TSP028 | Eric Scott – Transcription
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John Livesay:
Today’s guest on The Successful Pitch podcast is Eric Scott who is in charge of the investment at HVF, which is Max Levchin, the co-founder of Paypal’s investment world. Eric is in charge of hearing all the pitches that Max’s company is involved with. Two huge companies have come out of HVF, which stands for Hard, Valuable and Fun, by the way, which is how the evaluate their pitches and Affirm is one and the other one is Glow, which is an app for women who are pregnant or want to get pregnant. What they’re talking about here is a whole new way of looking at pitching.
One of the things they care about most is when you pitch to show them how you think. That’s what they’re most interested in. Eric covers companies they’ve invested in that have been bought by Twitter. Companies they’ve invested in that are in their Series A and finally, companies that they have now given them their seed round and what the criteria is for each. It really all comes down to what is your defense against competition coming in and taking your idea. Enjoy the episode.
Hi and welcome to The Successful Pitch podcast. Today’s guest is Eric Scott who handles all the investments for HVF investments run by Max Levchin. You might know Max as the co-founder of Paypal. He works for a company called Slide that Google bought and now he is running a company called Affirm, which actually came out of HVF and Max handles all of those things concurrently, so he needed a wiz guy like Eric to manage all the other things that HVF is doing. So, let’s get right to it. Eric, let’s get to the show.
Eric Scott:
Thanks for having me.
John:
Eric. I am so impressed with the volume of things that you and Max are doing and the intensity. Let’s first start off with the cool acronym and what HVF stands for, which is Hard, Valuable, Fun. What a great culture description. How did you guys come up with that name and what’s it like to work at a place that’s Hard, Valuable, and Fun. Can you tell us a little bit about what that means?
Eric:
Thank you. Yes, yes absolutely. Well, first of all, I can take no credit for coming up with the name. I was hired under Max’s technical assistant at HVF around a year into its inception. The origins of the name actually date back to Paypal at some point or another, Max was working on an incredibly technically hard problem and Peter came up to him and basically said, why – Peter Thiel, the CEO of Paypal at the time basically came up to him and said why are you working on this problem. There are much more valuable things that you could be doing and Max, as a 23-year-old CTO basically said, What are you talking about? This is like an incredibly hard problem, so it’s obviously valuable. Peter then essentially explained to him why the things that are technically hard, while fun, are not necessarily the most valuable things to work on at any given time. So, HVF has essentially become the three criteria for which we evaluate whether or not we’re going to work on a product or invest in a project.
John:
Wow. That’s such a great insight. So, let’s talk about your background just a tad before you got to working with Max. I know that you – I have read some of your blogs and you’re incredibly savvy technically and so he must have an incredible trust factor for you to be his go-to guy and decide, you know what, this is something we should invest in or not invest in and I know you’ve worked at some startups, but just tell us, did you ever in a million years imagine you’d be doing this?
Eric:
You know, the weird answer yes.
John:
Oh, I love that.
Eric:
I had no idea that I would be doing it with Max and I had no idea I’d be doing it so soon and I get to be working with as great of people that I get to work with, but I always kind of knew that I would be starting companies, help start companies, and my goal is to kind of eventually be a venture capitalist that happened ten years sooner than I really thought it would and I got really lucky along the way, but yes. I sort of always had been drawn to technology and entrepreneurship.
My background, you know, it’s pretty, it starts like a lot of, sort of, you know, people new to Silicon Valley. I graduated from Claremont Mckenna, small liberal arts school down in LA. I started a company when I was there. It was an e-commerce company that let you split the cost of a gift between friends.
So, this is like slightly before Venmo and right as KickStarter was becoming a thing. I got into the 500 startups accelerator. I successfully ran that company like straight into the ground and worked for my competition, which was a company called Wantful. I got laid off from Wantful and I was more or less unemployed on my couch watching West Wing when a friend of a friend texted me and told me that Max Levchin, this guy named Max Levchin; first of all, have I heard of him? I was like, of course I’ve heard of him; was looking for a technical assistant.
So, this is an important thing to understand about HVF is that we do three things. We start companies, we run companies, and we invest in companies and the people who really do like the grunt work for starting these companies are the analysts and technical assistants. So, these are people that can get up to speed really quickly on any technology, any market, they are usually PhDs or masters in computer science. I’m neither of those. I barely got my minor in CS from Harvey Mudd. I basically texted my friend back saying, hey, thanks, but like why are you at all, you know, why do you think I’m at all qualified for this? And more or less, I decided to just go for it at his behest and so I guessed Max’s email.
John:
Your first hack. I love it.
Eric:
Yeah, yeah. Ironically unlike the second or third interview with Max, he told me about Reportive and that has like changed the way I guess people’s emails forever, but no Reportive, I just sent it into the ether and three days later he, you know, was weirded out by the fact that I knew he was hiring this strange position and I started as his technical assistant and then around three weeks it became apparently that I wasn’t great at the technical assistant thing, but I had sat in on one pitch with him and he asked for my thoughts and I wrote up three paragraphs essentially saying, I think I might have been the first person to just bluntly say like, hey, look, you can invest in this and you’ll probably like not lose your money.
In fact, you’ll probably make it back, like you’ll, I don’t know, get 20% or maybe double or triple it, but like, who cares? And he said, this is a very good analysis, would you like to do this more? It’s kind of after that the rest is history. The next big break was essentially when he decided to go run a firm full time and that sort of left this vacuum for me to step and make sure Max’s money continues to be put to work, but he still, I should clarify now that he’s still very active in helping our portfolio companies. He doesn’t have as much time to sit in on pitch meetings as he used to, but beyond that, you know, we’re definitely a team along with the rest of the HVF labs crew.
John:
Just to give the listeners a big picture, correct me if I’m wrong, from what I can gather from all the research I did, HVF; Hard, Value, Fun, Affirm and another company Glow, which is an app for women who want to get pregnant or are pregnant grew out of HVF and Max really wanted to run Affirm so that he now really spending a lot of time doing that, but there’s obviously a tremendous value of what Max is interested in and keeps his pulse very much on what’s going on at HVF and what you’re doing. Can you give our listeners a ball park of exactly, you know, how much money HVF is investing these days? You’re obviously a VC, so it’s not just seed money.
Eric:
Yes. So, we are, so we’re certainly not a traditional fund. Our investment kind of look like a, our investment portfolio or our investment strategy you could say looks like a double helix on its side. It’s kind of hard to imagine, but essentially the sort of strand , the first arm of the double helix looks like a barbell, right, so by percentage of round, we take up an enormous percentage of very, very early seed and pre-seed rounds.
Every once in a while we’ll do this like once a year, maybe this includes Affirm and Glow, includes some companies that we did not start, but we aboard seed, we’ll kind of be as close to being the founders as we can without actually being a founder, actually being involved day-to-day. Then there’s a dip where like when you look at Series As and Series Bs, we are investing a tiny percentage of the round. Like, we work very well with almost every venture capital firm in the valley or, not, I shouldn’t say almost every, but we work very well with many, many venture capital firms.
Not really a competitive for any of those Series As or Series Bs and then there’s like some later stage kind of special situations where we’ll do, again, maybe one of those a year, but take up the entire round. It’s like something a normal venture capital firm would ever do. If you look at number of investments, these are kind of like $250k investments where we’re just coming in alongside a 10 million dollar round.
It looks like just a very straight forward bell curve where, you know, we’re investing pretty much like seed Series A, Series B party round or not and as far as how much money we’re trying to put to work in a given year, like I’m not actually like a real, because we don’t sit on a real fund, we get to be very opportunistic about it. It’s like last year we did roughly 28 investments.
This year we’ve done one and I know we’re about to do another next week. It’s just a matter of mechanics. So, we sort of get to pick and choose, you know, the things are only going to make money, but also things that we can actually help with.
John:
Got it. So, in those 28 investments that you’ve made. I’m sure it’s all public knowledge, right, it’s in CrunchBase and stuff. Can you give us a ball park of how much that dollar amount was last year?
Eric:
I cannot give you the exact dollar amount, but I can tell you that around a third of those were follow on investments both from things that we have really big on ownership stakes in and also some things that we don’t have as big ownership stakes in and two thirds of those were completely new investments.
John:
Oh great. Right like you said $250,000 is sort of the average investment that you make in those situations or you do bigger ones as well, yeah?
Eric:
$250k is more like the, it is just below the average, but it’s also the minimum. So, $250k is kind of the amount where we’re like, this is a lot of money, we are highly motivated to help you succeed with this money.
John:
Got it. Let’s go back to what you said using a hard valuable fund as their criteria of which pitches you hear that you decided whether you want to recommend to Max to fund. How does that filter through when you’re hearing a pitch, since everyone listening to The Successful Pitch podcast is trying to learn how to pitch better. How would they pitch HVF making sure they’re hitting all three of those?
Eric:
Yeah. So, every VC, every angel investor kind of has their own style that they’re attracted to. Their own style of listening to a pitch, they’re own style of pitching a company themselves if they’ve been on both sides of the table. I think for us, honestly, the best thing to is to try not to pitch, just explain. Like, we kind of – we view our pitches as a search for some sort of fundamental truth about what the company is, what true the defense ability is, how, probably more important than anything, we’re just trying to get a sense of how the founder thinks, which at the ultra early stages is arguably more important than what the company is actually doing.
It’s likely that changes a few times, but what the company is doing and how the founder thinks about it, how the founder decided to attack this first is the kind of ultimate way of understanding how this person in front of you actually looks at the world and reasons through problems.
John:
I love that. We’re probably going to tweet something out about that. How a founder thinks and views the world is one of the key elements to pitch and show when you’re pitching. Can you explain a little bit about the search for truth being defensible? Are you talking about, what are you defending? The barrier to entry with competitors or the numbers, what are we defending here?
Eric:
It’s all about competition. Let me rephrase that. When I refer to understanding how something is defensible that means how do you prevent a competitor from coming in and taking away your revenue. There are many ways of defending the business, there are some that we understand better than others, certainly, but the sort of arching like, search for a fundamental truth, it’s much more holistic and abstract than like, we’re looking for truly how is this defensible. Usually you can reason through that pretty quickly, but there’s lots of nuances around how they’re pitching what they’re saying.
John:
Can you give us an example of a pitch you heard that had a great defensible barrier to entry from competitors.
Eric:
Yes, yes. So, probably my favorite type of defensibility is a network affected data. So, this is a specific network affect in which basically a central brain makes all the decisions for these like customer nodes out in a network and the more nodes the central brain has connecting to it feeding it data, the smarter it gets. So, what the heck does that mean?
John:
AI.
Eric:
Uh, not really. It doesn’t need to be…
John:
Really?
Eric:
Yeah, like it definitely, part of the defensibility, part of the mote or at least initially getting there can certainly be machine learning as it is for one of our portfolio companies, Sift Science, but it doesn’t need to be. So, Sift Science is a great example to kind of understand this. They started out and I believe still are really leading the charge in fighting fraud, fighting fraud online, and basically the way it works is your company that come up to you, let’s say your Twitter, and they come up to you and they say, hey, you have all these people buying ads with credit cards. Give us a whole bunch of your data and we will tell you when somebody is about to fraud you.
You Twitter and you say, okay, that’s great, how are you going to do that? The answer is, well, we’ve got Uber’s data or we’ve got Facebook’s data or we’ve got these restaurants’ data or we have like these people who have no relationship to you. If Twitter succeeds or fails that has really no impact on whether or not Walmart is going to, I should be clear, I have no idea who their actual customers are.
John:
Right, it’s just an example.
Eric:
So, these are just an example. These two like popular Silicon Valley companies, Twitter and Uber, like they don’t seem competitive. So, as soon as let’s say Twitter’s data, you can look at someone who is swiping their credit card on Twitter and say, oh, they’re a fraudster and alter everyone else on the network. Hey, we have this fraudster on an unrelated website, you should watch out for the transactions. That’s like a really strong network effect on data, because if a competitor pops up the next day, all of the customers are already on one website. They already have all the transactional data on Sift Science, there’s no reason to switch.
John:
Right. It’s almost like if you Uber you don’t need Lyft. How many apps do you need to get a car to pick you up, right?
Eric:
Yes, yes. Most market places have these types of network effects. Our favorite, like you said, a network effect that is dependent on some form of somewhat intense machine learning to actually get off the ground.
John:
Got it. I want to ask you about three different kinds of investments that you’re marking it Hard, Valuable, Fun. One is you got a couple of companies that have actually been bought. Another that is in Series A and then ones in a seed. So, I think it’s fascinating, I love to just have you touch on each of those three topics. So, I saw that you have a company called Cover that got bought by Twitter and something called SmartThings that got bought by Samsung. Let’s just, can you take a minute and pick one of those companies and describe how you guys invested in them and how long it was before they got bought by Twitter or Samsung?
Eric:
Sure. So, I can – trying to think of what I can and can’t say. There’s definitely things I can say.
John:
Just top line. You know, this is what the company did. This is why we liked it and then it got bought x numbers of months or years later because, so obviously that was a successful investment.
Eric:
So, for your listeners, there’s not going to be too much that’s new or surprising here. I mean, both had excellent founding teams, both had visions that fit really well in line with sort of the thesis of the year for HPV investments, both had pretty good traction and decided to take acquisition offers within two years for both cases, because things were going well, somebody offered a price the founders found really attractive and we are certainly not the types of VCs to prevent any sort of acquisition nor are we big enough investors in either deal to have prevented that if it was the case. So, I think both of them were really good outcomes for all the investors and the founders and really good situations. The SmartThings was -…
John:
Yes, please, tell us what they were. For those who don’t know, what is SmartThings and what is Cover? What do they do?
Eric:
Sure, sure. So, SmartThings is, excuse me, was basically the first sort of internet of things platform for your home. They launched on KickStarter I believe several years ago. They come with a central hub and a package of devices and sensors that let you know when a door is opened, motion sensor, all sorts of things like that.
John:
Kind of like Nest, right? Monitoring your temperature and all that?
Eric:
Nest except for just one device, they have many sensors that weren’t necessarily push and pull. Like, you could just read data from it, so you can see that the temperature is raising, you couldn’t necessarily raise the cost, but you could also see like, oh, your front door is open and things that Nest couldn’t tell for you. So, that was SmartThings. The second company Cover, really cool idea, basically it was a plug-in to Android that would predict what you were doing given the sensors on our phone and show you the relevant apps. So, it would detect that you’re driving and have the see immediately on your cover scene show Google Maps and Pandora, because those are probably the two things that you want to use when you’re driving in a car. It would detect that you’re running, again, probably put up Pandora and automatically open up Strava so you can track your run.
John:
Fascinating that Twitter wants that, yeah. Those are great. So, the only one I want to ask you about is in a Series A is ZenPayroll. I love the name,, what are they doing with Payroll that makes it zen and what can you share about their process to be in the Series A.
Eric:
Man, this is one of those deals that we are so lucky to be apart of, the founder, Joshua Reeves came and pitched me and I was extremely skeptical when he walked in to the pitch and I was like incredibly fired up when he left.
John:
Wow. This is what, a year ago, two years ago? How long ago?
Eric:
I think a year and a half ago maybe sounds right. It was a year ago.
John:
I love to get people a framework. A year and a half ago they came in to pitch you and now they’re in Series A, just the frame work. What was it that made you go from skeptical to excited?
Eric:
So, I went from skeptical to excited in maybe like 22 minutes. That’s – that sounds about right, around 20 minutes. So, on the surface, you know, the way these things work is we had email intro, we rarely take cold meetings just because our network is pretty strong. The email address says, hey, look, there’s this guy in his team and they have a bunch of already pretty famous Silicon Valley investors in and they’re working on payroll and I’m like, alright.
We already invested in a lot of thin tech, so we know this space really well, payroll has super thin margins, it’s not like preventing aging or any of the like crazy biotech stuff we’re investing in, like why should I really care? And kind of took the intro because it was a warm intro and the way that Joshua really, like genuinely cared about this problem is just infectious and it sort of like, alright.
At first, we were extremely skeptical kind of anyone that walks in with a bunch of like who touts their existing investors and anyone who like pretends to be more excited than they are about their current problem, but the sense that I got and this is after listening to thousands of people kind of try to sell me their BS is like, this guy really cares and he is really smart. Like, if nothing else, this will be the world’s best payroll solution and I don’t think anyone can do it as well as him.
John:
Wow, I love that. We’re going to tweet that out. When you show that you care about the problem, it is infectious to the investors.
Eric:
Absolutely, but here’s the warning. If you try to make it seem like you care and you don’t actually care, a good investor will pick up on that in four and a half seconds.
John:
Authentic has to be part of that. It’s not acting, it’s actually really caring. Can you tell us what the problem is that he’s so passionate about solving?
Eric:
Yeah. I think he views payroll as something that should theoretically be used by companies to be the life line of the relationship between the employer and employee. Like, when somebody does really well, the payroll is the mechanism that delivers this like, the most – excuse me, the payroll is the mechanism that deliver this great news. Like, you’ve done well, you get a bonus. You’re doing well. We care about you. A check will show up every two weeks and provide sustenance, provide opportunity, provide everything else that money provides, and yet today it’s been twisted into this like terribly complicated, decrepit system run by these giants who have no attention of innovating any time soon.
They’re like trying to take down Silicon Valley startups by reneging on contracts. I mean, it’s just a pain. I remember running my startup setting up payroll and I was like why the hell am I spending three hours figuring out like who to call and then paying hundreds of dollars a month when I should be spending that money on rum and I’m ultimately just like sending these like really small checks to the few employees I have, like these are just numbers moving from one account to another, why am I stuck in this old system? So, that is the problem Zen Payroll is solving.
John:
I love it. It seems to me that he connecting money to the whole spirituality zen, if you will, of there’s a person behind the check and it’s not just some automated thing that’s coming to you and therefore there’s a connection between your performance and payroll that’s more than just numbers and data. I love it and so you guys invested in that or heard it and said we want in and you gave them some seed money and now you’re going for Series A, is that sort of the snapshot of it?
Eric:
No, no, no. He had already raised his seed money and already had a lead for his Series A. We were participants in the Series A. So, we’re not major investors in that from his perspective at least. We’re just glad to support him in his journey.
John:
Got it. Alright and then I picked one, but you can certainly talk about another one. You have BlockStream as a seed investor. Is that a good one to talk about?
Eric:
Yeah.
John:
Tell me what that is? What was that pitch like?
Eric:
So, that was a super impressive pitch, especially for us because we are mega crypto nerds. Well, I should rephrase that. I like to pretend I’m a mega crypto nerd, but everyone else at HVF actually is. So, this thing called Bitcoin really hit the scene so to speak a few years ago. We read all the papers and basically were just taken a back by the math. Economically, politically, business perspective like the actual asset of Bitcoin has a lot of debatable positives and negatives.
We could probably talk for three hours about that, but what is not debatable is the math behind it. It’s elegant, it’s powerful, it is like a true peer crypto innovation and BlockStream was the first or at least, maybe not the first, but the most serious attempt that we had seen at fundamentally innovating, again, on the block chain. Founders are very serious, they’re all extremely well known in the Bitcoin and security communities. So, we decided to basically take a bet both on the really cool math they were pitching us as well as just knowing that these are great founders that we want to bet with and we want to play with, so to speak.
John:
But, what problem are they solving with this whole Bitcoin world?
Eric:
They are the high level, they ultra, ultra high level and I’m going to purposely avoid some of the technical details, because I’ll just talk over myself.
John:
Please dumb it down. Like you’re talking to a 7th grader.
Eric:
So, today a Bitcoin is this digital asset and the way that you record that it is transferred from person A to person B is via the block chain. The block chain is basically what makes Bitcoin what it is. It’s this huge public ledge where stuff is going. What you can not do today is you can’t transfer other goods and services, because other goods and services are more complicated. The deed to a house needs third party approval, fine art has all sorts of implications with it, you can imagine; other things that require somewhat more complicated contracts. So, the technology BlockStream is building is essentially helping turn the block chain into more of a platform so that people can build complex contract on top of this trust-less system.
John:
That’s so clear and easy to understand and I can see why you got excited about it. Thanks. Before I let you go, I want to ask you about your recent blog. This whole concept that one person could – the race for one person to create a one billion dollar company as oppose to – because of technology, can you give us another one or two sentences about how did you come up with that idea to even write a blog about that?
Eric:
Oh, so I was sitting eating lunch with two of Max’s technical assistants at the time and one of them came up with the idea. I actually don’t remember which one it was, so it was certainly, it was certainly not my original idea. I’m just the guy that dug into the data and wrote the blog about it. I’m not sure if it was Derek or Elliot, neither of whom are currently technical assistants anymore. They’ve all moved on to awesome things within the HVF family, but yeah. I wish I could take more credit for it. It’s become a pretty well known concept. I’m the first person I know to have blogged about it. I did digging to make sure I was, but since then people from other reputable parts of the venture capital community have realized this very well might happen and might happen in the next decade.
John:
I love it. Eric. Is there a book that you think is really helpful for startups when they’re coming to pitch or just about life that you think is useful to know, especially when you’re talking about – if you’re evaluating how a founder thinks, is there a book that you think would help a founder present that or really be attractive to you when you’re thinking about, you know what, I can tell that guy read this book because he thinks like I think or he looks at the world like I do.
Eric:
That is a good question. I don’t think there’s a single book.
John:
Whatever comes off the top of your head that you like, you found useful.
Eric:
So, here is, I think there’s, so there’s two, there’s one and a half. There’s one book I’d read and there’s one message that I would leave you with and there’s probably a book out there that describes it really well. So, the book that I just finished that I really should have read a long time ago is Barbarians at the Gate. It’s about the hostile take over of RJR Nabisco, the biggest transaction of all time, at the time at least, and it is really interesting because the transaction that we do are in order of magnitude, maybe – sometimes two orders of magnitude simpler than an LBO.
Like, somebody comes in, they pitch us, we get fired up, we do two weeks of research, we do four weeks of research, we invest, we help them, it’s done, but even with that simple of a transaction, the number of moving of parts, the number of incentives that need to align; the number of different types of incentives for different research, the number of different parties you need to corral is enormous at the smallest level and if nothing else, Barbarians at the Gate does a really good job of showing you how everyone you’re talking to may or may not be talking to each other, may or may not have different reasons for talking to each other, and may or may not have different reasons; in fact almost certainly does have different reasons for talking to you.
So, with that in mind, I would say the most important thing when you walk into a pitch, into any pitch, is to just understand exactly or as close to exactly as you can what that investor is looking for. What gets them excited, what type of personality are they drawn to. What type of company are they excited about.
John:
Great. We’ll tweet that out. Know the investor before you pitch them. That’s the tweet. I love it.
Eric:
That’s it — for us, for us that thing, you know, we want someone who is thinking is just as clear as day.
John:
Got it. Don’t confuse people. I always say the confused mind says no and it’s very true. You have to explain yourself clearly.
Eric:
They’re hard concepts really. A lot of these things are complicated. So, if you can explain a really complicated thing very clearly in a way that doesn’t dumb it down. That’s great.
John:
Yep. I love it. How can our listeners follow you and follow HVF and what’s the best way to keep in touch and follow your blogs, etc?
Eric:
So, probably the best way to follow HVF and myself is through Twitter. So, my handle is TweetOfEric. HVF’s handle is HVFLabs. Anytime we write a new blog, launch a new company, invest in something that we can publicly talk about, one or both of those will be active.
John:
Fantastic. Eric, it’s been a pleasure having you on the show. Thank you for sharing your insights and your wisdom across companies that have been bought, Series A and seeds and all the important things that really jump out when people come to pitch someone like you. It’s been great having you on.
Eric:
John, thank you so much for having me.