TSP017 | Charles Smith – Transcription

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John Livesay:
Welcome to The Successful Pitch podcast. Today’s guest is Charles Smith who works at Social Starts, which is both an investor in seed round as well as series A and Charles talks to us about the different criteria and the different amount of money that they invest and how they decided. Charles said that the culture of a company beats the scheme every time. He talks about one of the companies they started as one of their first investors called Boxed, which is basically Costco for the mobile app and the CEO of that company is so successful now that they are paying for their employee’s students to go to college, which is obviously generating tremendous amount of publicity and a huge success story.

Charles talks about how important it is to find out other people who have pitched him and what questions he’s going to ask before you come to see him. Great intel. He really wants to know why this idea is great, how it’s going to change the world, why you’re passionate, and most importantly, why you’re the right person to make it happen. Enjoy the interview.

Hi and welcome to The Successful Pitch podcast. Today’s guest is Charles Smith who is working Social Starts. He was just named one of the top 25 angel investors in New York to know, so you can imagine how excited we are to get to know him on the show today. Welcome, Charles.

Charles Smith:
Thank you, John. I’m excited to be here.

John:
Would you tell us a little bit about Social Starts and then maybe backup and tell us how you got into the whole startup world in the first place.

Charles:
Oh, sure. Social Starts is a seed stage investment fund. It also has an A round fund, so we have a very interesting approach to the world. We have over 160 investments spread out over four years who very active fund and we really like to be the first money in to a company and then we also always reserve pro rata so that we can invest out of our series A funds. So, we look at those as two separate stages in a company, obviously, but we’re very particular about what we want to see when a company raises series A, so those criteria are very different going to seed to series A. The way we look at the world is the internet has enabled trust over distance at scale for the first time in human history.

John:
I love that. We’re going to Tweet that out. Trust over distance.

Charles:
Yep. So, our general part is a man called Bill Loshe, coined that phrase, or at least I credit him with coining it, and so we look at things that are right in that vein. Like, what does trust over distance enable? It enables media to happen, it enables social networks to happen, it enables you to make friends and have those friends tell you about things over distance and so that’s where we look. So, if you look at our portfolio, it is a lot of examples of social analytic platforms, marketing analytic platforms, media platforms. We do a lot of mobile commerce and we’re looking at the software of the internet of things as well. So, those are the ideas in which we do a lot of investing.

John:
Fantastic. Can you give us a range. I know the article said you typically go between $25,000-50,000 with the startup seeds, is that what Social Starts does?

Charles:
Sure, so Social Starts actually, that was my angel investing statistics, when Social Starts looks at $50,000-100,000 to invest in what we call a motive of inception investing and then our series A fund invests $250,000.

John:
Got it. Wonderful. Alright and very different criteria.

Charles:
Very different criteria.

John:
Would you mind walking us through really quickly what’s the criteria, was it moment of inception?

Charles:
Moment of inception. You know, we look at the moment of inception fund, we really look hard at the SEO and whether or not they are going to be able to get the company through the hurdles that all companies face and we have the process where we want to meet with those CEOS at least twice with two different partners in person and spend time challenging them, not only about the company and the way the company is structured, but as a person, because there is a, there’s so many points of inflection happen in a startup. Paul Graham coined a phrase, “the trough of sorrow.”

So, how is that CEO going to deal with that? How are they going to deal with the fact that at some point you’re not going to know everybody who’s in the room very well. How are we going to deal with the fact that when you’re 100 people and you have to manage a board of directors and a group of investors and a group of customers, because they are very different skills growing from a company that has 2-3 co-founders in a room as oppose to growing it to 200 people. So, those are the kinds of things we try to get to.

So, we’re very interesting in CEO’s backgrounds. We’re very interested in what they’ve done in the past. We’re very interested in why they’re doing this particular idea and what makes it a great idea from their perspective and then we also analyze, is the market big enough, if there are metrics on the company. We do fund businesses that aren’t necessarily launched.

So, we get to do projections there, but if there are statistics, how is that going? Do we think the market is as big as the company says it is? Are they creating a market? What hurdles do they face there? One very important thing too, we fundamentally believe that technological skill is what enables you to beat your competition and so we don’t invest in companies that don’t have that skill in house. That’s important to us.

John:
In other words, they’re not outsourcing it. They are still looking for somebody, they have to have that person on board and somehow either that person is working for equity and no money at this point, if there’s no revenue or however they find that person.

Charles:
However they find that person and that we want to be able to evaluate that CTO as well.

John:
Let’s just tap into a little bit of the trough of sorrow, because it is fairly familiar to most people, but since you brought it up as a key criteria, you know, that trough of sorrow can last a week, sometimes I’ve heard it last some people a year and it really is this whole concept of what am I doing, not just what you mentioned of, which is also overwhelming of I don’t know everybody or the skill sets are totally changed or I don’t know, it becomes this whole self-doubt issue, so I would imagine when you’re evaluating people that you look to have them share some experiences of when they’ve been down or had a hurdle and how they’ve come back from it. Would that be an accurate assumption?

Charles:
Absolutely. You want to talk about ways that they’ve, you know, challenged themselves in the past and how they’ve come through those challenges and that, one of the things about funds often wanting to and, we’re no different, wanting to invest in previous entrepreneurs is they’ve dealt with a lot of those issues, even if they fail previously. If they’re willing to go ahead and do it again, knowing ow hard it is and knowing the issues they face, well, that’s something that is very important to understand.

On the other side of that, we also wants to see the passion an entrepreneur has for his or her business, because if they don’t think that it’s the greatest idea ever and that they are there to change the world, well, then, we’re not going to be able to convince of that, right? So, the first and most important thing is that, is they believe their idea is going to change the world in whichever world they happen to be in whether ti’s human resources or anonymous chat, whatever.

John:
Right. I read about your article about being one of the top 25 angel investors to know that changing the world is a very, very personal motto for yourself and it’s not just about finding the right entrepreneur or making a lot of money, it really is about changing the world. Can you give us some examples of startups that you feel are changing the world and why you’ve invested in them?

Charles:
Sure. Well, there’s a couple of examples from my personal portfolio and it doesn’t, changing the world is an interesting thing, right. Well, I’ll give you a great example from our Social Starts portfolio. We just invested in a company called Style Lend and Style Lend is a business which allows, mostly women, to share their closet. So, they buy a dress and, you know, it costs, say it costs $200. Well, they wear it once and they can rent it out three or four times and then they wear it again.

So, they amortize the cost of the dress out through a network and this is a perfect example of this trust over distance and the way it changes the world is well, there’s a whole lot of clothes made that only get worn once and then thrown away and a woman is unsatisfied with what she purchased. Well, here’s a way to build a relationship with someone. You understand the sizing parameters are that you’re getting. You understand what it’s going to look like on you, because you created a relationship with this person. Maybe you can rent the same dresses from women again and again, different dresses.

Look, is that changing the world in a grand scheme of things? No, but it has a huge impact on women’s lives, women love it. It’s launched in the San Francisco area. It has great reputation among its customers and has an opportunity to really change the way you think about buying clothes and then wearing them.

John:
I really like that. You can see why you invested in that, because you were a VP at Etsy. Am I pronouncing that right?

Charles:
Etsy, yes. You are pronouncing it right.

John:
Where people shop from all around the world, so you have a knowledge and expertise in the shopping arena and certainty if you found someone who is your size and that dress fit you perfectly, you’d love to probably rent multiple dresses from that same person.

Charles:
Yes, absolutely. You almost become closet buddies, right. That’s a big deal.

John:
Yeah, that’s a great example. Let’s jump to what the criteria is because it is so different for social starts series A. What are you looking for there? Are you looking for revenue to be happening? How many people need to be on a team? That kind of thing.

Charles:
We are looking for..in moment of inception fund, we will act as a lead syndicator for an investment. In series A, we will not do a lead. We are a small fund. We have three active venture partners, two general partners, general partners above the venture partners, so only ten people in the fund overall, so we can’t do significant due diligence for series A. So, we’re looking for a venture capital lead on series A that we can follow. So, that’s the biggest criteria right there. It’s got to be a venture capital lead.

Now, other things that are involved there. Again, it’s often companies that are already in portfolio for which we are investing pro rata and, you know, it’s going to be obviously also in our areas of expertise, so that’s what we look for. So, different series A depending on the type of business can have very different criteria for whether or not you’re willing to fund a series A. You know, big time gaming businesses will often times raise a series A before launching a product, because the depth and the complexity of the technology so hard or you have a consumer business.

Well, you better be doing to raise a series A, you better be on a run rate to doing at least a million dollars a year with significant customer growth and customers you can go talk to. So, the criteria really depends on the area of focus for the business.

John:
Is there someone that you can give us as an example that’s public knowledge that started off as a seed and because you knew them so well, they’re one of the few people, while they weren’t, you weren’t their lead series A, oh yes, you’ve got series A, somebody else’s lead, now we know you, we’re happy to be..

Charles:
Sure. I think the best example in that category is Boxed. Boxed is a mobile shopping application, only on mobile, and it sells bulk items via mobile commerce and the founding team we got to know very early. I believe we were the first, that deal was done before I was at Social Starts, but I believe we were the first money into the company and then we followed on two rounds, I believe, after that and that’s just a great company, growing phenomenally and we’re very proud of that company as an investment and as a company. The CEO just announced that he’s going to contribute towards the college education of the children of his employees.

John:
I just read that today. That is so timely. Yes, because they compared him to the mobile Costco, right?

Charles:
Yes, exactly. Mobile Costco, yes, that’s what they would say.

John:
When I was reading about his willingness and some of the employees are making $70,000 and that company, if you qualify, is still willing to pay for your child’s college eduction, because he believes in education so much.

Charles:
Yes, that’s exactly right. Yep.

John:
What a smart marketing move as well as talking about changing the world in a small way. If you set that example of I’m a startup, this is what I’ve done and once I get to this level of success, I’m going to start making it so desirable to work here that I’m going to put my money where my beliefs are, which is I believe education is the key, as you said, tech skills beat the competition every time. Imagine him trying to attract some really smart tech people.

Charles:
Oh and I, you know, I’m a big Philadelphia Eagles football fan and the coach of the Eagles says, you know, culture beats scheme, right, and so, that’s another theme. If you’re growing a big business, you’re going to have to create a culture that allows you to grow. People define great culture as very different things and that’s something that I don’t even, that’s very difficult to define, but you know it when you’re in it and you know the company, the people in the company are committed to making a company grow.

John:
We’re going to Tweet that out. Culture beats scheme. When it’s true with sports and it’s true in your business and it really defines your culture in a way that’s just not a philosophical difference, but an actual way of treating people, you don’t have to be as big as Google, obviously, to treat people well, right?

Charles:
That’s right. That’s exactly right.

John:
What an inspiration your company picked someone of that caliber. I’m constantly talking to my clients about the importance of integrity, character, and trust, and honestly and not hiding things, because it will all come out in due diligence, but you know, tap into someone who A) has a great idea and the skill to do it, but then almost surprising you with that kind of decision that they’re going to pay for their employee’s student children college educations. It must be so rewarding to say, boy, we really bet on the right horse. The right jockey, excuse me.

Charles:
We – tons of emails around the Social Starts group today, you know, patting ourselves on the back for that kind of great decision. It feels wonderful.

John:
So, let’s talk a little bit about you and your background, because you have a really interesting background. As I mentioned, VP of Etsy and also working in this Ineo Group, did I pronounce that right?

Charles:
That was my consulting arm.

John:
You know, what caused you to want to get involved in being an investor?

Charles:
You know, if you start at the beginning of my career, my family owns a media business called Calkins Media. It’s small news papers and TV stations outside of Philadelphia, outside Pittsburgh and then the South East and I started my career at Macy’s and I grew very frustrated because I grew up in an ownership situation so I thought like an owner and after about five years at Macy’s I realized this is – I still think like an owner and that thinking is not valued in a large corporation and owners take risks, owners take responsibility, owners want to, you know, impart change on their companies as often as they can if it’s the right thing to do and so I got very interested at that point.

And that was 94-95 and the internet was just starting to happen and I thought, okay, well, I’m going to figure out hot to do that and so aggressively look for a way to get involved in an internet business and so being involved in that startup world in New York eventually lead me to investing and I find the idea of trying to understand how a company can overcome its obstacles and putting your own mind to work as that company tries to over come those obstacles was a fascinating way and not always a smart thing to do, but it’s a fascinating way to sort of put the ideas of your principles to work towards the company’s success, so I really loved doing that.

John:
That’s great, those three principles – being comfortable with risk, taking responsibility, and being comfortable with change and not just liking the status quo, which is what so much of corporate America is. It’s like it’s always work, let’s just try to make it work a little bit better, let’s not change everything or don’t be an agent of change, please.

Charles:
Yeah, exactly.

John:
You must hear a lot of pitches both at the seed level and series A, maybe not as many, but still quite as few. What are some of your big suggestions to people who pitch you or anybody on how to make it memorable and effective?

Charles:
I think the first thing you have to do is let go, as an entrepreneur, let go of the idea that that you’re controlling the pitch and understand that every investor is going to want to get different things out of the pitch and be prepared to respond in the way that the investor wants that information given and the better you know your business – if you know your business very well, you’re going to be able to answer the question in anyway that they’re offered.

John:
So, they could interrupt you during the pitch, you don’t have to finish the pitch to – or you could get asked after the pitch, it’s the ability to pivot while pitching, basically.

Charles:
Exactly and often the exercise of a pitch meeting really does test how you’re going to respond under pressure in a very small way and so I think that, you know, being prepared not to pitch, but being prepared to understand what the investor is trying to get out of you and having information as background and I think to that end, I’m always surprised entrepreneurs don’t spend more time networking amongst themselves. They do a lot of networking amongst themselves, but they really should take the step and say, okay, Charles invested in you, what’s it like to pitch him?

John:
Yes, do that homework, yep.

Charles:
Do the homework and not necessarily about like, I’m much less interested if they did a homework about my background then if they understand what it means to pitch me, you know, you can talk to two to three people pretty easily in my portfolio and say hey, what’s it like to pitch Charles? What is he looking for and then they’re not surprised and are able to, you know, that entrepreneur, he or she and I are able to have a better conversation.

John:
Because automatically they know A) you have to have the tech skills in house, right, something basic like that and they’re going o get asked that and also they want, you know, passion, you mentioned, is very important to do you so you better know the answers towards why you’re doing this and what makes this a great idea and what makes your team the right ones to execute it, right, some basic prepared answers to those questions.

Charles:
You said something there that I think is something that’s really important and you said it in a broader sense, but the real question you have to answer as an entrepreneur is why am I the person to do this.

John:
Yes.

Charles:
Because there are no new ideas, right. There are very few new ideas, so what makes a different is why the entrepreneur can execute this idea versus everybody else and part of that is a team and part of that is different strategies, but especially I advise companies as well occasionally and I’m always telling them that. You have to answer why you’re the best person to do this.

John:
It’s so important and you have to believe in yourself and you have to ideally have some kind of story that shows why you’re the best person and not just think it, right?

Charles:
That’s right.

John:
Well, since you’re such a specialist in mobile and shopping and all the other data things that you mentioned, mobile commerce in particular, are there any trends that you’re especially excited about?

Charles:
I think the interesting thing right now that’s going on and it really is sort of applying – I sort of back it up and say what I’m really an expert in is media, but what’s happening the world now is analytic systems and publishing systems are merging in such a way that delivering content based on analytics becomes, it doesn’t matter if you’re a commerce site or a media site, you’re going to be gathering information from various different sources whether it’s social media analytics, the analytics of what’s going on in your website, who is viewing your traffic, those things, what people purchased before, what ads they’ve seen before and delivering them an experience that’s based on an analytical framework.

So, the difference between, you know, serving up a dress and serving it up an article about children’s books are basically – it’s the same thing, it’s just a different type of content, so the trends we’re really seeing are and Boxed is a phenomenal example of a company that is laser focused on analytics and making sure that the items that they’re delivering to the customer are in line with what the customer has purchased before, what they want to see, what customer like them to see, right, which is, if you think about it, that’s what Buzzfeed does, right? They do the same thing and in very different ways, I’m not comparing them, in a lot of ways obviously they are apples and oranges, but that core analytic, you know, analytic and delivery framework comes from the same place.

John:
If you like this kind of article on Buzzfeed, we’re going to give you more of that. If you like this kind of garbage can, we’re going to show you more of those or where they really get smart with analytic is, seems like you might be running out of the filler for your garbage cans right about now, so serving you up an ad for that or content or story about it or something.

Charles:
And also I think the other thing that I think is going to change dramatically and this is different from in Commerce as oppose to media is what I call merchandising and what, which is very hard to do on the internet and stores do it very well. It’s very easy to see how this shirt goes with this pair of pants or hey, you need a wallet or you need a belt to match your shoes. There’s a key fashion tip right there. So, how are you merchandising? How are you suggesting other items?

And I think more and more analytics will go towards that so that, because look, there are two ways to raise your revenue as a retailer, as a commerce merchant. You can add more customers, right, or you can get the customers you already have to buy more and almost always easier to get the customer you already have to buy more because you don’t have to pay to acquire them again.

John:
Absolutely.

Charles:
And so, driving towards analytics is about how you raise that check size. How you raise that average check is really critical as a piece of analytics.

John:
What I’m seeing is, you know, the more you reward people for spending more with you, whether it’s an airline mile frequent flyer thing, being a frequent flyer on Boxed and getting more of a discount, people love that, because they’re like, oh, well, I wasn’t thinking of buying this with you, but if you’re going to give me a bigger discount on everything I’m buying, then why wouldn’t I buy it from you?

Charles:
Absolutely.

John:
That kind of strategy. Charles, what are some books that you like and it can be related to investing or they can be related to anything that you find useful about living a more successful, happy life?

Charles:
I often, when entrepreneurs ask me that question I tell them, I ask them typically like, you probably read TechCrunch everyday, you are overwhelmed in the amount of reading that you get in terms of magazine articles, etcetera. So, I often recommend that they do what I call mental floss reading and that’s a term from Brad Feld, who is a great and well-known investor out in the Foundry Group in Boulder, Colorado and that’s his – I’m borrowing that term from him.

So, take some time, do some mental floss, find an article. I love Neal Stephenson. He has a new book out. He is a great both computer programmer, he writes a lot about the internet age and also about science fiction and he’s books are like super technical. He has a great way of combining very technical subjects with great adventure. So, that’s an author I like to recommend to people if entrepreneurs haven’t heard of it, because it’s at high levels, but it’s not about what they’re doing.

John:
So, it will stimulate you while still giving you the mental floss. Fantastic. Is there anything else before we close that you want to say to the listeners? I mean, you’ve given us so many great takeaways about tech skills beats the competition, culture beats scheme, you know, getting over the trough of sorrow, all these great, incredible takeaways, is there anything else that comes to mind on being prepared for the pitch? As you said, talk to other people who have pitched me to see what I like to hear?

Charles:
You know, I think that, you know, at its core, pitching and trying to raise money is often dreaded by entrepreneurs and I think that if you look at it as a way to gather a very broad swath of advice from very smart people who have seen and done a lot of this before, you can change your thinking about your fund raising and managing a big company, managing a small company is all about managing the inputs.

John:
Love it.

Charles:
You’re going to get all kinds of advice, you’re going to get all kinds of information. So, the fund raising practice is really great practice for taking all those inputs when you’re running the company as well and so really look at it as a way to get information because you’re going to get conflicting advice. One entrepreneur is going to, excuse me, one investor is going to say wow, you should really go after the doll market, another investor is going to say, wow, you should really go after the athletic shoe market. Well, you have to understand what’s important and how to make use of all that different advice.

John:
I love that. Managing all the disparate input and looking at pitching and getting advice as a welcome experience as oppose to something to dread. Fantastic. What is the best way for our listeners to stay in touch with you? Blog, Twitter, LinkedIn?

Charles:
You can follow me on Twitter. My Twitter handle is CharlesSmithC. I’m always happy to receive inbound pitches, although a warm intro is always better, you know, if you know someone who knows me, I rather hear from you that way, but also nothing ventured, nothing gained, so if you don’t have a warm intro, my email address is Charles(at) SocialStarts.com, fire away and I’ll invariably respond, because I think if you’ve gone to the effort to reach out to me, then I don’t have so much volume that I don’t have the time to respond, whether or not I might not take the meeting, you know, I’m not going to take every meeting, but I’ll try to respond.

John:
How great. Well, I can see why you got voted one of the top 25 angel investors to know in New York. I would say you are one of the 25 people to know period, no matter where you are.

Charles:
Well, thank you. It’s been great talking to you. I really enjoyed it.

John:
My pleasure, thanks again for joining us.