Venture Capital Investing Today

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Venture investing is something we don't spend too much time talking about here at the Fool, given that everyday investors typically can't get exposed to it, but it's worth learning about. In this episode of Industry Focus: Financials, host Jason Moser chats with Motley Fool Ventures' Brendan Mathews about the venture capital scene and The Motley Fool's approach to venture investing. Find out how venture investing works, what part of the market MFV focuses on, why there's been such a rash of celebrity venture projects lately, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on June 17, 2019.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, June 17th. I'm your host, Jason Moser. And on today's show, we've got a special guest in the studio for a new installment of Between Two Fools.

Brendan Mathews has been working with The Motley Fool now for about seven years. Much of his career was spent helping find great stock ideas on our investing team. Recently, Brendan has taken on a new challenge in joining Motley Fool Ventures, a new branch of the company that's focused on finding great ideas before they ever even hit the public markets. Branden, thanks for being here!

Brendan Mathews: Happy to be here, Jason!

Moser: I'm excited to get you in here to talk about what you and the team have going on at Motley Fool Ventures. It's a fairly new part of the business, but you've been at it for a while now. And I've had the opportunity to sit in on some of the meetings and the process that you guys go through there. I think a general perspective from that side of the world, we don't ever really get. I don't think our listeners hear enough about it. So to have you in here talking about it, I think, is going to be really great.

Before we get into it, tell us a little bit about your background.

Mathews: I grew up in this area. I was a follower of the Fool as a teenager. Shortly after the dot-com bubble, I started a career in management consulting, which means I traveled a lot and got really good at spreadsheets and PowerPoint --

Moser: And submitting for expenses.

Mathews: Yeah, submitting expenses, getting reimbursed. I garnered a lot of airline points, hotel points. I learned a lot about business. Got promoted up to the solid middle of the pack --

Moser: Ah, yes, middle management.

Mathews: -- in the management consulting business, which is when I jumped out and went to business school, and started on the bottom rung of another industry, which was investing. I started working at a big hedge fund in California, then ended up moving back and joining the Fool, where I spent, I think, five or six years working for Tom and David on their investing products. You might know me from such premium services as Stock Advisor, Fool ONE, Supernova Odyssey 2.

So, an investing Fool. Last year, the Fool launched a venture fund to try to bring venture investments to retail investors, to our members. I joined that team to imbue it with the Foolish investing ethos.

Moser: I think you and I have some similarities in the way we got here. It wasn't like we just got here right out of college. I don't think it's necessarily what we even thought we initially were going to do. So you get here a little bit later in life, but with a lot of experience in some different work under your belt. I think as an investor, frankly, that gives you a lot more to go with. I mean, anytime you have an experience in some line of work, you bring that knowledge over to the investing world. It gives you a perspective, perhaps, that someone who's just been doing this job all their lives might not have.

Mathews: Well, we've got that Buffett quote on one of the conference rooms at the Fool, "I'm a better investor because I'm a businessman, I'm a better businessman because I'm an investor."

Moser: Oh, I thought you were talking about the ham sandwich. [laughs] I'm just kidding, I know which one you're talking about. For me, getting to sit in a couple of times with you guys, your team, to learn a little bit about the process with Motley Fool Ventures and the companies that you're looking for -- Motley Fool Ventures is brand-new. You got into it right at the ground level, as it was starting. Tell us a little bit about your experience getting into this world, what Motley Fool Ventures is doing now, and the types of companies that you guys are looking for.

Mathews: Sure. Just to give you the basic specs, we're a technology fund. We're focused on what's called series A. Venture capital has labels of rounds. They're chronological, starting from seed series A, B, C, D. A company like Uber might be a series G, where they're raising hundreds of millions or billions right before going public. We're at the other end of the spectrum, much earlier, series A. It'll typically be companies that are getting their first or second round of institutional capital.

Moser: So you're probably trying to find a lot of different names, then. You've got to figure a decent number of the companies that you invest in probably aren't going to work out.

Mathews: Yeah. The venture capital model is such that you have a few big winners that are massively rewarding, but most of your companies are losers. The earlier you start on the spectrum, that tends to be more extreme. You have companies like Y Combinator or TechStars, that are almost just focused on the seed stage. They have almost the lowest hit rate. We're one stage more mature than that, so we expect to have fewer losers, but still, probably, the majority of our companies actually won't end up working out. It's just such a difficult, massive undertaking to actually start up a company, build it up, and then take it to the point where you have an exit either by going public or selling to an acquirer.

Moser: We talk about Motley Fool Ventures, I mean, this is Motley Fool Ventures because it's something that incorporates members of our Motley Fool family. Members of our services have the opportunity to actually be a part of this venture fund. I mean, that's where the funding comes from. Is that right?

Mathews: Right. We have a fund. We're the general partner. We're an affiliate of The Motley Fool, the overall parent. We're an affiliate, but we're a separate company from The Motley Fool. The way that we raise money was basically by talking to our members. Now, they had to be accredited investors, and they had to be qualified purchasers. But we basically told them, "Hey, we have this opportunity." And a lot of it is just capitalizing on the reputation and the relationships that The Motley Fool has built over many years.

Moser: You say "accredited." We're just talking about the amount of money they have to invest, right?

Mathews: Yeah. The government has rules on who's allowed to invest in venture capital or private funds. You have to have a certain amount of income or net worth to invest in private investments.

Moser: Got it. So, let's talk about some of the companies that you've been keeping your eyes on. I know there's some that you and I have talked about before, some that we've worked alongside with, at least for a little while. And there was one that I was really interested in that I was able to be a part of as well. Talk about some of the companies that have been put across y'all's radar.

Mathews: I think the one you're referring to when you said you and I worked on it is a company called MyWallSt.

Moser: Yes.

Mathews: It actually used to be called Rubicoin. It's a company, it's interesting, it goes back quite a while. The Motley Fool invested in it before there actually even was a venture fund. And it was started by one of our members, a guy named Emmet Savage, in Ireland, and a co-worker from Vodafone, John Tyrrell. They're both passionate investors in their personal time. But they're also really dedicated to mobile and the growth of mobile through their day-to-day jobs at the big phone company. They eventually decided to take the plunge to create a mobile app to help folks start investing.

Moser: I say this regardless of whether we invest in this company or not, I think with investing, that mobile presence has always been something somewhat lacking, I guess. Rubicoin, what now is called MyWallSt, they really have a very slick mobile experience. I mean, I'm a member of their service, so I get to consume it and look at it on a daily or weekly basis. I'm always very impressed with how slick and informational and educational it is. They invest a lot like we do.

Mathews: Yeah. They have two mobile apps. One is a is basically a free app, it's called Learn, that'll help you invest. The other one is called Invest or just called MyWallSt. That's the one where they'll actually give you some pretty good stock picks. It's a philosophy that's very similar to the way that The Motley Fool will go about it. It tends to be growth names, a lot of focus on management and opportunity size. It depends on your broker, but you may actually even be able to integrate that into your broker. You've got everything from reading about great stocks to making the trade all on your phone, and it's a very slick mobile experience.

Moser: Yeah. I do semiregular stock chats with their head analyst Rory Carron over there. Listeners may remember, we had Rory on here a number of months back on Between Two Fools to talk a little bit more about Rubicoin and some of the opportunities they were seeing in the financial space on the other side of the pond, as they might say, as we might say, as somebody might say. So, MyWallSt, I can relate to that one. What's this company or you're talking about here, MotoRefi? What's that all about?

Mathews: This is a company we invested in very recently. Different sides of the spectrum. MyWallSt is a company that The Motley Fool goes back with back to at least 2013. Very similar to the core business of The Motley Fool. MotoRefi is a lot different. It's something we invested in recently. It's a company that's dedicated to figuring out how to help people refinance their auto loans. You and MaFra, Matt Frankel, are probably well aware that a ton of people refinance their home loans, but not a ton of people refinance their auto loans. It's not because they're in great auto loans to start out with. Actually, a lot of people are in pretty bad auto loans because, for instance, they just take whatever the dealer offers, they don't shop around, their credit has improved in the past couple of years since they made their initial purchase. But the thing about refinancing an auto loan is, it's kind of a pain. You've got to have an appraisal of your car, they've got to make sure you have the title, they've got to run a credit check. Traditionally, this is done either by banks or credit unions. And the credit unions in particular haven't been aggressive about going out and marketing it to people. So you actually can save hundreds of dollars a month, it just is a bit of a hassle to do it.

So, what MotoRefi is really doing is, they're trying to take that friction out of the process. They're partnering with credit unions to help people get a loan with lower closing costs, and without a lot of pain on their end.

Moser: We've seen some data out there recently where it seems like there are a lot of consumers who are getting into arrears on their car loans. I mean, I can understand. It is difficult at times when these car companies will make it seem like you're almost irresponsible if you don't take advantage of this awesome deal that they're giving you to buy a new car. But yeah, it would seem to me, one of the big challenges there is, unlike a house, a car essentially is just losing value every single day. I mean, in most cases, the house over the long haul is going to be something that generally appreciates in value over time. How does the company offset that risk? Do you know?

Mathews: That's one of the challenges for the underwriters of the banks, and one of the reasons they sometimes haven't been as aggressive as going out and trying to make these loans. But the fact is, if you look at the data on car loans, even if you have a car loan that's 110%, 120% loan to value ratio, that person might end up still making those payments just because they need their car. Even during the financial crisis, we saw people walk away from their houses but not necessarily their cars. I guess MotoRefi really sees a niche there that they can play in where they can offer people closing costs of something like $400, and they can save people $100 a month on their auto loans.

Moser: That can make a big deal. I have an idea for you guys. I initially shot this across Ollen's bow probably six months ago or something. I'd just gone over to Chad Dukes' store there in Fairfax, Commonwealth Dry Goods, and I stocked up on some more Dizzy Pig. You know Dizzy Pig, it's that spice company out in Manassas.

Mathews: Yes.

Moser: They make all of these silly spice mixes that are good for steak and chicken. They had this line that's all of these different cultures, like Mediterranean-Ish, and there's Fajita-Ish. So, last night, we made for fajitas, and I used this Fajita-Ish on the chicken that I grilled. I mean, Dizzy Pig is just far and away some of the greatest grill spice mixes, and they're locally made here. It's like craft beer, except it's craft spices. I don't know for sure, but I think that actually, Dizzy Pig might be somewhat supplied by McCormick, which is another favorite of mine. It's not a tech company, Brendan, but it is a small, private company. If you guys are looking to branch out, maybe diversify a little bit...I mean, you know that tag line McCormick uses, right? You're looking at 90% of the flavor of the food that you're eating, but just 10% of the cost. Kind of like the people that are feeling like they have to take advantage of that deal that the car company is giving them, you almost have to take advantage of buying those spice mixes. They're giving you all the flavor at such a low cost.

Mathews: Hey, you don't sell the steak, you sell the sizzle. Send me a pitch deck. That sounds spicy!

Moser: [laughs] I will. So, I see in the headlines a lot -- maybe this is a mark of a top. I don't know, you tell me. It does seem like there are a lot of celebrities out there that are getting into this type of work that you're into. Now, I'm not saying they're not qualified, but they strike me as maybe not as qualified as you. I could be wrong. What is up with that? What is up with celebrity VCs these days? It seems like it's a trend that's growing.

Mathews: Yeah, the latest one is Aaron Rodgers, he's creating a $50 million venture capital fund. It's not a totally new trend. If you go back to 2010, Ashton Kutcher launched a venture capital fund. He's actually made 70 investments.

Moser: Yeah, he's got a pretty good track record.

Mathews: We're seeing actually a lot of celebrities become pretty successful as entrepreneurs. I think about the Honest Company, which I did not know was started by Jessica Alba. That's a $1 billion brand.

Moser: Not to be confused with Honest Tea.

Mathews: Not Honest Tea. It's organic baby diapers, baby food, things like that. Gwyneth Paltrow has her own empire with Goop, which I find very interesting, but it's certainly successful.

I think what all of these celebrities are doing is, they're looking at different ways to leverage their name value. In venture capital deals, everybody seems to want to be associated with celebrities so they can stick their elbows into a deal; they can try to get sweeter terms. A lot of celebrities will actually offer to be pseudo-spokespeople.

Moser: So, it's kind of like a rubber stamp, in some cases.

Mathews: A little bit. I can tell you a deal that we invested in recently, HUNGRY Marketplace. It's basically a catering network for chefs. Very interesting business, very good business.

Moser: Do you mean a network where chefs can get work catering events?

Mathews: A network of chefs. They cook the food, they pick the meals. What HUNGRY does is, they essentially have a website, and corporate folks who order lunch for the office can go on there, pick from a bunch of different menus, different chefs. That's HUNGRY, in essence. I think it's a good business model. They've gotten a ton of press from their recent series A financing. A lot of it had to do with the fact that Jay-Z invested.

Moser: I've heard of him.

Mathews: Yeah. Jay-Z recently formed a venture fund, Marcy Venture Partners. He invested. He invested less than us, but he's certainly more famous and more well-known than us. The company got a lot of publicity off of that. And once you get a couple of celebrities in, they start to add up. Usher is also an investor through his mom, who actually runs a test kitchen and has been in the food business. And somehow Ndamukong Suh got involved. It's interesting to see this trend of celebrities. I think it's just another outgrowth of what we'd call the influencer trend.

Moser: Yeah. There are some people that do really enjoy the potential of a celebrity even in their area. I remember before I moved up here, I was working for a year at Travelers Insurance in the claims department. There was a claim that was being filed on Usher's policy and some of the people involved with that work were just beside themselves that they got to work on Usher's insurance claim. I just found it interesting that it was just such a big deal.

Mathews: I think there's also something for the celebrities. They might say it's another outlet for their talent. Jared Leto is a talented actor, and he has a rock band, and just an all-around interesting guy living on a closed army base in Southern California. He's an investor in Slack. According to an article a couple of years ago, he was giving product feature road map suggestions that the CEO said were good. I think it's more interesting for celebrities when Uber or Zoom or Spotify or whatever goes public to say, "I was an investor in that deal." It's a lot more interesting than saying, "I have a tax-efficient, low-cost, diversified portfolio," if you can say, "I've got a slice of this little superstar."

Moser: I think if I remember, Jared Leto was also one of the people early on that dumped a bunch of money into Meerkat, that streaming platform that ultimately was rendered obsolete by Periscope, which then Twitter bought. You have to take your wins and losses.

Mathews: That's venture capital, that's the nature of it. It doesn't change if you're a celebrity. You're not always going to win.

Moser: That's right. Talk about some of the trends out there. On the investing team here we were always looking at trends, things that were taking us down the road viewing this whole idea that the market is a forward-looking mechanism. We're trying to predict the future to a degree. What are some of the trends that you all are paying attention to there in Motley Fool Ventures?

Mathews: One thing that's fun about Ventures is I almost don't even have to go out and look for the trends. They just accumulate as I talk to people pitching businesses. One is, I'll call it "data is the new goldmine" theme. Almost everybody who pitches us a business idea is telling us, "That's just the business. Think about all this data we're going to have, it's going to be so valuable." And I think on one hand, that makes sense. Increasingly, data is valuable. We're finding new ways to use it. The thing is, if that's the core of your business model, you have to consider that everybody else is going to be producing a ton of data, too. It's almost become table stakes at this point. If you're not producing a big, valuable trove of data, you're going to get left behind. I would say, very rarely is it true that it's really going to be centrally valuable to your business. But if you don't have it, you're missing out.

Moser: Yeah. I would say to me, it's not the data. It's how you use it. Remember the Internet of Things? That would be bandied about for virtually any and every investment thesis, which at some point or another, listen, you've got to tell me, what's the next step? You've got to connect the dots there, as opposed to just saying that's the thesis. Data is not the thesis. What are people going to do with it? And I mean, you saw just recently, Salesforce is making this big acquisition of Tableau, which is essentially a data company. It's going to help them make more sense of the data. Plenty of opportunities out there, but data is pretty much normal. That's the given. Everybody's on that playing field, I think.

Talk to me about electronic signatures. This is a market I'm actually pretty interested in.

Mathews: Yeah, so I've heard you guys talk about DocuSign a few times. I think it's interesting, because increasingly, more and more companies that we're interested in or are investing in are trying to streamline paper-based processes, to make things easier. Electronic signatures is a big piece of friction. I was talking about MotoRefi earlier. They've got electronic signatures, and it's powered by DocuSign. We've got other companies that are using DocuSign as the basis of processing electronic information. It's really becoming a pretty must-have tool out there. I'd say, when Motley Fool Ventures raised the fund, we did it almost online. We relied heavily on DocuSign for folks to sign their subscription agreements, to submit their tax forms. It was difficult, setting up a huge fund, but without the tools of DocuSign, it would have been even more difficult.

Moser: Yeah, I mean, you buy a house, you get a car loan, you start a venture fund, or you bring on business partners. To be clear, DocuSign is not the only game in town, but it does seem like they are certainly making their presence felt in a space that traditionally has left to a couple of bigger players. Adobe for a long time has benefited from that space. It doesn't really seem like Adobe has invested as much in that particular realm of the business. It reminds me a little bit of, we talk about how awesome a tool Zoom is. I think what makes Zoom even more compelling from the investing perspective is, while Zoom is making all these investments in building out this killer video conference platform, on the other side of the coin there, their competitors in the space with Google or Skype, those companies -- Skype is owned by Microsoft -- those companies seem like they're not even investing in that video conferencing platform whatsoever. It's making it a little bit easier for Zoom to capture some share there. Perhaps DocuSign is following that lead a little bit. I guess we'll see. But it certainly seems like the numbers for their quarter were painting a picture of success there.

What about AI? AI is a big buzzword these days, artificial intelligence.

Mathews: Yeah, almost everybody has some kind of artificial intelligence as part of their business idea. I haven't seen a Dizzy Pig pitch, but if they wanted to keep on trend, they would probably add, say, AI flavors, spices.

All fads have a kernel of truth. In this case, there's certainly more than a kernel of truth with artificial intelligence. It could be a potential game-changer. But I think probably people are bandying it about a little loosely just to garner that pub. I think the truth is, machine learning is a big deal, but we're still at early stages. I think that there's a battle out there for who's going to get the right training sets. You get the right data to start, you start getting your model trained up, you grow, you've got a better business process, more data, more learning. I'm less focused on somebody coming in and saying, "Hey, I've got all this data," or saying, "Hey, I've got this tool." It's more the process to get that flywheel up and going.

Moser: I don't know if I'm going to be able to get you a pitch for Dizzy Pig anytime soon, but I think I'll just send you a thing of their Dizzy Dust. Make some ribs at home, maybe some pork roast, something like that. You just tell me what you think. We'll go from there.

Mathews: You know what I'll call that? I'll call that a demo. I always prefer a demo to a pitch.

Moser: Of course! You want real-life experience there, man. I don't have to tell you how great it is, you see it yourself.

Mathews: Yeah, just eat the ribs.

Moser: Brendan, we're going to wrap up the show here. Normally, when Matt and I wrap it up, we like to give our listeners stocks on our radar. We're going to take a little bit of a different approach here because Brendan, you and I have been working together for a long time here until you recently parted ways and went to Motley Fool Ventures. We always like to complain. We like to talk about the things that bother us, things that grind our gears. Instead of stocks, let's talk about things that grind our gears. What are some of the things that grind your gears?

Mathews: What grinds my gears, I'll start with a professional one, and this is projections. We get a lot of projections. But if you don't include your actuals in your projections -- I need to know your 2018 numbers, not just 2019 to 2025 -- that's no good. I need to see actuals. I see projections all day long that are just made up. If you don't include actuals in your financial model, that grinds my gears.

Moser: You know what grinds my gears from a professional level, is when you listen to these calls, you read through the transcripts, it's like, "Hey, could you give us a little bit more color on this trend? A little bit more color on this item on the income statement? A little bit more color on your projections?" That's a double gear-grinder. The projections, the color. Guys, come on, let's change it up a little bit! Be a little bit more business-focused.

Mathews: Asking for color is like saying, "I don't have time to think of a good question. Now you talk."

Moser: Yeah, that's probably a pretty good observation there. What else?

Mathews: Another thing, this is just a personal thing, I think it's a collective action problem. When you're at the airport waiting for your bags at the baggage claim, that turnstile is going around and around. Maybe it's a flight that got in a little late, it was crowded, everybody is standing within one centimeter of that baggage carousel. If we could all just take two steps back, everybody would be able to see their bags and you could walk right up to the turnstile, grab your bag without having to elbow your way through. We'd all be better off if we would all just take two steps back. The problem is, if we all did it, or if just I did it, I would just be standing in the back of a bunch of people. And if we all agreed to do it, there might be one weasel who would say, "There's all this empty space, I'll just stand up here."

Moser: Yeah. It's like when you get off the plane, right? Everybody wants to get up at once and just stand there. And you're sitting there and people are trying to get up and get past you. But it's like, dude, you're not going anywhere. No one's even getting off the plane yet. You have to go off in a nice orderly fashion, just one at a time. Come on!

Mathews: Grinds my gears.

Moser: I like to play golf, and man, I tell you what, the game has gotten so slow. When you see people playing golf, and they'll roll a 10 foot putt and they miss it, and they've got a one foot putt left, and then they'll go up there and they'll mark their ball, and then clean it off, and then remark it, and then get back there and read the putt. You're not doing this for a living, guys. You're just out there having fun. Just putt it out. If it's in the leather, it's in the leather. You don't have to put everything out.

Mathews: I don't even take the flag out.

Moser: Why not? Now the rules say you can even leave it in. Come on! What about, you know when people call gyros [different pronunciation] gyros? What do you call it?

Mathews: I call it a gyro.

Moser: It's a gyro!

Mathews: One gyro for a euro.

Moser: Any Greek restaurant, they're going to say gyro. It's not a [different pronunciation] gyro, people. Not a gyro. And that is what grinds our gears, folks.

Brendan, this was a lot of fun! This was a lot of fun! We need to get you back in here soon to talk more about this venture stuff!

Mathews: Thank you, Jason!

Moser: Yep, you got it! Brendan Mathews works for Motley Fool Ventures, a separate sister company of The Motley Fool LLC. His appearance is not intended as a solicitation or offer of sale of any securities.

As always, people in the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show was produced by Austin Morgan. For Brendan Matthews, I'm Jason Moser. Thanks for listening! And we'll see you next week!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Brendan Mathews is an employee of Motley Fool Ventures, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. For individualized advice, please consult a financial professional. Brendan Mathews owns shares of GOOGL, GOOG, DOCU, and CRM. Jason Moser owns shares of GOOG, DOCU, MKC, and TWTR. The Motley Fool owns shares of and recommends GOOGL, GOOG, DOCU, MSFT, CRM, TWTR, and ZM. The Motley Fool recommends ADBE, MKC, DATA, and UBER. The Motley Fool has a disclosure policy.