Nate is a Co-founder of Anyclip.com, organizer of New York Tech Meetup and Advisor to Flybridge Venture Partners.

In Part 3 of 3 Nate talks about:

• what he’s doing for Flybridge Captial in his role as their New York advisor
• how to get involved in the New York tech community that helped him go from a mostly unknown to one of the more recognized people in the community
• the goal and future of the New York  Tech Meetup, that now stands at 12,677 members and over 800 attendees per month and growing.

Sean: There seems to be a lot more activity in New York from venture capitalists. There’s a first round coming from Philadelphia opening offices…

Nate: Flybridge…

Sean: …Flybridge hired you

Nate: Polaris….

Sean: …. So talk about what you are doing for Flybridge.

Nate: … for Flybridge? Well, I’m technically an advisor to Flybridge, and what that means is, for the most part is, when it comes to New York investments, I’m both helping them source deals as well as due diligence o n deals and then on their investments, help make connections. You know I think that it’s really something that, you know… I put, at the last New York Tech MeetUp, I put DreamIt Ventures up on stage to announce their new fund. I don’t think we should be, you know… I’ve been accused before of being a bit “chest-pounding” about the New York tech scene…

Sean: mmm-hmm

Nate: But at the same time, I don’t think it’s bad to have competition or more investors in New York looking at New York companies and focusing here. In fact, I think it’s a really good thing for the ecosystem, with the full disclaimer that I’m being paid to say that. Right? (chuckle) We’re not paid, but obviously I have skin in the game here.  But…

Sean: But at the same time, the reason the [Silicon] Valley is so successful is because there’s, you know, an ecosystem, and the idea behind a community here is get, build the same kind of ecosystem and you’ve got to support it…

Nate: Here’s the thing… part of the ecosystem is diversity. And the thing that really excited me at first, besides once I met with the Flybridge guys, they’re all just top-tier guys. They are just great, great people. Everybody involved in the firm. And I vetted them with Tengen. I made sure to talk to, you know, Union Square Ventures to talk to them about their co-investment with them and I made sure to talk to Dwight Merriman and a number of the Flybridge guys were at Greylock, which backed DoubleClick, so I vetted them. Something that excited me, beside the fact of who they were as people was the fact that they were doing investments outside of New York that don’t look like New York investments, in that they… As a Boston VC firm, versus a New York VC firm their investing in medical devices, they are still doing semiconductors – there’s still innovation in semiconductors – there’s all these technologies that New York isn’t necessarily strong in, and therefore New York-centric VC’s aren’t focused in. Where if you … When you plug in a VC from outside of the area, you’re getting all sorts of, intellectual capital that you wouldn’t have in this ecosystem anyway. So, you know, First Round Capital goes the same for them. They are more plugged into what’s happening in the [Silicon] Valley than any other, I think, VC firm that’s operating in New York City.  And so they are they’re bringing in all sorts of intellectual capital from Josh [Kopelman] and Chris’s [Fralic] and Howard’s [Morgan] experiences outside of New York and we’re better off for it. So that diversity, those outside agents, these agents that operate primarily in other ecosystems with different components in them are hugely, I think, adding to what we do. Having them here is really good.

Sean: So the whole Idea here is to promote the ecosystem.

Nate: mmm-hmm

Sean:  So for those who are outside of the community who are wanting to break in and get involved, what would your advice be?

Nate: Of course, I tell people to come to the New York Tech MeetUp every month, but I actually tell them that that should be… that’s sort of your staple. That’s your daily vitamin, I guess, but you’ve got to do more than that. … There was a time, not too long ago, that I knew nobody in this industry, and where I found the most amount of value were all of the niche, smaller events that are going on. The smaller groups; the more focused ones. Those were the places where I would go and I’d meet one or two people in these smaller setting where it was easier to do so. So that when I did show up at the New York Tech MeetUp, I could leverage those connections. That was the best way to leverage a crowd of (at the time) 400, 200 to 300. Right? Walking into a room that size is pretty intimidating, even for some outgoing people like most entrepreneurs. I suggest people go to Garysguide.org, subscribe to Startup Digest or Charlie O’Donell’s weekly email blast. You know, pick out some of the smaller MeetUps, whether it’s the Video 2.0  MeetUp, if you’re into video,  or the Fashion 2.0, or the Gaming 2.0 MeetUp, or TechAviv if you are into Israeli startups. Just like there is a Boston…  a different profile for Boston MeetUps, there’s a different profile for Israeli companies that operate in NewYork City. Right? Where we are more interested in, sort of, computer vision and advanced algorithms than amazing interfaces.  So I would just think about the different niches that you’re most interested in. Or you might find that it’s sort of like dating, right? You want to hang out at the bars and the cafes where you think you’re going to meet the most compatible person. And then come to the New York Tech MeetUp and you’ll feel like you’re more at home and you can better enjoy the, sort of, grand scale of the New York Tech Meet Up.

Sean: Last question, what’s the goal for the MeetUp? Do you want to grow it?…

Nate: Yeah.

Sean: …Is it getting bigger? Is there anybody that can house it? (chuckle)

Nate: Yeah. Certainly we’re grow[ing]. It’s a hard thing to balance. Strike a balance, right? I think that the goal of the New York Tech MeetUp is to advance the New York technology industry for its people and the world. The goal of the New York Tech MeetUp is not to have more members or explicitly to provide more programs. One of the beauties of the organization, I think, is that everybody involved is doing it on an entirely pro bono basis. And I think everybody involved is doing it from a pretty legitimately good spot in their heart where they really care about this industry and they find that this is a good way to put that into action. So, how do we advance the New York technology industry?   Well I think that one ways is to play, sort of, partner to all the other people who do have ongoing initiatives. Outside of the monthly event, which we’ll continue to do, and we’re actually going to move to, this summer we’re going to move to the Skirball Theater at NYU, because they are right down the street from here, which will now host over 850 people (chuckle), and after that, I think it’s Madison Square Garden.  Right?

Sean: Nice!

Nate: No, no… I think we’ll be fine at Skirball. It’s a beautiful theater.  So, I don’t even know if you want to even have… you want to always accommodate everybody. You hate to turn people away, but at the same time it gets very big. So, what we are going to do in the background is we are going to leverage the community to fulfill, to support niche communities. So, for instance, the education space is really important to me right now and other members of the organization. We feel like there is something that we can do to help be, sort of, the connective tissue among all of the people in the university system as well as the startup ecosystem. Columbia and NYU already have an amazing infrastructure for doing that, whether it’s the Columbia Venture Network or… they sort of compliment that at NYU. But, there’s still a lot of things going on at Pace, and stuff that was going on at Apollo which is now slowly getting wrapped into NYU. Stuff at Fordham, you know, Stevens even. Even Yale – I ran into a student from Yale that was just at the Tech MeetUp because it’s just close enough.  And so I think that we can provide… we can, sort of, fill in gaps where other people aren’t providing services or aren’t actively getting startups into research labs or students internships into startups. One thing I’d really like to explore is providing a scholarship to come and study at universities in New York City and be a part of this community while they are in school. That’s sort of a long-term dream. I think that New York Tech MeetUp, because of its scale and because of the passion in its community, is better suited…and again, nobody… everyone involved, their only platform is to advance the community. It doesn’t write checks for anybody, and so that means that we can really play this sort of dispassionate middle for all of the different people involved in the community. So that’s really the goal is to leverage this to move the needle in the areas like education research that New York could use.

Sean: That’s great. Man, we could go on forever…

Nate: Yeah.

Sean: … I’ll have to bring you back some other time. Thanks for coming. I appreciate it.

Nate: Thank You.

[END]

Nate is a Co-founder of Anyclip.com, organizer of New York Tech Meetup and Advisor to Flybridge Venture Partners.

In Part 2 of 3 Nate talks about what we all learned from the bursting of the bubble in early 2000’s, the infamous “RIP Good Times” meeting that Sequoia Capital organized for its portfolio companies back in 2008  and why the come back of Internet startups is sustainable this time around.

Sean: There was a famous, board meeting that Sequoia organized for all its…

Nate: Yeah.

Sean:  …for all its portfolio companies, of which we are one, that got quote/unquote “leaked.” It said “R.I.P. Good Times.”  This was October…

Nate: Yeah.

Sean: …November of 2008

Nate: Yep, yep. It was immediately after.

Sean: Basically saying that everybody needs to cut the fat, this looks a lot like 1999, however, what’s different is there’s a lot of companies creating a lot of value.  Buckle down.

Nate: That’s exactly… and I think that people paid attention along the entire chain. I think start-ups paid attention. I think that VC’s got more disciplined with their investments.  For instance, during that period of time, I was at Rose Tech Ventures, and we basically decided to only invest in companies which could be cash-flow positive with a million dollars or less. Which is a, filter that not many people were thinking about putting on their investments, because a part of the… This industry is attractive for many reasons, one of which is the, you know, the speculation that’s involved and the idea that you might need to take the ten million dollars of investments, or more, the fifty million dollar investment before you’re producing  a lot of cash. And so to think about this industry and the lens of getting cash-flow positive with a million bucks,  is just a type of discipline and a type of thinking that that scenario forced people into; both entrepreneurs and investors, whether it was that specific role or not.  And I think that produced just smarter companies and I think we’re better off for it.

Sean: I agree, but what do you think about the ‘Twitters’ and the ‘Facebooks’ who…

Nate: Well listen…

Sean: …probably want to miss those, right?

Nate: But, of course, Twitter didn’t take investment until it had… outside of the founders… I mean, it’s up to the founder’s prerogative. I think that if you’re sort of Evan Williams, you’ve made your money, and you can afford to buy back oddeo or Odeo, and reinvest in this concept that you really believe in, that’s sort of an entrepreneur’s prerogative.  It would have been, you know… could I speak for Chris Sacca for putting in the angel money at what point, you know, I’m not sure. But they had a prototype out there; they had some sort of adoption indication that this was interesting. I don’t necessarily think that… And then by the time they took serious venture capital money the growth curve was, was predicting this sort of, or you could at least imagine, this sort of scale. So, and again like Foursquare is a great example of that, too, where they, you know, Dennis [Crowley] had a success and he and Nuveen [Investments] were able to be very responsible, almost too cau[tious ]…  I mean, they could have raised money much before. So I think the investment community was almost, was… they probably would have passed their sniff-test too early, if they have even pushed it. I think, they were very smart to get it out there, see it ramp. And, sure, those two companies are examples of companies that aren’t looking, or aren’t monetizing, heavily monetizing right now. They likely won’t be cash-flow positive, or… Twitter certainly wasn’t on its first VC investment, Foursquare might not either. But these are like, again, these companies have growth curves that, I think, allow you to justify, sort of, other types of investments.  The rule that I like to remind people of is that we’re not all Foursquare and we’re not all Twitter, and that’s not the only way that value is created on the internet.  And people, I think, sort of forget that.

Sean: Yeah. What I think is unfortunate is that those are the ones that people…  Those are the exceptions and people hold on to those, because that’s the ones they find out about…

Nate: Well that’s a part of “the Dream,” you know. It’s like, when you go into this world you sign up for “the Dream,” and, you know, it just so happens that “the Dream” comes in all sorts of sizes, but like the default, sort of,” the Dream,”  the one that you read  most about is, again, that one model.  So you never read about, or you rarely read about “the Dream” which is the AnyClip model. And If we are successful we’re going to be, sort of, much more like, let’s say,  Zappos. Right? Zappos is a great example, where here is an existing sort of struggling company and, you know, which was then taken over by really smart, innovative entrepreneurs.  They didn’t hang out in any garage to sort of get Zappos up and running, but they are the fou[nders]…they would be considered founders and certainly any catalyst for its success. So I think that the more you become, I think, a dispassionate observer, of the industry, you sort of see that there’s lots of stories, there’s lots of ways. There’s people who work on an idea but don’t quit their job for two years, then all of a sudden it’s the right time. I think Yipit is a great sort of example of something that where you know, Jim [Moran] and Vinny [Vacanti] have been like super-patient with it. And I really think that it’s going to come into its own.  It’s a great… I think their building … I don’t know much about their traffic, but it seems to me, I just feel like that they must be doing well right now. And it took them some time to figure out exactly what that meant and I don’t think they over-invested in the company before that happened, which makes them smart and makes this industry, you know, all the better for it.

Nate is a Co-founder of Anyclip.com, organizer of New York Tech Meetup and Advisor to Flybridge Venture Partners. In Part 1, he talks about AnyClip, why New York is a great place to be an entrepreneur and the reality vs hype of what is going on in Silicon Alley.

Update – A transcript can now be found directly below the video. Thanks for your patience.

Sean: So we’re here with Nate Westheimer.  The… a lot of titles:  co-founder of AnyClip[.com], organizer of  the New York Tech MeetUps, and the newly appointed advisor to Flybridge Capital.

Nate: Yep.

Sean: You’re a busy guy so thanks for stopping by.

Nate: My pleasure, yeah.

Sean: (Laughter) So, let’s talk about the New York Tech community, in general, but as probably a good specific example maybe you could tell us a little bit about “AnyClip.” Maybe just like the elevator pitch…

Nate: Yeah, that elevator pitch that I give for “AnyClip” is  the only one I’ve ever given that gets a round of applause…But, it’s the index of the world’s films so people can search for and find any moment from any film ever made, instantly.

Sean: Oh, so that favorite food fight from Animal House?

Nate: Food fight, Animal House,”BAM! Gas station scene, Zoolander, “Roll on Shabbos,” “Make him an offer he can’t refuse.”

Sean: That’s awesome.

Nate: Yeah, it’s… the movies as a medium are just an, incredible force. I mean it’s almost the most democratic form of culture and of art. And so working with films is just a delight.

Sean: So you have an office in New York?

Nate: Yep.

Sean: And Jerusalem?

Nate: Yep.

Sean: Uh, And we were talking a little bit about the story behind how that came to be and I think it is a really good and interesting story that entrepreneurs would enjoy.  So maybe you can tell us a little bit about your background.

Nate: Yeah. I think, you know, what entrepreneurs can take away from the “AnyClip” story is that it’s not the traditional “two guys and a bowl of Ramen, in a garage” story that I think has been, sort of, canonized. You know, it is the “Google” story, and it is down to the “Foursquare” story, and it’s the “Tumblr” story. And that’s amazing for a number of reasons – those types of stories that’s;  capital efficiency, sort of being or having all of the skills in-house,  all of those things that help small ideas, or big ideas start small and then grow to be big. But “AnyClip” is a different story that people say an existing company that had tried something in the movie space, and knew wasn’t working with their current idea, with their current management, but, they had assembled a great team and the investors wanted to keep going. The investors, themselves, were quite passionate about the space for a number of reasons.  And so they were actively recruiting new management and they got around to my friend and co-founder, Aaron Cohen, who… he and I sort of talked about that opportunity.  We were sharing different opportunities. I was on my way out of Rose Tech Ventures. My term as EIR was coming to a close. He had been out of Menu Pages, he was the CEO of Menu Pages [inaudible] with New York Magazine. He had been out of that for about six months, sort of thinking about his next thing. We started talking about ideas. We took a look at this company together and decided that, you know, we had an Idea – the idea of “AnyClip” – that would be really, really compelling and that we would enjoy working on. So we took that back to the investors and they decided to hire Aaron and including myself to come in and, turn it around and, that was almost a year ago in a couple of weeks.

Sean: And, what happens in New York and what happens in Jerusalem?

Nate: In Jerusalem, the two main functions of everybody in Jerusalem is engineering and data engineering: so software engineering and data engineering.  When we say indexing the films, there are some things that we do logarithmically, but there is actually a huge manual component to that.  And then from an engineering perspective, we have sort of three teams, people on the core data, API and search teams, and then people on the web and product teams, and some on the Flash and development, which happens in both camps. In the [United] States, it’s more on the product side. So, I run product and technology for the company as a whole and Gabby Moore, our lead designer, sits next to me in New York.  So she is the main interface between, sort of, product and code because she is a developer, a former developer. Then in terms of business functions:  Aaron, our CEO, our head of licensing is in New York. And actually our head of business development is in L.A., so we kind of have an office in L.A.  And then we have a number of support staff here in New York as well. So we’re about 20 people – about half New York and Jerusalem.

Sean: Yeah. What do you think about building an engineering team here in New York?  What’s kind of the pros and cons?

Nate: Well the pros are… I adore my team in Israel and I couldn’t see doing this project without them. Of course it has its difficulties – to be so far away – and so I think that most people should and would be wise to look for building their team locally. And I think that in terms of – and not always, but in a lot of cases – start lean. Lean start-ups  can really… it might be cheaper in other places. Certainly that’s not a reason to be in Israel , but in other places in the world– it’s cheaper than New York. But you lose a lot in just that, sort of, having zero-latency in getting feedback, and brainstorming, and all that. So New York is the place where I think you’d want to be building your engineering team. And the question is, “Can you?” and I think, “Absolutely!”  It’s not that… There is no reservoir of engineers, nor should there be. Right? Engineers are highly skilled individuals and so it’s going to be tough, no matter where you are to find the right set of skills for your start-up.  I don’t think anywhere else in the world there is this reservoir that you can just dip into.  And so what you have to do is, just like any other place, you have to convince people to work for your company where you are. Well I can’t speak for your company, you know, but in terms of New York, it’s been increasingly easy to convince people that New York is a pretty awesome place to do work. And the quality of life here – what I put in a recent blog post and sort of made myself chuckle was– “where else can you live a life of such luxury and have a smaller carbon-footprint  than anyone else in the country?”

[laughter]

Sean: Yeah. You can live in box and have the best life ever.

Nate: Yeah, it’s true. That’s one of the appeals of living in New York. You, both, can take public transportation everywhere and you‘re actually living well and doing good at the same time. The lifestyle is just hard to beat. Outside of just business, right,… the MoMa, the entire city. So it’s easy to recruit people to come here and then a lot of those people are here anyway. I don’t think you generally have to hire somebody, convince somebody to come in from Chicago or Atlanta or San Francisco to move here. A lot of those people have decided that New York is going to be their home anyway. And so New York is a great, you know, a great feeder itself for talent.

Sean: So what do you think, about what’s happening with the New York, sort of, tech scene in general? We were just talking about how in 2006 we would go to these MeetUps,  New York Tech MeetUps, with about 100 people give or take.  Now there’re 800 people – you’re organizing them.

Nate: Yeah.

Sean: What do you think is going on?

Nate: I think a number of factors.  I think even in that 3-year period of time, or 3 ½ -year period of time that I’ve been involved, just the things that I’ve seen happen are… we had a sort of a bubble, we had a fever-pitch, I think, of you know like a year ago where… I’m always sensitive to the amount of publicity or attention given versus how much is deserved.  And I think it’s ok to have, sort of, one the formerly the later. Right? It’s ok a little bit more attention but not too much.  And I feel like we were, maybe 2007, things were getting a little out of control because of Tumblr and Digipop and started… I think they were the main two; the main brands that people were recognizing that were coming up in consumer internet. And consumer internet drives a lot of the perceived hype and awareness of the industry.  I think what’s changed between you know’06 and then ‘07 and sort of now is that everyone sort of is doubled, sort of reinvested the attention that they got, reinvested in really creating value.  People, I think, go to less parties because they are working harder, and that’s really healthy.

Part 3 in this series focuses on Charlie’s upcoming launch of the New York chapter of The Open Angel Forum and gives a key piece of advice to anyone thinking about starting a company.

Sean: Tell me a little bit about the [Open] Angle Forum I know you’re bringing it to New York soon so interesting to hear about it.

Charlie: So the Open Angel Forum that started a few months ago. I actually posted something a little before Jason [Calacanis], but Jason kind of has this much bigger megaphone than I do. So I think there are a lot of folks that basically make money-brokering introductions between startups and angel investors, which isn’t necessarily a bad thing I just don’t think it needs to exist. I think this is something that the community should be able to get together and do, you know, on its own without necessarily charging the entrepreneur, who by the way has the shallowest pocket out of the whole bunch. And so I think we realized that…and at the same time these weren’t necessarily the folks who had the best connections to angels and sort of financing too, you know. I don’t necessarily get my best deals by going to a conference where somebody paid a thousand dollars to go. In fact, I don’t necessarily want to find an entrepreneur who decided it was a good use of their own personal capital to spend a thousand dollars to get to me. I’m pretty accessible, and I think most investors generally are. We may have overstuffed inboxes that may take a couple times to get through, but we’re paid to find good deals and we have to look at a lot of deals. So, you know, the open angel forum basically, you know, it’s set up a as a dinner, you know really sort of relaxed, sort of intimate setting, smaller. We’ll take six or seven companies and, you know, introduce them to about a dozen angels. We’ll have some sponsors there, you know, who basically, you know, pay for the whole thing. But a much better way, I think, to interact in a small setting basis, and this is something we hope to do, you know, a couple times a year. I think the day is April 8^th. I should know that off the top of my head we just moved it. But we’ll take applications up until about, I think a week or two beforehand. So I think it’s definitely worth applying if you’re going through angel financing, and so far it’s been a success. They’ve done it in L.A. and Boulder, and companies definitely have gotten financing from it.

Sean: The model is, so you have sponsors to help pay for the event but also the angel investors pay [to attend] as well?

Charlie: No

Sean: It’s the sponsors?

Charlie: Yea…so there’s you know whether it’s a lawyer or a recruiter or somebody, you know, along those lines, but no the angel investors don’t get charged either. So both sides that need and want to connect  [are] as seamlessly as possible, there’s no barriers to them necessarily participating.

Sean: So you posted a week ago in your blog, any takers yet?

Charlie: A bunch. Yea. No I very quickly looked at the spreadsheet and it was like very overwhelming. So, I know I don’t have to think about it, you know, until we sort of make the decisions later on. But there’s a lot of interested folks.

Sean: How do you pick?

Charlie: It’s tough, you know. I think one thing we definitely are counting on is a little bit of diversity. So there’s a couple folks that I talked to that I thought had interesting models that would make for a nice mix. You know we didn’t want necessarily six or ten people doing the same type of thing. I think, you know, different judges may have their criteria, but I would love to see somebody who had a really great idea, might not otherwise be as tapped in as some other folks to this community. You know, probably, maybe less likely to pick somebody who would have gotten to these people otherwise.

Sean: And can you say who the angels are?

Charlie: We’re still trying to figure that out actually. There’s a whole bunch of people, and in fact, I think one of the big questions is who’s an angel? Right? You know look at somebody like Rodger Aaronberg who [has starting his own fund], and will still make angel size investments. There’s a number of VCs who want to come who want to make angel size investments. And that’s, it’s kind of a tough call. I think, you know, a piece of feedback, and I’ve had a debate with a lot of folks about this, is you should try and get people whose main job and main routine it is to make these kinds of investments. Where you’re finding somebody who does this by exception, I think it’s tougher for you to get that kind of time. They’re not as used to dealing with companies at this sort of stage. So, you know, were looking for people who are active, can write checks. And that’s the worst part about some of these forums where you pay money. Half the people I know haven’t written a check in two years and the entrepreneur sort of feels like it’s a waste. So there are a bunch of active people in New York that will get invites, and will all be a matter of sort of scheduling.

Sean:  If you were to give some advice…so it sounds like we both agree New York’s a great place to start a company, plenty of money, plenty of customers here. You don’t need to be on the left coast. You don’t need to have a Stanford MBA or degree. Anything else you would suggest to someone thinking about starting a company?

Charlie: I think, really, one important thing to keep in mind is…I think VCs and angels are seen as people who take risk, and actually I think if you really want to get an investment taking as much risk off the table to think about…There’s a couple of things. I think you know we look at team, we look at product, and you know, you look at market. And product…you’re never gonna have all three of those things.  But, you know, if you have the most experienced team ever, a product that’s already in the market and getting traction, and a huge market, well that’s a real and concern, that’s a late stage investment. On an early stage for a seed you might have an unproved team, with an interesting product, and a big market.  And you sort of have to pick and choose, you know which, which missing piece you’re basically gonna have your bet on. The more of those pieces that are question marks the tougher it is to kind of get there. So if you know you’re missing key motors of your team and you don’t have the right product, but it’s a big market, you know, what can you do to take some of those pieces of risk off the table? Can you bootstrap your way to an interesting product? Can you validate the market with a customer, you know, a couple of customers who are willing to buy it or even invest in the product? You know, try to take as much risk off the table as possible, you know, I think is a key piece of advice.

Part 2 of my interview with Charlie focuses on why New York is a great place to start a company and talks about why the early stage funding gap in New York has largely been closed.

Sean: So change of focus a little bit, what do you think about, sort of, what I’m calling the reemergence of the internet startup scene in New York?

Charlie: Well I think it’s been reemerging for quite a while. I joined the scene, you know, back in sort of late 04’ early 05’ when I started working for Union Square ventures. And I was certainly guilty of growing up here in New York, being distracted by the sort of Wall Street world. I worked in an institutional finance, and didn’t really know there was a technology scene. And, you know, when I started working in venture the New York tech meet-up was thirty people in the back of Scott [Heiferman’s] offices. And now they can barely contain the 750 people that show up at FIT, you know, once a month. I think it’s phenomenal. I think it’s fantastic, because I think what’s nice is…I think a lot of the pieces have always been in place. You know access to customers, critical mass of technologists, and look they may not have all been working for startups but there was never any shortage of engineering or programming talent in New York. They were just working on real time trading applications at Goldman Sachs, which by the way is an interesting technical challenge. A lot of people I think knock the financial scene as something that is, you know, not as worthwhile. But if I’m a programmer, and I know that whatever I build is gonna be used by hundreds of thousands of traders a day that’s pretty cool actually. And I think startups need to realize that because technical people look for great challenges there’s never been a shortage of money in New York. It’s New York, you know. I think there is a reemergence of dedicated, early stage, knowledgeable money. Entrepreneurs who have done this before are coming back to make angel investments who can really add a lot of value. I think there’s certainly a bit of reemergence in the community. That you can be someone who doesn’t know a lot of startups, doesn’t have a lot of startup experience, and very quickly get ramped up in terms of who are the people to connect to, where to get your information from, you know where to do hiring. That sort of thing.

Sean: You wrote in your blog a year ago, and actually a couple days ago, that there was a huge gap in early stage financing. And you wrote a couple days ago about [The Open] Angel Forum, and how that gap is closed or solid. Do you really think it’s closed?

Charlie: I think so. I mean, I think in New York there’s a number of very smart sources to get early stage or angel money. And the interesting thing is if you polled the whole entrepreneurship scene, most people would probably disagree. But that’s because less than ten or five percent of all entrepreneurs pitching ever get financed at all right. So I think it’s very fascinating that, you know, poll a hundred entrepreneurs, people who say they have an entrepreneurial idea did you get money? If the systems works well the answer should be no, because frankly most ideas shouldn’t get financed. Or whether or not they are good or bad ideas may not be appropriate for third party financing. I think those people that have good ideas, have good experience, and have the means to execute on a business, don’t find it particularly difficult to raise financing here in New York. I think there are a lot more people, a lot more smart places to get money, a lot more places to go, and for the most part do a pretty good job of financing most of the good stuff here.

Sean: What do you think the best thing is about starting a company in New York?

Charlie: The best thing about starting a company in New York, I think, is living in New York. I mean this is a phenomenal place to live more than anything else. And I think, you know, your access to a really diverse set of people and diverse set of networks…I mean the power of your network I think increases with the diversity. If the only people that you know are other startup people the likelihood that your network , its sort of the power of lose connections, the likelihood that your network is really gonna help you out that much both from a feedback perspective and from an introduction perspective is probably pretty low. In New York, you know I just think of myself as having grown up here. I mean, I know folks that are in the finance industry from when I worked in, and the technology industry. I teach up at Fordham so I know a bunch of educational folks. I kayak, and so you know the potential useful connections that come to me, particularly from the feedback perspective. If you’re gonna be a direct to consumer play, you’re gonna struggle if the only feedback you’re getting is from your other tech friends who are all on twitter, and all blog, and you’re only sort of thinking one way about things. Secondarily, I love the community here. I think the community here is very open. I don’t… I think sometimes in other areas you might feel like if you didn’t work for certain companies or you don’t have a certain pedigree you’re sort of not on their radar. And I think New York has a very kind of blue-collar approach to, you know, building companies. I think as long as you work hard, and pay your dues, and show you’re [very] passionate about something people are very accepting of it. Were all kind of in this together, sort of help each other out.

Sean: You don’t need a Stanford degree?

Charlie: No definitely not. Definitely not. A Fordham degree, but no [not a Standford Degree].

Part 1 of my interview with Charlie O’Donnell above and below focuses on financing startups, pros and cons of incubators like TechStarts and YCombinator, and First Round’s own investment criteria.

Part 2 focuses on why New York is a great place to start a company and how the early stage funding gap in New York has largely been closed.

Part 3 focuses on Charlie’s upcoming launch of the New York chapter of The Open Angel Forum, and First Round’s most recent investment in Backupify

Transcript: Charlie O’Donnell Interview Part 1 of 3:

Sean: We’re here with Charlie O’Donnell from First Round Capital, Charlie thanks for being here.

Charlie: No problem.

Sean: Maybe you can just tell us, as a way to get started, just about First Round, and you know what you guys are up to.

Charlie: Sure. So, we’re very properly named. First Round Capital, we like to do investments as early as possible. So I think people like to sort of think of us as a seed or angel stage investor that’s typically what we encounter [with] a lot of the companies we meet with. But at the same time we can follow on and were a hundred twenty-five-ish million dollar fund, and you know can do some larger amounts as well.

Sean: And you’re fund is based out of Philadelphia?

Charlie: Yes

Sean: But you guys are opening an office here in New York and [you] have one in the Valley as well right?

Charlie: Yea, so we got a couple of partners in Philly. Rob Hayes is out in San Francisco with a team there. Josh Kopelman and Chris Fralic work out of Philly office. Howard Morgan works out of everywhere. He spends quite a fair bit of time in New York, and we’ll be sort of needing our New York office, which will be open hopefully by the end of the month if not the first week of March right in Union Square.

Sean: I saw the photos on your blog and posted it as well, where exactly is the office?

Charlie: So it’s right in Union Square. It’s 200 Park [Ave] South, which is the north end of the park right across the street from the W. So great location, well worth the wait, and we’re excited about it.

Sean: Awesome, so what’s your sweet spot in terms of the amount that you like to invest?

Charlie: So I think our average, at least in New York, our average deal size has been right around six hundred grand. But that’s kind of a mix between, we’ve kind of done some smaller initial amounts and some larger initial amounts. I guess it depends on whether or not were part of a company’s initial angel ground. We like to have the opportunity to look at that. Sometimes companies come to us after they’ve raised five hundred friends and family have been looking to do two million dollar ground or something like that. We’ll certainly take a look at those too, but I think where we feel we have the most value is in the very early stages of a company. The product development cycle. You know, really focusing in on where the most value is going to be created in a company.  [And] helping companies get to a venture round.

Sean: So what do you look at, besides being early stage, what do you look for [in an investment]? What are you guys focused on? In terms of what’s your decision making criteria?

Charlie: I think a lot of it is trying to figure out you know where the value inflection points are. You know, when somebody comes in and says you know we’re raising a five hundred million dollar, uh, five hundred thousand dollar round, my number one question is ok where does this get you. And the answer shouldn’t be a year, because that doesn’t mean anything I can’t buy a year. But uh, and I am quite sure you can spend the money in year but does it lead you to a place where significant value is being created? So, if you’re in the local market, does it get you to five cities, is five cities meaningful for you as a company? Why is that? You know does it get you a certain product that you think is a viable product as a company. That’s really important, you want to see really, really high leverage for that amount of money whatever it is that you’re raising. I think obviously scalability. Um, I think the number one thing I’ve seen missing from most pitches is customer acquisition. Um, how do you, how will people find out about this? Can you efficiently acquire customers? And where are they and how are they going to encounter you’re application, and figure out that you even exist. I was just talking to an entrepreneur the other day who said okay when they come to our site. I said wait wait, they don’t know you. How do they even figure out that you exist, so that’s really important.

Sean: What about team?

Charlie: Team is critical. But team is sort of an interesting thing because you know a lot of the folks that we’ve backed haven’t necessarily been veterans of eight start ups before. And you know so I think, for me personally I like to see a good match between the product and market and the skill set of the entrepreneur. So if this is a product that really, really needs a strong hit the ground running kind of sales team, and this in the DNA of the entrepreneur, and you feel like this is the right person to execute that kind of plan, that’s really important. I talked to a company not too long ago who was really going to depend a lot on search traffic, and that’s something I think is really important to have in the DNA of the founders, to think about. You know how do you make a well-structured, search-friendly site. And you know I think at the early stage we’re playing in there’s going to be missing parts to the team. I don’t think we ‘re necessarily looking for complete teams. But, knowing that the pieces that are in place are really strong pieces is important.

Sean: What do think about these mentor programs like YCombinator and Techstars, and you know what do you think about them in general and how do you guys sort of compare?

Charlie: Well so I think there’s a very wide range right. I think TechStars and YCombinator have clearly taken a lead and those fall into a category of incubator programs. They come with money, and…which is always good. Because if you can get teams to focus on something for a particular period of time, put a little money in their pocket, I think that helps attract people to it. I think it gives good incentives, on you know on the part of the people running the team. There are other kind of incubator programs that are focused on helping people get financing. I think those are tough. I would love to see more of those programs focus on helping startups build great companies, cause at the end of the day great companies get funded not great pitches. You can have the best pitch in the world, if you don’t have a great company and a big market it’s gonna really be hard. And at the same time I think any investor worth their salt can see through a bad pitch to a good product. Sometimes you just don’t have that front man as part of, or whatever, as part of the team. And so I think a lot of focus should be shifted from, I mean not everybody needs to raise venture funding. I probably tell more people not to raise money or to raise smaller amounts of money. Or to go out and just start generating revenues, that’s the best form of financing there is. Financing that doesn’t come with ownership attached to it.

Sean: The model seems to be, you know if you read through the lines, they put in ten to twenty thousand dollars [and] they get five to seven percent of the company. You think that’s a fair deal?

Charlie: I think it depends. You know I think there are some instances where it could be two college kids working over the summer and this is maybe the only way that they will ever be able to access any capital, and you know the kind of networks that folks like TechStars and Y Combinator could bring.  So I think that’s very valuable to them in that situation. But if you come out of an industry, you’ve made really good contacts, I sort of feel like most people should be able to raise, through their own social capital, a couple hundred grand of angel financing to get something off the ground. Because I started to think, if you don’t have good industry experience somewhere and haven’t been connected to successful people, where did you get the idea that this was a good idea. I think a lot of people when they start their businesses they’re working somewhere for a little while. I think that’s when they see the opportunity in markets. It really depends on what the entrepreneurs looking for.

I sat down with Alfred Lin after my tour of Zappos headquarters in Las Vegas a few weeks ago. I will post the video from the tour in another post. In the meantime, check out the incredible insights Alfred shared in the interview below.

By the way, the video from the interview wasn’t usable, so I submitted it to Mechanical Turk, another Amazon company, to have the below transcript made. It took three hours and cost $20! Now that’s service!

Sean: We’re here with Alfred Lin, the CFO, COO and Chairman of Zappos.  Thanks for taking some time to meet and talk a little bit about Zappos and startups in general. To get started, maybe you can talk a little bit about your background before Zappos and how you got to be interested in startups.

Alfred: Sure! I guess I started out and met Tony Hsieh, who is our CEO at Zappos, in college and he’s always the constant entrepreneur with the big ideas.  We had a grill in a college dormitory that the seniors would buy each year and run it for that year and sell it to underclassmen the following year. So Tony bought the rights to the grill and he thought well, making steaks, hamburgers and fries is just not as leverage-able as a business or as profitable a business, so he decided he wanted to make pizzas and so he bought a pizza oven and put it in there and he ran a pizza business in our dorm.  I owned a large common roomie group so I used to just come downstairs buy one or two large pizzas and take it upstairs and sell it by the slice. And truth be told, you know, it’s a funny story and it sounds kinda bad that I’m cheatin’ my college roommate but truth be told, I wasn’t trying to make off of my college roommates. Lets say the slices were a dollar twenty-five, a dollar fifty. Quarters were a price commodity in college because you need it for washing machines, you know, drying machines, vending machines and so even though it was a dollar twenty five or a buck fifty I would always get two bucks.

Sean: So there was a company before Zappos that you guys did together right?

Alfred: Yeah, Tony and I have had, y’know, our businesses growing up as a kid. The real first business that we built together, he started with his college roommate, was Link Exchange and I joined about a year later, after Sequoia Capital funded it. A year after that, we sold to Microsoft for about two hundred sixty five million.  The reason we sold is, and you’ll hear Tony talking about this, is not because it wasn’t doing well, it was one of the few companies at that time, in 1998, ‘99, actually it was cash flow positive and any company that was cash positive was pretty hard to come by. We were actually thinking about taking the company public but the reason we decided to sell was because the culture just went completely downhill. Tony, being the co-founder of the company, didn’t even enjoy coming to work and so we sold that company off.  We thought, to start up the very, very early stages of a start up where it’s ten guys and there all sleeping under the desk and it’s really fun, you got this huge sense of accomplishment. And so we started a venture firm called Venture Frogs and started investing in a bunch of Internet startups in 1999. Zappos just happens to be one of ‘em, and um, Tony joined relatively early on and I came about five, six years ago. And we’ve been runnin’ the business ever since.

Sean: Do you guys consider yourselves founders or..?

Alfred: Nick Swinmurn was the founder, he had come to me and Tony and pitched the idea of selling shoes on the internet and we thought it was a crazy idea, even he thought it was a crazy idea. He had left a voice mail saying, “Hey I have this crazy idea, I wanna sell shoes in the Internet,” and Tony and I had a finger on the delete button because it did sound crazy. We started going over the numbers and it was a 40 billion dollar industry and five percent in 1999 of it was being done in mail order. And so it wasn’t rocket science to believe that the Internet was gonna be bigger than mail order.

Sean: Was it obvious in the beginning that the point of differentiation would be customer service?

Alfred: Actually, it was not. I would say, at Zappos, we have been very, very, fortunate, very, very lucky, and uh… there was no master plan that this was going to be a customer service company. In fact when we invested in the company it was all about taking orders, creating a website, taking orders from the web, from our customers, and sending it to brand partners that have them then fulfilled, and not carry inventory. And that sounds like a great financial model where you’re just the middleman but it turned out, it wasn’t that great of a business because it was very hard to get real live data feeds and inventory feeds from the brand partners. So we would have customers who would order and then we would pass on the order to the brand partner but they would not be able to fulfill it but they would tell us a week later. By then you would have a customer that’s somewhat annoyed and very dissatisfied with the service. So then we decided we would start inventory our own products, providing good service, and we also just noticed, the customers that we provide good service to, they just purchase more from us and they purchase more from us over time.

Sean: So what came first, the culture or the customer service? And was one a necessity for the other or are they independently being built?

Alfred: Every business has a culture; I think it starts with the culture. Whether you like it or not, at your company there is a company culture. And it’s very, very important to make sure that that culture continues to grow over time. So, we have a very simple philosophy. Yes, we’re a customer service company and we want happy customers.  But we don’t think it’s possible to have happy customers without happy employees. And you can’t have happy employees without having culture that they want to help live, breathe and help grow. So if you wanna think about input and output, the output is happy customers, the input is having a great culture.

Sean: At Link Exchange was it more about not having attended to the culture or just having made wrong decision on the culture that made it what it was?

Alfred: Tony might have a different answer. My observation was, it was a little bit of both. We hired people who had the right resume, the right technical background, but didn’t know enough to pay attention to culture. And no individual hires destroy culture but you make one mistake and that person hires people more like them then the rest of the company. The second thing is I think most companies don’t want their culture to decline but they also don’t pay as much attention to the culture to make sure it grows. So my example is typical planning progress that all of this has gotten into because it’s a new year and you’re rolling out a new plan with new goals. Usually it means we need more sales which means we need more customers which mean we need our existing customers to buy more from us which means we need to do this, that, y’know other things related to hiring more people, putting in more servers, building more plants, getting more inventory.  All those things are great, you need to do all those things, but has anybody ever said, “oh we need to grow our culture” and plan for that? And I think that simple thing, making sure that your culture is a part of your planning process will make a huge difference.

Sean: So tell us a little bit about the principles of your culture from the perspective of someone that’s got that five person startup and they’re sleeping under their desk so there’s a culture already which is passion and hard work.  There’s a lot going on here [at Zappos headquarters] as we could see from the tour. But there’s probably principles that drive it all ‘cuz obviously you can’t dictate who hangs what up in the office and y’know, what not to hang up in the office right?

Alfred: Yeah we kind of talk about it as a user generated environment here, people put up what they want to put up. In terms of the principles behind it, I think it’s both very, very easy and very, very hard. It’s easy to say, “that group has a culture” the hard part is can you articulate it? Can you define it? Can you talk about those in terms of value that, y’know, a hire/fire is based on? And that’s what we ended up doing. In the early days, nobody really writes this stuff down because you as the founder, the CEO, can interview everyone that comes in. So they tend to have a very consistent culture for some period of time. Get to the fifty/a hundred people, can’t quite interview every single person, you have to rely on other people to interview and, the question is, do the other people that are interviewing really understand the culture? And we didn’t know to do this even at Zappos, we did this in 2005, probably 500 employees back then. We basically said we need to put our core values down on paper so that we can educate everybody at the company that these are our core values and we’re going to hire/fire based on these values.

Sean: Have they changed a lot, you know, those core values? Have they remained the same or have you had to change them as you got bigger? You’re now what, 1600+ employees?

Alfred: Tony sent out a question, “okay can you tell me about your personal values? What do you think the Zappos core values should be?” It was a year process where we basically got the input from all the employees and tried to make it grass roots. It started out with 37, 38 values but that was too long a list so we combined some of them and we ended up with 10 core values. It hasn’t changed since we rolled it out, but I think that is a testament to both being patient and sticking to what we really believe to be the values when we write down the values. It’s not just a, “oh this is nice we’re gonna write something down and put it as a platinum wall” and the second reason I believe, that we haven’t had to change all this because we’ve done a good job hiring and firing based on those values. And if you’re hiring and firing based on those values, those values will tend not to change.

Sean: It was obvious to me, in arranging to sit down with you today, part of the culture is you living it right? And being accessible which is something we saw downstairs with you guys siting out in the middle of all your employees. But I was personally surprised to have such easy access to you.  You had no idea who I was when I first emailed yet you wrote back. Is that typical? Are you that accessible? And if so how the heck do you manage, y’know, email from random people like me?

Alfred: Well, I’m pretty accessible and people who write me I tend to write back. I, um, probably don’t respond as quickly as I used to, but look we’re a service company. I can’t say the rules are for everybody else except me. If we’re gonna be a service company and we’re gonna get back to people, as a company to customers, to partners, to investors, to employees. Then y’know, if everybody is doing that then I have to do that. That’s only fair. One of the fastest ways to ruin a culture is to have a double standard based on things like that.

Sean: So do you think there’s a lot of opportunity still left for a company that starts today whose core point of differentiation is customer service?

Alfred: Absolutely. And the reason I believe that is… we generally don’t get very good customer service and it’s kind of a shame. More companies should think about service as a differentiator.

Sean: It seems like people spend more time figuring out propriety technology that will keep everybody away. This [customer service] almost seems an easy choice to make. Regardless you guys put out a lot of information on how to do it. It seems like not a lot of people pay attention.

Alfred: I think we have a tendency as a technology business to complicate things and things are complicated enough. It is interesting, simple things executed really, really well, it’s quite hard to do that. And so consistent service is probably one of the things we as consumers all complain about and it’s just very hard to get consistent service.

Sean: What would be your advice be to someone starting a company today in terms of choosing and executing a differentiator?

Alfred: Well, I have a few thoughts on that and one is, for all entrepreneurs, if you’re in it for the money you’re probably going down the wrong path. Tony talks about chasing the vision, not the money. So pick something you’re really, really passionate about. It might be extreme; Tony asks the question, “What would you do for the next ten years if you didn’t make a dime?” And that might be a little extreme, but I think the spearhead of the question is you didn’t make any money passed your basic needs, basic, basic needs. And what would you do? Like if you could find that sort of work and be that passionate about it. You’re much more likely to succeed if you’re doing something passionate.

The second thing we’ve noticed it’s always better to make decisions faster. There are very few things in life and in business the longer time allows you to make a better decision and part of that is, it’s not that more information isn’t better, it’s that being able to iterate and move forward is much more satisfying because it gives you more perceived control and progress. It’s just much more satisfying then waiting a long period of time and then making a decision. And there are plenty of things where your gut tells you you should do something and then some level of evidence tells you to do something but you don’t have all the information and you wait and then it ends up being the same result anyway. So why don’t you just cut that time period down?

And the third thing I would say is, if you’re truly an entrepreneur be both willing to push and your tolerance just to the edge of uncomfortable. You don’t wanna jump off a cliff, but you wanna get right at the edge of the cliff and stand on the edge.

Sean: So last question; it’s no secret that you guys were acquired by Amazon.com last year. Looking out, five or ten years, what’s next for you? Are you back in the VC world? Back as a entrepreneur? Still a big question mark for you?

Alfred: We have a lot of work to do here, we’re still scratching the surface at Zappos. We did do the deal with Amazon, but we did tell them that we really believe that we’re building something special here and we’d like to continue building the company. And so why not [give us] the independence to build that company, build that brand and build a culture? And that’s what we’re hoping continue to do.

Sean: So you’re just getting started as Jeff Bezos says, “It’s always day one.”

Alfred: It is always day one.

Sean: That’s awesome. Thanks a lot Alfred for taking your time.

Alfred: Thank you!