Leeds Business Insights Season 2 Episode #2
S2E2: Jaclyn Hester - Giving First In Venture Capital
[00:00:00] Amanda: Welcome to the Leeds Business Insights Podcast, featuring expert analysis to help you stand out from the herd. My name is Amanda Kramer. We are thrilled to be discussing planning for and pursuing a career in venture capital with Jaclyn Freeman Hester, Leeds alumna, and partner at Foundry in Boulder. Welcome to the Leeds Business Insights Podcast, Jaclyn. And thank you so much for being here with us today.
[00:00:26] Jaclyn: It's great to be here, Amanda. Thanks for having me.
[00:00:29] Amanda: Let's ground the listeners first in what you do. Tell us, what do you do? And tell us a little bit more about Foundry.
[00:00:35] Jaclyn: It's funny. This morning I was with my daughter and she told me she wanted to be a firefighter. And I said, "You don't want to do what mommy does?" And she said, "Oh, yeah, I want to be a boss lady." That's not actually what I do, but I would like to think so. So, I'm a venture capitalist, which means that I invest in early-stage startup companies. That doesn't mean that for every venture capitalist, but that's what we do at Foundry. Our model is a little bit different, where we invest not only directly into early-stage tech startups, but also into seed-stage venture funds. And so, I do a bit of both of those things.
[00:01:10] Amanda: And for those who are listening who may not be familiar with what seed stage means, could you outline that for us a little bit?
[00:01:16] Jaclyn: Sure. It's actually a challenging request because the definition of seed has changed a lot even over the past couple of years. But we think of seed stage as the first institutional capital that a founder raises. So, often, a founder might raise a little bit of money from friends and family, from some angel investors, just to get started. Some founders bootstrap, which means they're looking to have... probably, put a little bit of their own money in and then try to have revenue and customers on day one and have customers fund their business, which we think is a great way to do things. But some businesses raise venture capital. And seed is that first round. There's also pre-seed these days, and there are even funds that just specialize in pre-seeds. So, it's very early. And often, that is a founder or two and an idea and an ability to build product, but haven't actually built anything or have any customers yet.
[00:02:10] Amanda: Thank you very much for outlining that. Part of where I want to take this conversation is in preparing for a career in venture capital, which may not look like a linear line. And you've talked about the importance of thinking about yourself as a product or brand and to think long-term, specifically about how you're differentiated. To borrow a phrase from Phil Weiser, I'm referencing the entrepreneurial self. Tell us more about the importance of this mentality and how you think like an entrepreneur.
[00:02:37] Jaclyn: Absolutely. And I will say that Phil Weiser once described that concept to me, and it really changed my life. I didn't really know about entrepreneurship until law school, which is where I met Phil. And this concept of the entrepreneurial self, I think, is really interesting and resonates whether or not you want your own startup. You control your own destiny, and you get to create your brand. I think the best way to do that is in a way that's authentic to who you are and what you're great at and what your interests are and what your values are. That brand goes with you from one job to the next and really can help... I think it helps other people help you, in a way.
And so, we think about, for a venture capital fund creating a brand, you want seeing the best deals is the most important thing in venture. You've got to pick them, but you have to be fishing in the right pool. And so, having a strong brand means that people kind of know what you're about and get excited to send you deals, but know what to send you. And that's actually pretty important for venture. And then I think, as far as winning deals, it's often about the brand of the firm and an entrepreneur identifying with that brand and wanting to be part of it. But in venture in particular, and I think this applies more broadly to other careers as well, it's really about the people. And so, you want to have a personal brand that I think is complimentary to and fits within the broader firm that you're working for or your own startup, so that people kind of know what you as a human are about and what's the experience like to work with you directly and what do you bring to the table and how are you going to act.
And so, it's all brand and reputation. But I think thinking of yourself as, you know, a thing that you're going to sell to the world in whatever way, shape, or form, and so how are you going to attract people to want to work with you, to want to hire you, to want to be your customer, whatever it is, to want to donate to the nonprofit that you start, whatever it is? I think you have to figure out how to show how you're dynamic and attract people to want to be around you.
[00:04:38] Amanda: How does the entrepreneurial self-mentality apply to the VC industry?
[00:04:41] Jaclyn: Even as a VC firm, we have to stand out. I think, certainly, when Foundry started, there were far fewer venture firms in 2007 when we started and in 2000, when my partners were, you know, at a different firm. And it's gotten a lot more competitive, which in some ways is great. There's more entrepreneurship. There's more people starting companies. There's more capital for those companies than ever before. There's more appetite in the broader market to be part of startups. There's all these stories of companies going public and early founders making a lot of money and early investors making a lot of money and solving real problems with technology. Like, all that's really exciting, and I think has really spread around the globe. Whereas, maybe, ten years ago, many people felt it was really just concentrated in the Bay Area.
So, what's my proposition to the folks that are going to give me their money to put my fund and deploy with founders? And why are those founders going to take my money? And why did talented young people want to come work at my firm? And why do other investors want to show me their deals to do with them? So, all of those things, there's an entrepreneurial aspect to creating a brand, doing something that's differentiated, and existing for a reason to actually solve a problem and provide a service to whomever you're working with.
[00:05:55] Amanda: Absolutely. Is there anything else that you would add in terms of advice for someone that is looking to, maybe, make a transition from doing something else into becoming an entrepreneur and potentially pursuing funding?
[00:06:14] Jaclyn: Sure. And I did that myself, in a way. I think you're constantly recreating yourself while balancing that authenticity I talked about, which is, what are you good at? What do you love doing? What do you bring to the table? What's going to... what are the strengths that you have that attract people to you? And so, for me, for example, I was a practicing attorney. And there were things about it that I loved and things about it that I didn't love. I have a skillset of I know how to write contracts, or I know how to write motions or whatever part of the law you're from, and take a step back and say, what are the skills behind those things?
And so, for me, you know, I did M&A work, and I did corporate work for startups. And so, it was like, well, I know how deals work, and I know how these negotiations work. I understand cap tables. I understand investor processes. For M&A, I can manage a deal, right? Like, I can manage all the different people in the firm that have to review pieces of the different contracts. And I can analyze, and I can apply one situation to another. I can look at a different deal that we did and pull out the things that make sense for this one. And I can understand the motivations of each party and try to ascertain where we can come to the table and what's incentivizing each side, and how to negotiate.
And I think it's this constant focus on, what am I good at? What gives me energy? Because I'm likely to perform the best if I'm spending time in what some people call the zone of genius. Because I think a lot of people get stuck in the... in two places. One is, "I get a lot of energy from this, but I'm not that great at it." And the other is, "I'm really good at this, but I actually don't like it that much, and it doesn't really give me energy," right? And so, as a founder, of course, you want your product to be solving a real problem. You want to have great fit with your product of, this is the thing I'm obsessed with. And I was born to build this company to solve this problem, and I've understood the landscape and where I fit in and what the competitive dynamics are, and all of those things. And that's a very entrepreneurial spirit, is to kind of like I'm going to create something new because I see an opportunity, but I'm also going to vet that opportunity and make sure that this is I think I'm going to pour myself into, right?
[00:08:14] Amanda: One thing you've said is that... and this may surprise some people. You know, you've said that, in your opinion, if you plan a career path for VC, you're doing it wrong. Tell us more.
[00:08:23] Jaclyn: With folks that are figuring out, they are early in their careers or still in school, the way you even introduce the podcast, right, it's about standing out from the herd. And so, I think that, while having direction is great and having goals and thinking long-term is absolutely the way to be, it's all about the experiences that you gather up in the meantime, both professional and personal, that kind of are part of your brand. And so, if you think of yourself as the thing, you're selling, right, and so the entrepreneurial self, you want to make sure that what you bring to the table is interesting and differentiated and adds a lot of value. And that really comes in the way of a unique experience path.
And so, I'll say, like a lot of hiring in venture capital these days, is looking for folks that have deep operating experience in startups, maybe have even been founders themselves, and really have empathy for the entrepreneurs and the folks that work at these companies and can add a lot of value of, you know, "Hey, I've seen this before. I know where you're coming from, or I know who you should talk to," and building a network along the way. Those are all little assets that you bring with you. And even doing things that seem a little bit different, like I traveled the world, or I, spent time in Teach for America. All of those things actually add up to lots of interesting skills and experiences that you bring to the table and make you more of a dynamic person that brings a very unique perspective to the table. And we know that teams and companies that have a lot of diversity on a lot of different levels perform better. And so, it's not that you have to pad your resume of, "Look, I did this and this." It's these deep experiences that bring a perspective and being able to articulate what that perspective is and why it's interesting. I think that's what really helps folks stand out.
And so, especially when you're younger taking a lot of risks and being way more focused on the journey and the curiosity and the learning and who you meet and collecting people along the way, versus the lockstep career path, "I'm going to start out as an analyst in an investment bank, and then I'm going to go into a venture firm as an analyst. Then, I'm going to be an associate. I'm going to source this many deals. And then I'm going to do this," it's just not quite as interesting.
And honestly, that startup experience, as I think about hiring younger people to come into our firm, that's what I'm looking for.
[00:10:41] Amanda: You mentioned this in the information you just shared with us. The VC world is changing, and different perspectives are valued in the industry more than ever before. Tell us a little bit more about why diverse perspectives are needed and how investments and innovations are driving change.
[00:10:57] Jaclyn: Yeah, absolutely. If you think about the earliest stages of companies getting funded like I described before with seed and pre-seed, it's a people game, right? You've got lots of these seed managers out there. It's often one person, maybe two. They've got probably a 20 to 50-million dollar fund, and they're going to make, call it, 25 to 50 investments in really early companies. And so, what they're looking for is they're trying to just spot talent. And is this founder really talented? Are they going to attract interesting people to work with them? Are they... do they have founder-market fit? Like, they've actually experienced the problem they're trying to solve, and they're obsessed with doing it because we all know it's going to be a really hard journey.
So, it's a people game. You're betting on people because there is no data. They haven't necessarily even started the company yet. And if they have, they're super early. They're just getting the product going, just starting to hire people. So, you're taking a bet on a person, really, or a set of people that you believe can actually build something. And 50% of the time, you're just going to be absolutely wrong, and you're going to lose the money. And that's what venture is, it's a high-risk asset class. And generally, venture funds that perform well, and so investors are looking to take the pile of money, that $50-million fund, and at least three exits. So, you're paying the money back, and then you've got another 100 million of profit over that. So, you want to turn 50 million into 150 million. That's the idea. Or more. And, of course, everyone is seeking higher returns. But you have to take a lot of risks to get to those outsized returns, which means, in taking a lot of risks, a lot of them are going to go to zero. And some people will say the statistic is that 90% of startups fail. It's generalizing, but about a third carries the fund and is where all the performance lies; about a third are kind of okay returns, maybe you get your money back or a little more, and about a third are going to probably be zeros.
In any case, it's a people game, you're betting on stuff early. And so it's important that the people are attracting the talent, which are the founders. And if you think about the democratization of entrepreneurship and the concept of startups, even something as simple as Shark Tank, which I'm probably the only VC in the world that actually watches Shark Tank. But I love it. That opened people up to this concept of I could go build something. And my partner, Brad, is like a big champion of startup communities. He's written books about it in venture deals. And I think his whole goal was democratizing and kind of spreading this concept of entrepreneurship to be anywhere, and you could build great companies anywhere. It's not just in Silicon Valley.
And so, as you've seen that evolve, there's also costs have come way down on starting companies. You can use Amazon Web Services, things like that. So, there's all these different accelerants to the spread of entrepreneurship and the concept of starting a company.
And with that means that the face of the entrepreneur and the profile of the entrepreneur is changing. So, if you're democratizing access, then that means a pool of people who've been overlooked or didn't even know that this was an opportunity that they had are now getting access to it. And it's kind of spread everywhere. That means that the investors need to be able to know and understand the folks that they're seeing these potential opportunities with and more broadly, the buyers that those companies are serving. If you just look at demographic shifts, it's pretty incredible. I mean buying power of women, of Latino populations, of black populations, like those are all things that I think people weren't really paying attention to until more recently. And with those demographic shifts, that means that companies need to be stood up to serve the needs of those populations, both from a consumer perspective and also from a business perspective.
And, if you have a bunch of, for example, what venture firms have historically looked like, which is a bunch of sort of wealthy white men, evaluating all the opportunities out there, they're just bound to miss a bunch of things. That's a negative in two ways. One, for their own firm's performance and the LPs that they serve, who by the way happen to be things like foundations and pension funds and hospital systems, that you know, they are trying to grow their pool of money to support the things that they do. And it means that those potential consumers and customers and businesses that would use these services that make their lives easier and more efficient but allow small businesses to operate like an enterprise, all of those technologies, you know, won't be funded if you have a subset of the population controlling all the money. So, it's both an opportunity miss for investors and it's an opportunity miss for the broader population. And so, that's why it's really important that ventures firms start to bring in diverse perspectives. And not just from a race and gender perspective, but like all sorts of diversity—in geography and life experience and socioeconomic background and all of those things.
And the more diverse perspectives you have, the more likely you are to see opportunities and value them in a way that others wouldn't, to connect with entrepreneurs in a way that others might not, and frankly, like "capital" is in the title, like capitalize on those opportunities, right? And that's the job of venture capitalists. And then, more broadly, driving innovation forward for everybody and not just a subset. That's the powerful and, I think, exciting thing about venture, you are funding the next wave of innovation, and that innovation is going to be created and used by everybody. Your firm needs to be set up to succeed there.
[00:16:32] Amanda: Absolutely. And you answered my next question about the importance of democratization of wealth and of innovation. Is there anything that you would add there?
[00:16:42] Jaclyn: Yeah. I think people view venture and startups as this get-rich-quick thing, right? Because you only hear about the positive side and the exits and not about how hard it is. So, I do think that it can be over-glorified and over-glamorized. And I don't think everybody at needs to start their own fund or their own company. I think there's a ton of learning that can be done by joining companies and joining funds, and especially early. I think it's just important for folks to realize that there is no one way to do this. And having some experience before you go start is often the best way.
The other thing I will say is not every business has to be a venture-backed startup rocket ship, right? So, once you take venture capital money, they're expecting you, like I talked about before, they want to return to their investors at least three times what their investors gave them. But since... if half the things go in a zero or that third-to-third-to-third breakdown, then that means the ones that do well have to do better than that. And so, they're really looking for 10 and 20, and 50x returns, especially the early-stage investors. Which means, once you're on that track, it's not that you're forced into doing anything, but that's the expectation that you're setting. And so, all of a sudden, you have to be a company that really grows and can get to an exit because it's not like a business where you send a dividend home every year. These investors are expecting they're going to hold their investment, maybe put more money in over time 6, 8, 10, 12, even 15, even 20 years in one case in our portfolio.
And so, you got to want to do that and have that pressure and that expectation, and also have investors involved in telling you what to do and other people owning a piece of your business. I think what's happening today, at least I'm seeing a lot more, is a lot of people talking about there's other ways to finance businesses, and there's other ways to build great businesses that can be life-changing for you and your family and your employees. I think that the glorification of the venture-backed companies has at least had a broader effect of just people thinking about this as an option, right? Like, I could start something. And getting excited about that. And so, I would just say that talent is not just in one place, right? Talent is actually equally distributed. It's about opportunity. And so, it's up to schools and communities to really just open people's eyes to, hey, there's lots of different ways to start something yourself.
[00:19:03] Amanda: That was great information, Jaclyn. Really inspiring, I think, for our listeners. One question I have coming out of that. You mentioned that there are these alternative financing options popping up. For those listening, what might be a couple of signs that your company may be a good fit for pursuing venture capital versus some of these other financing options?
[00:19:25] Jaclyn: Sure. So, one is like straight-up just the desire to go big and really understanding that, once you're on that path, you're on that path. It doesn't mean that you have to raise tons and tons of money. It just means that you're now bringing other people in that have an expectation. So, I think it's one. I think it's desire to go big and to hustle through that. Again, it doesn't mean that everybody has to work 24 hours a day, like there's a new culture that's developing, which I like. But there's got to be that drive from a founder's perspective.
I think, also, the market has to be big enough. That's a controversial statement because some people will say you can build a very big business in a niche market. But there has to be a large enough revenue opportunity, even in that niche market. So, you can look at industrial and manufacturing and just industries that haven't really been disrupted by tech. And so, I think it's going to sound like a little cliché, but you want to do something that's kind of revolutionary like you're really creating a big change. It's got to be something where you're going to be able to prove out what they call product-market fit relatively early, which means there is a need for the thing that you're selling. It's not just a, "Oh, that's cool. I need this. And once I have it, I can't live without it." So, I think it's just the desire to go big, it's the market opportunity, and being okay with having other people on your cap table and having other people own a piece of your business. And there has to be a real need for it that doesn't currently exist in the market.
[00:20:53] Amanda: Absolutely. One question that's coming to mind is, do you have any lessons learned from investing in people? Any people that you thought, this person's going to be a sure bet based on their background, based on their presentation, based on what they've done, and it doesn't end up working out? Or the converse?
[00:21:11] Jaclyn: Yeah. So, investing in people. I think, in some ways, every choice that you make in life, at least around career and how you're going to spend your time, is an investment because there's always something else that you could be doing with that time. And you're trying to build towards something. So, I think this is actually even broader than just, you know, investing from a VC's perspective. For example, if you are looking at three different jobs, I often tell, especially younger people that can take some risks, like, focus on the people versus the substance of what it is. Obviously, you want to be excited about what the company does or what it is that you'll be doing, but more often than not, the people really matter.
I think a lot of VCs and, I'll say in at least once instance like I went faster than I would've liked to, and I think just not taking the time to get to know people is certainly a thing for me. I'm big on like vibe and body language. And I have a really hard time getting what I need from a Zoom conversation versus spending time with people in person. I think it's a learning for me that I, at least personally, when I'm leading an investment, I want to meet the people in person at least once, and hopefully more than... That's hard being a VC that sits in Colorado and invests all over the country, but I do think spending time with people in person is important.
I think folks get caught up in spending all of the diligence time on what's the company and what's the business model, and who are your customers, and competitive landscape, and not enough time just getting to know the other person as a human and understanding what their values are. I think values alignment, both for hiring and for investing, is huge because it speaks to, I don't know every single decision that's going to come up with this company, but if I understand your values and what motivates you and how you think about things and what your philosophy is on lots of different aspects of building a business, then I can have better trust and insight into, when things come up, you know, it's going to play out in a way that I would like. And so, I think having hard conversations around big questions that you have and being direct and trying to understand someone else's values and motivations is really important.
Other red flags are folks that are just selling too hard. They will not admit that there's anything that's been challenging. And that's just not true. Every single one of Foundry's companies that has been successful almost died at one point. That's the journey of startups. And so, anyone that won't acknowledge that there are hard things and there's stuff they don't know, and there's things that they got wrong, but they learned from it, like those are definitely flags. Like, everything can't just be so rosy. And I think folks that won't answer questions directly, again, I'd rather you just admit that you don't know the answer, and that's fine, versus trying to veer away or answer a question they would've preferred to answer.
What else? I think that you want to do tons of references. And I would say this to founders that are taking money from a VC like they should be doing reverse references. I would say this to folks that are taking jobs. And it's easier said than done. This is why building a strong, trusted, deep relationship network is really important so that I can be two or three phone calls away, like back-channel phone calls, where I can get a sense of how this person acts. Venture is a repeat-play game. So, it's very reputational. And it's pretty quick to get a bad reputation for sort of not doing right by founders not doing the right thing. And I think that can be true of founders as well. That's another thing that, maybe, people don't spend enough time on is doing the references and just making sure there's nothing out there.
[00:24:45] Amanda: That was fantastic. Let me ask the last question here. You had mentioned the importance of values alignment. And you believe wholeheartedly in the give first mentality, and you live your life with this theme. Tell us more about how you apply this concept in your work.
[00:24:58] Jaclyn: Sure. The idea with giving first is you give without the expectation of getting anything back. You give because you like doing it. You know in some way it will come back to you to just put good stuff out there and to show up and to say yes and to help other people. And it's not transactional where it's, "Okay, I'll do this favor for you. Now, you'll do a favor for me." It's just you start to plant lots of good seeds, and things come from that, and people want to help you back over time.
So, for me, I think that took the form of saying yes to things while I was in school. I did my JD and my MBA at CU. And I started to be interested in entrepreneurship and just started helping with stuff in the community, saying yes to things. One example is I was the TA for this venture capital class that I had taken. It was my introduction. And the person that was the professor for that class and also more broadly, Brad Bernthal, really involved in Silicon Flatirons and in the startup community in Boulder. Said, "Hey, you're doing a great job as the TA, but what we really need you for is this other thing, which is to be the..." I think I was like the executive director or something of Startup Colorado. "There's somebody doing it, and it's not going well. And so, we need to bring somebody in. I know you're still in school. This will be very minimal from a time commitment," which is totally not true. "But we'd love you to do that." And so, it was just that openness of like, "Yeah, sure, I'll do that."
And so, that led me to getting to know different people in the community. I ran this program called Startup Summer, where we would have college students come to Colorado and work for local startups. So, in some ways, I was helping them. I was helping all these companies hire interns and putting all of that together. I was putting content together were founders and operators in the local community, they were giving first by coming and showing up and teaching these students something, knowing that maybe someday, one of those students would send them a deal or send them a hire or be their customer, whatever it is.
And I think that's how the Boulder and Denver community work. It's funny. Someone asked me recently, he had just moved from the East Coast to Denver and was really interested in getting more plugged into the startup community and angel investing. And so, you know, I was like, "You should talk to tech startups about being a mentor and do this and do that." And he was like, "I don't want you to waste one of your bullets on an introduction for me." And I was like, "No, no, no. That's not how it works here. Everyone is just psyched to have people that bring something to the table that are willing to show up and help."
And in venture, at least Foundry's approach is doing it that way. Helping, making introductions, giving people advice, showing up to stuff, being on panels, whatever it is, planting lots of good seeds. And I would say that my sort of mentor in all of this or person that I look up to in all of this is Brad Feld, who's just built an entire career around giving first. And it has, I would say, come back to him in spades. He's very successful. And a lot of that is just because of how much he has given of himself and people wanting to give it back, right, and to send him good investments or make the introduction he needs or spend time with the entrepreneur he had just spent time with. And so, I just think it's a wonderful way to get to live a life. It's a very powerful tool.
[00:28:03] Amanda: That was fantastic, Jaclyn. And I feel like, you know, the way that you're articulating the landscape and the ecosystem is so beneficial and accessible, I think, for our listeners. So, this has been great.
Every episode, we have an LBIdea or a key takeaway. And there are a few key takeaways that we have from our conversation with you, Jaclyn. One would be that - go in it for the journey more than the outcome. And this applies to pursuing a career in venture to pursuing an entrepreneurial idea. You've got to have the passion and you've got to be willing to learn and grow and be committed to the journey. The second piece would be, be willing to take risks. You don't know what saying yes will lead to. And you've given some great examples of that. And then the last would be that you can change something, whether that's giving the world a product that they need, investing in an entrepreneur that needs a chance. You have the ability to make change.
[00:28:56] Jaclyn: Love it.
[00:28:57] Amanda: Thank you, Jaclyn, so much for joining us today.
[00:28:59] Jaclyn: Thank you so much for having me. This was really fun.
[00:29:04] Amanda: Thank you, again, for listening to Leeds Business Insights. Don't miss a single episode. Subscribe to Leeds Business Insights wherever you get your podcasts. You can also find more information about our podcast series at leeds.ly/lbipodcast. We'll see you next time.
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