Episode 31: Jason Caplain of Bull City Venture Partners on Why Founders Are the Secret Ingredient to Investment Success

Episode Transcript

Shiv: All right, Jason, welcome to the show. How's it going?

Jason: Good, how are you?

Shiv: Good, excited to have you on. Obviously we've been friends for quite some time. So why don't we start with giving a background about yourself, Bull City, and we'll go from there.

Jason: Yeah. So, you know, thanks again for having me. I grew up in the southeastern part of Massachusetts and worked for an investment banking firm out of school, moved to North Carolina back in ‘98 for Red Hat and was the 80th employee at Red Hat. We were doing about $11 million in revenue at the time and joined the finance group at Red Hat. How this whole thing started, our venture capital firm, is we took money from Greylock and Benchmark at Red Hat to prominent firms and we never really considered raising capital from regional investors. So, you know, the thesis in starting this was let's create a firm here in the region that the future Red Hats would take capital from. So left Red Hat in December 2000 and to launch the first fund.

Shiv: Awesome. And in terms of Bull City, what are the types of companies that you're focused on and investing in?

Jason: Yeah, so I would say 90% of our companies look like this where they're, you know, call it seed and early stage. Usually they’re software companies and they're led by an experienced founder that can take the form of a repeat successful founder or someone with just out of industry with deep domain expertise. That's about 90% of the bucket. And when we're kind of investing, usually, I'd come up and down the East Coast. Every once in a while, you'll see us invest somewhere else, but most of the relationships are kind of close to home.

Shiv: And on the seed side, so basically these companies are doing less than $5 million in most cases?

Jason: Yeah, absolutely. So we're kind of the it's not not a hard and fast rule, but the companies I would say kind of in our general sweet spot are between $20 and $200K in MRR when we invest. Having said that, every once in a while, you'll see us do something that might be doing a little bit like we're digging in on a company right now is doing much more than that. But we'll we'll you know, sometimes we'll invest in companies that are $5, $10, $15, $20 million in revenue when we invest. Usually they're very capital efficient. Maybe they got past us with an early round and we're trying to make it right and we don't want to miss. So we're trying to make sure we get a piece of it later. So good examples of that would be companies like WeddingWire or Etix, Double Positive. There's a long, you know, a pretty good list. I would say we kind of sprinkle in two to four of those per fund.

Shiv: Got it, but then the rest are on the smaller end?

Jason: Yeah, the rest of those are the seed, you know, seed, early stage, even pre-seed. We'll do some companies where it might be, we did one last year where it's two very successful founders, actually brothers. One is in Nashville, Tennessee, the other one is in Vermont and it was two, you know, two guys and a, and a PowerPoint presentation. So no code or anything, but just a really good idea. But this, this is the third, this is the third company. So when we go really early like that to pre-seed, it's usually someone we've known for a long time.

Shiv: And so, right. And in those cases, like what is, what is a founder profile you're looking for? You mentioned that, like, is there certain characteristics beyond just being a repeat founder that has had some success that you're looking for?

Jason: Yeah, absolutely. I, you know, I, this may sound like a little, a little silly, but it's finding, finding the founder that you get the feeling you want to quit your job and go work there. So it's usually someone that's really good at recruiting, they have a good ability to sell the vision to customers, prospects, partners, they are good at capital raising. So they've got to be a good visionary and also like a magnetic personality. And, and, and they're great at surrounding themselves with other great people. Right. So we always say like A-quality people, A people hire A's, B's hire C's. So trying to find those people that have, especially in the case of the repeat successful founder, someone that has a really good ability to see around corners. They have been through lots of different economic cycles in the past. So yeah, that's probably a pretty good summary.

Shiv: Right. What about when they're a little further along and like they're past this initial pre-seed stage and they have some traction? How are you evaluating companies then because they don't necessarily have product-market fit and they also don't have enough data to kind of figure out how well things are working. So how are you vetting companies at that stage?

Jason: Yeah, it's still a lot on the team. You know, David, my partner, likes to say we have this like 80% weighting on team. So, you know, we're about to make a new investment, I think later this week or early next week. And, you know, it's a very heavy weighting. We spend a lot of time and kind of over index there. And then it's like, do we believe that it's a big market will validate that with our not only chatting with their customers, you know, early on, but we kind of add our mix to it as well. And that kind of helps sell the Bull City story of like, Hey, not only are these guys going to invest, but they've got this great network. They're already starting to help us out and already starting to make introductions to valuable contacts out there, helps us with diligence and helps them out at the same time. And so that we put a, you know, a pretty big weighting too on like, what's the feedback we're hearing from, from, you know, the market out there. It's not always accurate because sometimes people don't know what they want in the future but we definitely use it as a gauge.

Shiv: Are you more, you know, and I've been to your Founders First event and met the types of companies that are there and you've built quite a presence in the Raleigh-Durham area with how many companies you know and how you've been able to serve that community. But when you look at these deals, is it more reactive in terms of the companies you're meeting or are you going about saying, we want to invest in this market, now let's try to find the right company based on this thesis to kind of find somebody to back.

Jason: No, it's actually different. So I would, I would flip it. We actually say, this is the person we want to back. So, uh, this founder is on the sidelines. We want to back that founder. What can we find? What can we do with that founder next time around? So like, and we've done that on a repeat basis, not only with our founders. So like Scott Wingo, we backed twice, Troy McConnell twice, Robin Smith twice, but also like who else is out there that we had that feeling about the founder. Cause I think it's like, I think if you go through it our way and you have picked the founder, then they lock onto an idea that they really like rather than finding an interesting idea and then forcing it on a founder. It's not really theirs, you know, at that point. And they're kind of like more of a hired gun kind of approach. Very, very founder focused. Pick the great people you know, again, you know, we try to, we miss a lot because, you know, don't have perfect analysis around this, but try to pick a great founder, then, then lock on the idea. And that's what we roll with.

Shiv: And is that - then sourcing founders and really that becomes a big part of what you need to do then. Yeah, which is where maybe other firms are maybe sourcing deals. In this case, you're sourcing founders, especially at the stage where you are. How do you go about that? How do you find these talented individuals?

Jason: I think it's like, you know, the cool thing about our job, right, is every day is different and we're constantly having Zooms or, you know, in-person meetings. We travel probably more than a lot of other firms I know to all the regions we care about and in-market there regularly to the point where they, you know, we're part of their community. We get engaged. You know, I was on the board of Venture Atlanta, you know, I'm on the board of Mindshare up in DC. So it's like getting involved in all these communities and meet as many great founders as we possibly can do.

Shiv: Right, and when you say you're in-market, how many of these events are you going to? You mentioned a couple there, like in Atlanta and some other folks, but just I'm trying to understand what is the scale of this? Because finding a quality founder sometimes can look like finding a needle in a haystack, right? Or is it easier than that?

Jason: Yeah, look, I think we're less about, I think events are great. And I think events are good to like, see and be seen and raise the flag and let people know that, you know, we're around and accessible and all of that. At the same time, I think like our best deal flow comes from founders. So asking the other founders and market who they like, who they respect has been like the recipe for us over the last two decades plus of operating.

Shiv: Right, so just through referral and having the right relationships and good people know other good people.

Jason: Absolutely. Yeah, like our best referrals, yes, we hear from the law firms, the accounting firms and all the other service providers and other VCs and angel funds and go to all the events and, you know, we're active on, you know, try to be active on LinkedIn and Twitter and all that stuff.

You know, we post our email addresses on our website, but at the same time, we want to make sure we're activating all the entrepreneurs in the local market. And then we've got like our LPs out there, right? So our LPs, many of them are accomplished entrepreneurs or they're executives at other tech companies. So they send deals our way, which is fantastic. And then we've got a very accomplished advisory board as well. And they're all active and sending us deal flow as well and helping us close and work with some of these entrepreneurs.

Shiv: Right. I think one of the interesting things about your approach is that when you look at ROI from deals that investors make, you know, getting 2X return on your money over or even 3X return is like a really good outcome when you're deploying capital, especially in later stage companies, because you kind of have to grow it. It's growing it from like, let's say $50 million to $100 million. It's not an easy task. And even if you do like a lot of the values kind of priced in, so finding that 2X, 3X return from the investors that we work with, they find that to be quite a good return at the end of it all. But when you get in this early, do you find that because you're such a critical element of the value creation engine behind a company that there is an outsized return that's available to you and your LPs because you're basically the first institutional capital, but almost like a quasi-founder in some cases with these individuals?

Jason: Look, I think I know you said a critical piece. We look at ourselves as a small piece of the puzzle, you know, and a very minor piece. Like these founders have options. They don't have to work with us. Like I mentioned, they write their own checks. They usually come with a network. They've worked with other venture funds in the past. In some cases, we're having to displace those other funds or work with them, you know, fit into their, into their deal.

But they come with options. They certainly don't have to choose Bull City. So yeah, I mean, I just think that we're like a smaller piece. And then from a return standpoint, absolutely, we think about it this way. When we invest in a company seed and early stage, we're shooting for that 10x-plus return that everyone talks about. And that's our hope and dream.

When we're investing in a company that's later stage, it's maybe doing $5, $10, $15, $20 million in revenue, we're usually underwriting that to like a 3X return, but the strong belief that if all the stars align, it can produce an early stage like return, taking growth equity risk. And so that's how we think about that. And that formula has worked out really, really well for us.

Shiv: Understood. Yeah, that makes a lot of sense and and then in in driving that value inside these companies like once you invest are you actively involved with the founders to actually kind of help them figure out critical items like product-market fit or their go-to-market or or their product roadmap? Or are you more just hands off and letting the founders run with a business?

Jason: Yeah, look, so our belief is like, when we invest, we have to show the founder, like capital's a commodity, right? Like I mentioned, like, hey, these founders have other options. We're going to show like why we belong and why they pick, you know, prove like prove them correct that, hey, we were the right choice. So, and we believe going back, you asked a question earlier, like, how do you find like all these companies? I said, Hey, it's the founders. So the harder we work for these companies, the better the experience that they have. That means they're going to refer for us more entrepreneurs to work, to work with more of their friends to work with. And then when they have a sale or an IPO, they want to rinse and repeat and work with us all over again. So that's the formula. So yes, we, um, we will help out with recruiting. That's really, really big. We'll help with fundraising, working on a deal locally, a seed deal. And David, my partner, they want to raise like $1.25 million. And again, we'll probably write a smaller check. So he's helping them fill out the round and make all those introductions. So capital raising, recruiting. We're big, I mentioned earlier, big on the customer side. So we want to be part of the sales pipeline. And we're not set, I wouldn't say we're like selling, but we are making those introductions. So, we're already starting to have a call later today with a company we didn't even invest in yet, but going through that process and helping go through our network and how we can help accelerate their revenue.

Shiv: What do you find, on the recruiting side, what do you find is one of the biggest areas where these businesses at the earlier stages need help with?

Jason: Sales, marketing, also like usually some kind of finance resource. Usually that's a part-time resource initially, fractional resource. But we have two companies right now that are both local to North Carolina. One's hiring a head of FP&A, another one's hiring a VP of finance. So usually those roles come up a bunch. Yeah, that's probably it. It's cooled down a little bit, by the way. I mean, it's definitely, it's, you know, you rewind like two years ago, it was absolutely insane. So it's definitely hiring stuff has cool down across the board.

Shiv: I guess, I'm thinking even as to how I founded this business in the early days, I was a CEO, I was the marketing person, I was a salesperson, and I was the services and product person as well, right? So, earlier stages companies, basically the founders have that challenge and you're balancing cash flow versus growth and trying to think about how fast you can grow and serve the market. And at the same time, you want to stay, say, like solvent and have the cashflow to continue operating the business, right? So how do you think about balancing those needs? And I'm assuming it differs on a company by company basis because software as an example is likely burning capital in those earlier stages as well. But curious kind of how you see that.

Jason: Um, yeah, I think that, I think you're absolutely accurate. I mean, um, you know, one of our companies just, you know, um, is going with, you know, even though they're at scale, they're given how challenging it is right now to raise capital. They're going without a head of HR right now. And they promoted two people from within, two more junior people. So, um, I think everyone is being like super cautious and trying to lengthen out. They've got a certain amount of capital and realize how hard it is and don't want to be out there fundraising this year. So they're trying to lengthen those dollars out as long as they possibly can to create as much runway as possible. But I think that makes sense. But yeah, we're seeing, I would say a couple of years ago, less caution. And now it's very, very tight.

Shiv: Yeah, what advice would you give to founders that are listening where like they're when they think about their businesses and where the opportunities are or how much capital to potentially raise? Like what avenues should they consider and how do they figure out what's the best avenue for them?

Jason: To raise money?

Shiv: Yeah, to raise money, because obviously there's a, with you guys, there's a specific path that they take, right? But there's options like bootstrapping and maybe waiting things out and seeing if you want to raise more capital later on or if at all. So just curious, like how should founders look at these types of investment avenues for themselves and try to figure out if it is the right avenue.

Jason: Yeah, yeah, no, great question. You know, look, I think it's I think it takes more names. So raising capital is a total sales process, right? Just like selling to customers, it's selling to VCs. So but we actually kind of flip it and say we're also selling to the entrepreneurs. But the I would say, I'm seeing some companies create a hit list of VCs that are 100, 200 names long. And so I think gone are the days you can run a quick process. And I'm talking about this at the earlier stages, OK? Gone are the days you can build a list of 10 names and go tackle it and you get two term sheets. That's not happening. So I would say that the, you know, we had one company that, you know, built out a list of like 150 names and we helped them tackle some of that and go out and raise capital. But it's kind of doing whatever it takes.

Also, I think it's like, not just thinking about VCs. Like I think like everyone's like, you know, you go to TechCrunch, right? And that's, it's like, you know, not making fun of those guys or anything, but like it's, it's, uh, it highlights all the, all the companies that raise venture. But I think there's other sources, you know, it's going to family offices and individuals. And I think it's like getting creative about who else is a market that can write checks. And also entrepreneurs need to connect with entrepreneurs for referrals. That doesn't happen often enough. So getting those introductions from your fellow entrepreneurs like, okay, this this company just raised $10 million locally, chatting with them about how they did that is I think would be really helpful too. And that doesn't happen enough surprisingly.

Shiv: Totally agree. What do you think about debt and leveraging debt as a potential capital vehicle, especially in the earlier days?

Jason: I’m very… the bankers are going to hate me with this. And there goes all deal flow from my friends that are bankers… but I'm very like anti-debt early on. So I believe like, there's a time and place for debt. And it looks cheap, right? So the interest rates low, you get a little warrants, they've got a great network. I'm talking about venture, you know, traditional venture venture debt guys.

What happens is like, eventually it has to be paid back and who's going to pay it back. It's like the existing investor. So I just mentioned earlier how tight it is to raise capital. Well, at some point that's going to come up and you raised one to three, $4 million of debt. That's going to be paid back. You're going to raise more money. I just talked about how hard it is to raise capital. So that becomes that like puts the company in my opinion, in a really tight spot.

Having said that we believe like in the magic box. So like if a dollar goes in on the sales and marketing side and you get like $3 out. So if you follow all of your advice, right, that you give companies, they're probably getting like $4 out rather than three. So they, so when that comes out, once you have that magic box discovered, I think their debt makes a lot of sense. So when you get more of a predictable revenue stream coming in and you understand there's less risk in the business, I think it's a great time to raise some debt. But early on, you know, hey, because you can't raise equity, you start loading up the company with debt. If I look at the last like two decades, 23 years of doing this, our worst companies have loaded up with debt because they couldn't raise equity. And so they raise money in debt. And I think that's an unfortunate spot to be in.

Shiv: Do you think it was a better idea two, three years ago when interest rates were much lower versus now?

Jason: Same, same. I think it's like, you're gonna be like totally convinced you can pay it back. Like how do you pay it back? Because to pay it back, you have to raise more money. Because what happens is at the earliest stages, when you start spending the bank's money, like, all right, so let's say you raise like $3 million and then you raise another million and a half in debt. When you get down to the bank's money and you start using their money, that's like a huge like no, no. So you've raised the money, you think you've got a little bit of padding, but then the bank wants to know, hey, when are you gonna raise the next round of capital so that they, you're not using going into their proceeds. So given how hard it is to raise right now, I think that's like, it can put the company in a really bad spot.

Shiv: Yeah, it puts the founders under a ton of pressure where like you're servicing the debt and then you don't have enough sales coming in and you kind of get on this treadmill. You can't get off of it in some ways.

Jason: Again, I think also venture capital is expensive too, by the way. My opinion is like, again, there's a time and place for debt. I just think, hey, when you have a more predictable revenue stream coming in, I think that's a great, great spot to take it.

Shiv: Right, right. Yeah. What about things like convertible notes or using SAFEs to fund companies? Because that's kind of quasi-equity in a lot of cases, no?

Jason: Yeah, yeah. Look, we've done all of them. We've done SAFEs. We've done convertible notes. We've done everything, price rounds. I think my only concern is sometimes we're seeing founders stack some of these SAFEs. So they'll raise a SAFE this month here, and then they'll raise another SAFE like next month and the month after, or maybe even spread out six months apart. So all of a sudden we see a company and it's got like four different times they've raised a SAFE and it's like they've got now like $10 million and it's converting to an A round. So that becomes a little more tricky to develop. We've also seen a company recently where they had closed on some SAFEs the same month, but at different caps.

So I think it's like keep it really well organized, maybe do it once and then raise a price round if you can. But I think a lot of founders have this tendency to kick the can down the road. And again, I think there's a time and a place for that as well. But I think it's use it once, then try to go to the price round if you're able to.

Shiv: Yeah, I think your point about debt definitely resonates with me in that even just from a personal finance level, right? You don't want to load up on debt unnecessarily. Like if there are assets behind it, then it makes more sense than just taking on empty debt, right? I think it's similar with companies, but when we think about companies, people almost start behaving differently and taking on obligations that maybe the vehicle that they're in may not be capable of handling.

And the second thing I wanted to touch on is what you said is sometimes venture capital is more expensive than debt or just some of the most expensive type of fundraising. Can you expand on that a little bit more?

Jason: Yeah, I mean, my point there is just like, Hey, it's, it's not for everybody. You pick a valuation and it gobbles up a chunk of equity there. Not all, not all investors are equal. Right. So I think it's understanding what the value add and we're going to get out of that. Is it just like a passive check or are they gonna grab a bunch of equity? But what did Amazon sell early on? I think he said like he raised money at a $4 million valuation initially and raised a million bucks. So he gave away 20%. Jeff sold 20% of the business. So yeah, that's just my point is, hey, it can be very expensive.

Shiv: And what about this idea that founders kind of have to, they're playing multiple roles, but there's two pivotal roles that from a cash perspective are super important. One is obviously fundraising and you need to raise money to keep the lights on and fund the operations. And the other is actually driving sales and revenue. And in my experience, and I would love to hear what you think about this, I found that founders or CEOs sometimes lean too much one way or the other. And it's often to their detriment, and I'm wondering if you've experienced that as well.

Jason: Yeah, I think at the end of the day, the best companies, the best companies are good at both, right? Like they, they, uh, and they attract capital. Like, you know, I, I have this thing where I kind of say that there's right now there's like A-quality companies and then there's everybody else. Like the A quality companies have that all down, right? They have the sales and marketing engine going there. Maybe at the early stages are growing 3X year-over-year. They've got great unit economics. And those companies, it's hyper competitive right now to get into those companies. You know, we looked at a company down in Atlanta. It just got six term sheets. And then there's the B-quality company where maybe they, hey, they don't have the sales and marketing engine down. Maybe they're growing, hey, 2X or a little bit under 2X, or there's something else - maybe unit economics is a little bit off - and they're not able to raise, they don't have access to capital as well.

Shiv: And do you find that in terms of backing up a jockey or investment, like even those B-level investments, like it's almost like, hey, if we help them figure this out, they're actually an A-investment, so you're kind of underwriting that into the deal? Or is it better to compete for those A-level deals, even though there's way more competitors out there and it's like dry powder fighting each other for a higher valuation?

Jason: Yeah, yeah. I mean, I think, you know, I think it's okay to do B-quality deals. I think there is, I think the A-quality stuff for the most part is like way overpriced. And maybe you go for the A-minus or the B-plus. But usually, you know, usually chasing the market where everybody else is going, all the other investors are going, is usually the wrong place.

If you look at, you know, again, look at the data, you know, that of companies we've invested in our most successful exits, the ones that have generated 10X plus for our LPs are ones that no one else liked, you know, for a very, very long time. And so including some of our IPOs. It was markets that no one else really thought were really interesting. Some people might laugh when we made the investment. That's the place that generated the outsize returns. So the place, the deals that we went after that everyone else was interested in, those are actually haven't haven't done as well.

Shiv: Yeah, it's kind of like the value is already priced in, into those investments. And like they kind of say with real estate, you make your money when you buy the asset versus when you sell it. It's kind of like that, right? Where you actually want undervalued assets more than perfectly priced assets that, or maybe overpriced assets, right? And then you can generate a much higher return.

Jason: It could be a flawed area of venture. Like, you know, you get a big partnership, 20 people sitting around the table making decisions, you know, new partner shows up. They don't want to bring in a B-quality deal. They want to show that they have access to the highest quality and don't want to take the risk of the B-quality stuff. So I think that's kind of like feeding this as well.

Shiv: Right, right, right. Yeah, I think it's, nobody wants to like get a base hit. Everybody wants to hit a home run, but there's only so many home runs out there, right? So, and in a kind of reverse logic ways, like if you buy an undervalued asset, your return on that, generating a 2X, 3X, 5X or 10X return is easier than if you've overpaid for an asset because now you're kind of like chasing the valuation that you paid for it, right?

Jason: Yeah, I think it's hard to, you know, depends on who you talk to. Some investors have a different view, but I think our view is like try to pay, you know, fair, reasonable market valuation for companies. We've stretched for sure ourselves over the years and learned to do that. But I think we try to stay in line the best we can.

Shiv: Yeah, I think it's a balance, right? It's like, I think it’s Warren Buffett who said like, it's better to buy an excellent company at a fair price than a fair company at an excellent price. So I think that's the flip side of it where, right, you want to find great companies as well.

Jason: Great, great entrepreneurs.

Shiv: Yeah, and great entrepreneurs. Exactly, exactly. I think that's great. Jason, I think let's end the episode on that note, but before we do, what's the best way if founders are listening and they want to get in touch and learn more about what you guys do, what's the best way for them to reach you?

Jason: Well, since Joanna started it with giving her email address, I will do the same because she did that with your podcast that I watched. And she gave out her email address, which I was shocked by that she did, just to pick on her. But my email address is jason at bcvp dot com.

Shiv: Awesome. We'll be sure to include that in the show notes and I'm sure you'll get a ping by a bunch of founders as well. So with that said, appreciate you coming on the episode and sharing your wisdom, Jason.

Jason: Yeah, I enjoyed it. Good seeing you.