Author & Fund Manager: Ryan Ries
The following interview has been condensed for clarity.
Ryan: Hi Paul. Thanks for taking the time to chat with us at Big Red Ventures.
Paul: I was glad to be put in touch. Happy to chat with you.
Ryan: Tell us about your path to venture capital (VC) and how you got started.
Paul: Sure. My path into VC was sector driven. I’m interested in economic development, infrastructure, and sustainability. I worked on those topics in a few contexts and then entered VC where I’ve continued working on them.
I spent about three years—before and after grad school—working as a consultant at McKinsey. My clients included private equity investors and state and local governments. I met the founder of Commonweal Ventures, Nate Loewentheil, while I was a student at Yale Law School.
We worked together on a couple of political campaigns, including the 2020 Biden campaign where we worked on infrastructure and small business policy. At that time, he was at a different venture firm and then left to start his own firm, Commonweal Ventures. Nate knew I was interested in investing and had some experience working in the sectors that the fund would be prioritizing, so he brought me on to help launch the first fund at the beginning of 2022.
It’s been a fun journey getting up to speed on the craft of investing. I absolutely love it. I consider it a privilege to invest in and then support founders who are literally staking their livelihoods on the success of some new business idea. That is super energizing for me.
I also think it’s a good fit with my personality because I love synthesizing new information, combining empirical analysis and qualitative personal judgements. At the earliest stages you’re often investing in a couple of people with an idea, so the founding team matters just as much as your market sizing model or your financial underwriting of the deal.
Ryan: You synthesize a lot of things that I find appealing about VC, too, and one of the reasons why I wanted to get involved at the fund here at Cornell. Obviously, every day is a little bit different, but what does the typical day look like?
Paul: Sure. A typical day usually includes at least one thing in each of the following four areas.
First, pitch calls. Almost every day I talk to one or two new companies. Often, I’ve looked at their deck beforehand, and they give a brief presentation, then I throw some questions at them. We usually have a conversation for 45 minutes to an hour.
I then synthesize that information and in the following week I make a recommendation to our investment team as to whether we should have another meeting and start due diligence.
The second core bucket is diligence. I’m very likely to spend a couple of hours each day performing diligence on companies somewhere in our pipeline.
Third, I spend some time each day supporting our portfolio companies. We’ve invested in 8 companies, and in several of those cases, we have board seats and are in touch with management teams on a weekly basis. So, it’s very likely that in any given week I’ll be working on some form of support for a portfolio company.
For instance, we just had a board meeting yesterday for one of our companies. I spent a couple hours in the morning going through their financials and coming up with some questions I wanted to ask the CEO. Then we had the call and got up to speed on how the business is performing.
The final area is deal sourcing. On any given day, I might do some amount of proactive outreach to founders with whom I’d like to meet, who are building companies in a particular market where we have conviction.
Ryan: Great, thanks for that overview.
VC as an industry has grown a lot over the course of the last couple of decades. It used to be a niche thing, and now a lot of people are getting into it.
What advice would you give folks who are interested in breaking into the space today, and what steps could they take to get their foot in the door?
Paul: VC is an industry where there’s often not really a formal hiring apparatus. I previously worked at McKinsey which is almost the opposite of VC in that the firm knows exactly how many new associates they need to hire every year. They schedule interviews and info sessions at a bunch of college campuses, and so on. In VC, job opportunities are typically less formal. So, you want to proactively make connections with anyone you know who works in investing and stay top of mind for those people.
In my case, I worked with Nate, Commonweal’s founder, on a couple political campaigns, so we had a preexisting professional relationship. In other cases, where you don’t have a professional relationship, coffee chats and regular check-ins can be effective. I’m always encouraged and impressed when a student I’ve been in touch with or a former intern of mine circles back to share that they’re doing research into companies that are relevant to our interests.
Ryan: Let’s pivot and talk a little bit about Commonweal Ventures. Can you tell us about the investment thesis at your firm? What do you look for in a company?
Paul: Sure. We think we have a differentiated approach in the early-stage venture market. Our firm’s thesis is that there are several markets and sectors of the economy where public policy is changing quickly and government funding is flowing in so rapidly that it’s creating enormous opportunities for entrepreneurs.
Given where policy is shifting towards right now, we have been investing in climate technology, but we also look at pure gov-tech, infrastructure, manufacturing, and workforce development—really any sector where our team’s experience and networks in the public sector are going to be helpful to catalyze opportunities for an entrepreneur. I’ll give a couple of examples to illustrate the thesis.
One of our most recent deals was this past summer when we invested in a company called Crux Climate. They are building a marketplace for transactions of tradable tax credits associated with renewable power projects. The Inflation Reduction Act drastically increased the total market size for these tax credits. The act also made the credits tradeable, so it essentially created a new market overnight which will be well into the tens of billions of dollars over the next several years. If Crux can become the dominant, go-to platform to consolidate this activity, they’re going to have a massive business. The founder, Alfred Johnson, also has an incredible fit with this market. He had worked in the White House with one of our fund’s senior advisors, Ron Bloom, and had previously founded and successfully exited a software business. Very few people have had that combination of experiences.
We’ve also invested in a company called Advocate, which is a seed stage company building an AI powered, Turbotax-like platform that will help people access federal government disability benefits. The market is massive: about 4 million people per year file for these benefits. But the market today is very technologically outmoded and fragmented. So, Advocate wants to create a tech-forward solution with a smoother customer experience. They’ll earn revenue as a share of their clients’ successful benefits claims, so their incentives are aligned with the public good. I think that’s one of the most socially beneficial use cases I’ve ever seen for artificial intelligence. The founder, Emilie Poteat, is also an impressive person. She previously worked at Goldman Sachs and Bridgewater, but more importantly, she’s had experience with her own family members going through the disability benefits morass—so she really understood the depth of this social problem.
Ryan: Yeah, that makes a lot of sense. I think most everyone would agree that there’s a lot of opportunities to make governmental processes more efficient. Anything that can do that will help society and a lot of people at the same time.
Paul: Right. We look for a lot of those markets where you can build a product that makes the world better in some way and also makes immediate business sense. Selling to the government is certainly challenging and we look within that space for faster sales cycles or an economic motivation for the buyer, whether that’s an individual person or a city government. We’re really excited about government-facing applications of AI.
Ryan: The two companies you mentioned in Commonweal’s portfolio had experienced founders with an established professional pedigree. What impresses you about a founder who comes to you as a first-time or a relatively young founder who maybe doesn’t quite have that professional pedigree, but they have a great business idea?
Paul: If you don’t have a track record to point to, your direct interactions form more of the total base of evidence upon which they can reach a decision. So, these things always matter, but matter more for less experienced founders.
First, you need to be responsive to the questions posed by investors both in a pitch meeting and in follow-up exchanges. Sometimes it’s painfully obvious when a founder has sort of a cookie cutter answer where when they hear a certain word in your question, they start to play some pre-recorded response track from their mind. Fundraising is exhausting and you might have tons and tons of meetings, but when I ask a specific question, I’m really impressed by founders who really listen to that question and give me a responsive, clear answer that mitigates my concern. In some cases, they might acknowledge the concern and say, “Look, I don’t know. That’s a point of uncertainty.” Or “that’s the risk here with this business and here’s why I think you should take that risk.” Giving an honest, thoughtful answer rather than just sort of papering over it as quickly as possible goes a long way.
In addition, the speed with which you respond to follow-up requests matters. I’m always impressed when founders respond consistently within 24 hours over several weeks of diligence. In my brief experience as an investor, there is a very high correlation between a founder’s speed of response and their overall competence at operating their business.
Ryan: Got it. Next question I’ll ask is—and this is personally interesting to me because I’ve done a couple of startups and I haven’t raised money from VCs, but I have raised money via grants and some investments from customers—what is different about the way a founder who is trying to raise money from VCs might approach the pitch?
Are there things that they might include in say a pitch deck or executive summary to really capture the attention of the VC crowd versus the ones that I mentioned?
Paul: Yeah, I think this is relevant for our fund’s thesis in particular because we are investing in businesses that we believe are beneficial for our country and for the world. I think founders in these sectors sometimes get so excited about how important the problem is socially that they don’t spend enough time on a rigorous analysis of the market size and their business’s unit economics.
I’ve had instances where I ask basic questions about how they are thinking about their gross margins, and if founders can’t answer those questions with a quick, basic answer, I have to pass. I cannot recommend that company to my investment team.
Likewise, on the overall size of the market, I want to hear a compelling story about why the market is large enough that you could generate a successful venture outcome with a relatively small share of that market.
Ryan: That makes that makes a lot of sense, too. In my first startup I ran into this. We built a software application that was designed for people who had speech disabilities, and this is 10 years ago or so, before the proliferation of smartphones and tablets everywhere.
There was a lot of heart string pulling that we could do and anecdotally a lot of investors would say, “Oh, this would be great for my parent or grandparents who had a stroke,” but when they started asking us about insurance coverage, margins, and scaling the company it was more difficult to answer those questions. We were so invested in this being a great idea that would help humanity. But ultimately, as you point out, VCs are in the business of making money. If you can’t marry those things together, sometimes you can have difficulties.
Paul: Yeah, absolutely.
Ryan: Last question here. Give us something that you’ve experienced or seen in pop culture, the mainstream media, or even the traditional business media where they have this caricature version of what VC is. Can you comment on any of those perceptions or stereotypes?
Paul: I think unfortunately, many of the perceptions and stereotypes of VCs can be true.
But my answer will be from my specific corner of the VC world at Commonweal. We could not be more different from the sort of typical kind of libertarian “move fast and break things” approach, reflected in many of the stereotypes about VCs in the media.
For us, government policy is core to our thesis. We’ve done empirical research internally finding that about a quarter of venture backed $1-billion-plus companies over the last 20 years benefited from government support in some form. That includes government procurement, government grant funding, government loans, regulatory changes, etc. That’s a material share of billion-dollar companies being created that directly benefited from government support.
So, I think that undercuts this narrative you often hear in VC about how the private sector alone drives innovation in our country.
Ryan: I totally agree with that. I think there’s this desire of people within the space to present themselves like the anti-government. There’s a portrayal that they’re doing the things that the government gets wrong when the reality is that a lot of the times the success is occurring because there’s policy changes that are incentivizing people to get into the space in the first place, right?
Paul: Right. In some sense this hearkens back to the origins of the sector and the asset class. A lot of the earliest venture capital firms and successful investments were in companies related to defense contracting, semiconductors, biotech—these were intimately linked to government spending. It’s only more recently, with the internet boom of the late nineties and early 2000s that I think we’ve had this illusion that if you’re investing in innovation, it’s in a totally separate, non-public sphere.
Ryan: I think that’s a great point to end on, Paul. I think people will be interested to hear that perspective. I really appreciate your time. Thanks on behalf of Big Red Ventures.