Canvas Ventures' Mike Ghaffary, and how Mining The Federal Register Can Make Your LPs Very Happy - D.F.A., or Please Do, #13:
Ghaffary, Noah Shanok, and Peter deVroede founded Stitcher in 2008 - and it may be the biggest podcasting exit ever.
I first met Mike Ghaffary right when he started Stitcher, when I was at LaunchSquad, about 15 years ago. This was right around the time that the iPhone launched, and Stitcher was one of the very first truly great podcast apps. It was also one of the first ones to have a really large exit. Of all of the acquisitions in the podcast space, the only that come close to Stitcher’s eventual $325 exit to SiriusXM, only Amazon’s acquisition of Wondery ($300M) and Spotify’s acquisition of the Gimlet ($230M) and Ringer ($50-200M) are the few deals that I know of that have fairly similar numbers.
Stitcher was that one app in the podcast space that really figured out a super-smart way to make podcast listening easy and seamless. It took every podcast that you liked and “stacked” them into a snackable format. Since SiriusXM shut the app down only a few weeks ago (Reddit forum for the best Stitcher replacements here), I decided it would be a great time to sit down with Mike and talk about his adventures in venture capital, since the team has now been together for ten years, and, in 2021, closed their third fund. Read on to find out how Ghaffary and the Canvas Ventures team evaluate startups, and how they sense which ones just might not make it.
Probing Co-founder Disputes:
Co-founder disputes are often cited as a major reason for startup failures. As an investor, how do you probe or suss out potential co-founder disputes during your due diligence process? What red flags do you look for, and how have you handled situations where you've detected potential issues?
Co-founder disputes are a major reason startups fail, but they also happen more often than many people realize. If you passed on investing in every company with a co-founder dispute, you would have missed investing in the early rounds of Facebook, Apple, and many other iconic companies. That said, it’s still something I watch for, and I look for certain signals starting with the first pitch meeting:
Is there a clear CEO and clearly defined roles for other co-founders?
Is there a “Chairman” above the CEO or one founder who doesn’t seem to have a clearly defined functional role, but is exerting influence? More often than not when I notice that in the pitch deck, I’ll see that same Chairman talking over the CEO or steamrolling the conversation. That is a common failure pattern.
Are equity splits off, for example, where the founder who is seemingly contributing the most has less equity than a less engaged founder who might have provided some initial seed capital or had more leverage for another reason?
Are there too many co-founders? Three co-founders is often an upper limit for a success pattern (Airbnb had three), and two is more reasonable, with one also being fine. Four or more co-founders can cause clashes.
I always ask companies how they make decisions, and how they divide up responsibilities. Listening to each co-founder tell that story in their own words is very telling.
Reflecting on Stitcher's Journey in the Podcast Space:
Stitcher was a pioneering startup in the podcasting space. Looking back, do you feel that the timing was right for Stitcher's launch, or do you and your co-founders feel that there were critical mistakes made along the way? What were some key lessons learned that could be invaluable for today's aspiring entrepreneurs?
Stitcher was an amazing idea and we were ahead of our time, which is a nice way to say we were too early to market. We were ahead of a major wave by getting started right before the iPhone and then the iPhone App Store launched, but it was just too early for the podcasting market in general as well as iPhone adoption. Several companies that were later to market were able to have better exits than Stitcher’s first sale (to Deezer), and in many ways I think the podcasting market is still too nascent to support a very large company. Hopefully that changes.
One key lesson from Stitcher is to look at early engagement and churn data very carefully, and iterate quickly based on both the data and spending time with users qualitatively. This seems obvious to many founders, and yet startups often miss this and continue to bang their head on the wall when they should be listening to feedback or iterating.
Stitcher recently sold (again) to SiriusXM for $325 million, so there is clearly serious value that was created there, and it is validating to see that recognized.
3. Advice for Emerging Fund Managers in 2023:
Given the current challenges faced by emerging fund managers in 2023, could you share one critical 'do' and one big 'don't' for those trying to raise funds in today's environment? How should these fund managers navigate the complexities of the current venture capital landscape?
One big “do” for raising an emerging fund in 2023 is to have a clearly differentiated strategy and to build deep relationships with Limited Partners that ideally already have some affinity or history with the emerging fund manager. For example, turn to old bosses, CEOs of companies you worked for, people who’ve invested in you in the past, affinity connections via university affiliations or some other connection, etc. Cold-calling Limited Partners in this environment is extremely difficult.
One big “don’t” is to get discouraged too easily and to not put in the time and work to spend time with dozens if not hundreds of people who can help with fundraising. The goal is to find these people in your existing 1st and then 2nd degree network, so they can vouch for you.
4. Venture Capital Landscape Evolution:
Mike, having moved from co-founding Stitcher to the world of venture capital, how have you seen the investment landscape evolve, particularly for startups in the tech and media space? What opportunities do you see on the horizon for new companies in these industries?
The investment landscape has changed drastically from when we founded Stitcher through the previous 2008 financial crisis, to the boom times of 2010-2021, to the new tech downturn of 2022-2023. Fundraising was extremely difficult back in 2008, and now when I’m advising startups going through those challenges, it feels a lot like that previous era. The benefit of those hard knocks of 2008 is I can empathize with founders out there now and give advice on how to manage their operations, finances, fundraising, and growth. It was obviously much easier to fundraise two years ago, and now founders really have to show they know how to grow responsibility while keeping burn in control.
That environment is difficult for media startups, that are often looking to buy their way into making a splash through paid marketing and branding campaigns, and also have limited revenue early on, especially with ad-driven models. Right now media-related tech opportunities are very limited, with the bulk of funding in the area going into the anointed winners taking advantage of generative AI, and there could be additional opportunity there, it will just be extremely competitive. My best advice to founders is to focus on an area where you really have a passion for the area, and then you can develop expertise if you don’t have it already because you’ll make yourself into one of the world’s experts. For example, at Yelp, all of the early team loved consumer apps, the power of geolocation on the iPhone, finding local businesses, etc. I used to play a game or cool party trick where people could ask me the Yelp star rating of any restaurant in San Francisco, and I would tell them the rating and why it was that way–we just loved the product so much. If you aren’t that excited about your product, why will employees you recruit, investors, and users/customers get excited about it? And why will you spend the time required to become a true expert in the subject area, and to keep iterating on the product until it is the best?
5. Investment Philosophy and Decision-making:
Could you walk us through your decision-making process when investing in a new startup? What specific traits or characteristics are you looking for in both the team and the product? How has your experience as a co-founder influenced your investment philosophy?
I love working with VCs who are former founders and operators, because of that founder perspective we can ring to both the decision-making process and to helping founders build a successful company.
At Canvas, we look at the main areas that most VCs would look at: team, product, market, and traction. Everything starts with the team for me, because I’ve seen again and again over my 20+ years in technology that the best teams find a way to get ahead, and mediocre teams don’t tend to build the meaningful companies that we all want to invest in and be a part of. I look for teams that have a unique fit to the problem they’re solving, and “founder-market” fit is important. My experience as a co-founder really influences what I look for here, and I try to figure out if this founding team is committed enough to push through and really survive all the challenges and roadblocks that eventually hit every company through its growth.
For product, we try to look for something that customers or users can’t live without, and I love the question that Superhuman, an amazing product I invested in very early, likes to ask: how disappointed would you be if you lost this product? What would you do? Listening to the answer to that on diligence calls really clarifies how important a product is to customers. When I get lukewarm or unclear answers there, I know something is off.
On the market, we usually need to see many billions of dollars of opportunity. Some investors will say they’ve missed great investments when they passed because of market size, but when I’ve passed because of a small market, it’s often turned out the company was limited precisely because they hit that wall. Market sizes can grow and you might have to use imagination, but you want to make sure a company is playing in a large enough arena. For example, to bring it back to podcasting, the podcast advertising market was very small when we started Stitcher, and that put headwinds on how big any podcasting startup could be for many years.
Lead Zeppelin’s Investment Firm Clients: $40M raised in the last 12 months
At this point, Lead Zeppelin has eight investment firm clients and a few more on the way.
These clients have now raised a total of $40M with them.
The fun part of raising a fund is having conversations with LPs, but sometimes prospecting and doing cold calls for LPs is not so much fun. The other day, we heard from a very large and successful Silicon Valley VC fund whose 15th fund was oversubscribed. If that’s what you’re working with, you definitely don’t need Lead Zeppelin.
That said, if you’re 50 LPs short of what it would take to close your fund, working with Lead Zeppelin for 7 to 12 months could make your team’s life a lot easier. And, the cost? About as much as lunch for 2 people, per day. Would you
To learn more, feel free to check out Lead Zeppelin’s pricing page or book an intake call.
How To Find LPs Using Federal Register Data
Ever wondered where the smart money looks for insights that others might miss? Welcome to the world of the Federal Register, a treasure trove of information that's more than just a government publication. It's a tool used by savvy investors to gain a competitive edge, and it could be your secret weapon for attracting Limited Partners (LPs).
Who's Using the Federal Register in 2023, and Why?
Quantitative Analysts and Hedge Funds: By mining the Federal Register, quants and hedge funds uncover regulatory changes that might impact specific industries or companies. Algorithms sift through the data, finding nuggets of information that can lead to profitable investment decisions.
Compliance and Risk Management Teams: Investment firms rely on the Federal Register to stay ahead of the regulatory curve. By understanding potential risks and opportunities, they make informed decisions that line up with the latest regulations.
Economic Research Firms: Want to know how regulatory changes might impact the economy? Economic research firms analyze the Federal Register to gauge macroeconomic trends, giving smart insights to investors.
Individual Investors with Niche Interests: If you specialize in sectors like healthcare or energy, check out the Federal Register to get insights on regulatory changes that might affect your investments.
Government Relations and Lobbying Firms: While not exactly traditional investors, these firms analyze the Federal Register to advise clients, including investment firms, on potential regulatory changes that could impact their interests.
The Federal Register isn't just for bureaucrats; it's a goldmine for investors looking to uncover unique opportunities and understand the regulatory landscape. From hedge funds to individual investors, the Federal Register offers a window into the world of regulations, government spending, and more.
If you're an accredited investor or VC, understanding the Federal Register could be your secret weapon. Ready to explore how this unassuming government publication can enhance your investment strategies? Let's dive in!
2. Understanding the Federal Register
What is the Federal Register?
The Federal Register’s official journal of the federal government of the United States. Published every business day, it contains government agency rules, proposed rules, public notices, executive orders, proclamations, and other presidential documents. It’s basically the daily newspaper of the U.S. government, providing transparency and public access to essential information.
It sounds boring but it’s way more than just a collection of legal texts and government announcements. It's a living record of the nation's regulatory pulse, because it offers insights into the workings of various federal agencies and the executive branch.
Why It Matters to Investors
So why should investors care about a government publication filled with legal jargon? Here's why:
Regulatory Changes: The Federal Register is the first place where new regulations or changes to existing ones are published. Understanding these changes can help investors anticipate shifts in the market, identify opportunities, and mitigate risks.
Government Contracts and Grants: Looking for insights into where the government is investing? The Federal Register contains information on government contracts, grants, and funding opportunities. This can be a goldmine for investors interested in sectors like defense, healthcare, technology, and more.
Public Comments and Feedback: The Federal Register allows the public to comment on proposed rules and regulations. Analyzing these comments can provide investors with insights into potential challenges or support for specific regulations, offering a unique perspective on public sentiment.
Economic Indicators and Data: From import/export statistics to labor market trends, the Federal Register offers a wealth of economic data that can inform investment decisions. It's a resource for understanding broader economic trends that may impact various industries.
In short, the Federal Register is way more than a dry, legal document. It's a dynamic resource that offers a window into the regulatory environment, government spending, public opinion, and economic trends. For the discerning investor, it's a tool that can unlock insights, guide investment strategies, and provide a competitive edge in today's complex investment landscape.
[To read the rest of this post, head over to the Lead Zeppelin blog. There are also about 3 more posts about cool ways to get LPs for your fund there as well!]