closer. And despite being better and better ingredients and fresh out of the oven, it’s 20–30% cheaper than Pizza Hut because it’s made by the robots and not by people.

Sean: You’re looking geographically at these opportunities, you know, beyond Silicon Valley, obviously, you’re based here in New York. Where would you look in particular, you know, or pretty much anywhere where there is a good opportunity?

Fabrice: The problem is, as investors, we’re driven by where can we deploy capital effectively, which means, where are there exits. And so, market sizes actually matters, tremendously, and so we only look at large markets. Part of the issue with smaller markets, beyond the lack of exits, also there’s no series A or series B available. So, seed money is kind of available anywhere around the world. Late stage money, once you get there, is available anywhere around the world because the Tiger Globals or Insights will find you.

But series A and B money is actually really hard to come by in most countries, and so we only focus on the larger ones. These days, 70% is US, kind of everywhere in the U.S., but of course New York and Silicon Valley. Twenty percent is Europe especially Germany, UK, France, Spain, and Sweden actually, because they have a tendency to build global companies because the domestic market is small, and then 10% is Brazil, India, and a splattering of China, because their domestic markets are large enough, so they actually have VCs, they actually have exits, and many of the companies also have global ambitions, so you can actually make it work. We don’t invest in…I don’t know, Chile, for instance, because the domestic market is too small, unless you actually really have global, or at least regional ambitions.

Sean: And how do people approach FJ Labs for funding?

Fabrice: So, every week, we get about 100 deals. We have a team of 15 people, and the team looks over deals. Now, usually about 50 of them are really out of scope, so they are amazing, but they’re like agriculture tech, or hardware, or something, or like, bio-tech where we don’t really have any expertise, so we tell the entrepreneurs, you know, “Thank you, but no thank you. I mean, we cannot help you because we don’t know how to evaluate those.” To the other 50, we typically interact. We do a one hour call, then the team, on every Tuesday, we have an investment committee meeting, and for over two hours summarizes all of their interactions and their recommendation, and then Jose and I will take a call, and it’s a one-hour call.

So, on the basis of two one-hour meetings, we will make an investment decision. So, usually in less than a week, you can get a yes or no as to whether we’re investing or not. And we’ve been investing in one to two companies a week, basically, for the last few years, and that process works rather well, but it really works because there’s a team to whom we’ve taught both our philosophy and thesis, but also a Euro 6. So, the way we decide whether we invest this three-core Euro 6 that has sub Euro 6. So, “Do we like the team?” which is an assessment of intellect, ambition, passion, ability to execute, grit, tenacity.

“Do we like the deal terms?” And we’re somewhat price sensitive. And number three, “Do we like the business?” And now, do we like the businesses as nine or going heuristics, is like total addressable market size, good in economics, capital efficiency, business model, scalability, little risk, and this could mean a number of those. And basically, we have kind of this checklist and we evaluate every company on that checklist, and if we like everything, we need to like everything; we need to like the team, the business, and the deal terms, and then we pull the trigger.

Sean: And that’s also on a deal that’s already being led by another lead investor?

Fabrice: The deal may be being led, and if it’s not led, we will help them find a lead. So, we’re not leading, we’re not pricing, we’re not seeing void seeds. The way the deals come in, by the way, about a third come in directly because we’re known as investors. A third come in because we share deal flow with other venture capitalists. By virtue of not leading, and not pricing, and not having minimum equity requirements, we don’t compete with them. And, in fact, many of them, we will bring great deals from C to ABC to later-stage VCs, and so they send us deals so we can go invest with them. And often, we will find the company’s leads, and so we will bring them seed lead investors if we find something and someone that we like.

And so, because we’re not really competing with VCs, we get a lot of deals from them. And then the third aspect is, to date, we’ve backed 400 startups, which means about 1000 entrepreneurs. They come back for the next company, they send us their friends, they send us their employees who decided to become entrepreneurs. And so that’s another great source of the deals.

Sean: You also find yourself as an investor, you put in, say, that average, say, 400 check size. Do you follow as well into the later rounds, or is it really at the one stage that they need you most that you put in?

Fabrice: We follow on opportunistically. So, maybe we follow on 25% of the cases. We don’t usually have enough capital to really do proper follow-ons, and because we own very little, on average we own like 2%, 3%, there’s no negative signaling in us not following on…and we’re not team boards, so it doesn’t really matter. Usually, we try to build a close relationship with the entrepreneurs. So, the entrepreneurs, even though we’re not in the board, and were active in 400, or we’re investors in 400 companies, they often find this to be the most useful investors they have because, first of all, we don’t actually bother them, we don’t ask for reporting, we don’t ask for anything. If they want to give it, great.

The reason we’re helpful is when they want to fundraise in the next rounds, because we do full deal flow sharing with a number of VCs, we will actually help them work on their deck, and we will introduce them to the VCs. And by virtue of making those introductions, they’re going to get the meetings, and that saves them a huge amount of time, because we’re not conflicting, we’re not going be leading the rounds any way, shape or form, whereas the lead VC from the previous round may want to actually lead that round, and so he’s definitely not going to be introducing them to competing VCs. And so, the entrepreneurs find that role of helping them fundraise, probably, the most value-added thing we’d do for them.

Sean: That’s great. Any last word of advice for entrepreneurs as to what it takes?

Fabrice: Few general advice, I guess. One, it’s actually, these days, very easy to build things for very, very little. So, don’t go to investors, ask for money to build a company. That actually proves you probably can’t execute and bootstrap a business, so I’d rather you found like a couple of $100K, and love money, and pull friends’ and family money, execute it, build something, and launch. That shows you know how to execute. And then, for me, it’s a little bit of risk. And then I’m taking market risk, but I’m not taking execution risk.

Second thing is everything should be tested. Like, whatever your assumptions are, we live in a world where we can measure, which is the beauty of the internet, and so you should multi vary test everything you do. For disruptive product change is the sum total of 1% improvement is done 1000 times over. And so, if you keep doing statistically significant improvements over every step of your funnel, and every set of your product, you ultimately end up with something that’s massively better than what anyone else has.

And third, don’t worry that much about competition. For the most part, things that destroy businesses, or either the co-founder is fighting or fighting their board, or product market fit, business model, etc. Like, it’s rarely competition. So, be careful of your unit economics, control your burn. It’s not like a land grab where you need to actually capture the entire country. You may actually be better off making sure your business really, truly works in a city, getting the scale there, getting to profitability, at least, definitely, you need economic profitability, and then expand, and then expand first. But really create a sound solid base from which to expand on, rather than a rush thinking that it’s a land grab, which will probably set you up for failure.

Sean: Yeah, that’s what we call it. Nail it and then scale it.

Fabrice: Exactly.

Watch the full 42Q interview with Fabrice Grinda of FJ Labs here.

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