Andrew Oved (Founder & Managing Partner at Reformation Partners)
An alternative option to VC, building a network on both coasts, being a first-time GP, "breaking into" tech, and more.
|Michael Spiro||Jul 13|| 1|
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Interview Guest: Andrew Oved
Role: Founder & Managing Partner at Reformation Partners
Previous: Corporate Development at FirstMark Capital (early investor in Shopify, Pinterest, Riot Games, InVision). In this role, Andrew connected portfolio companies with customers, acquirers, and operational expertise.
Final Note: The interview took place via a phone call between Andrew and Michael Spiro (Founder at The Takeoff) in late May.
We hope you enjoy today’s Edition!
Michael’s favorite quotes from the interview:
On venture capital: "You're in the business of looking for the extreme outliers, so you're underwriting to multibillion-dollar outcomes for every investment because you're taking high-risk, high-reward shots on net with the goal of driving one or two amazing outcomes (like Shopify or Pinterest) to make up for all the zeros."
On early-stage, capital-efficient businesses: "Additionally, we realized that every early-stage investor was underwriting to these types of outcomes, and therefore we believed there is a huge gap in the market for early-stage, capital-efficient companies that are growing, in many cases profitably, but don't fit the traditional venture model."
On the businesses Reformation looks for: "We look for companies that are roughly $1M-5M in annualized revenues, growing well, have high margins, and don’t need a ton of cash to grow profitably."
On Reformation: "What we are trying to do at Reformation is basically provide companies with an alternative financing source that aligns with the goals of the founder, striving for realistic outcomes via potential M&A opportunities, or just profitable growth where we can get some liquidity out over time without forcing a founder to sell their company."
On having a cross-coastal network: "I think a lot of investing is about having a unique angle and a unique network. I figured if I can build a great network in Silicon Valley and then come back to New York where I already had a great network, I would have a very valuable combination of relationships that could be a competitive advantage."
On "breaking into" tech: "From an operating perspective, as someone who's been an investor, I don't know what my advice is worth on that front, but I would say if you're interested in "breaking into” tech, not as a founder, I would go work at a Series A or B or C business on a very high growth trajectory."
On building a strong network: "...the best network in your career will not come from networking with people or going to events. Rather, it is actually going to be the people you've worked with."
Before the interview, a few folks that I’d love to interview for The Takeoff:
Nait Jones (Andreessen Horowitz)
Katrina Lake (Stitch Fix)
Emily Weiss (Glossier)
If anyone has a relationship with any of these folks and would be open to reaching out to see if they’d be open to doing an interview for The Takeoff, shoot me a dm on Twitter (@mspiro3) or email (spirom [at] wustl [dot] edu) and we can figure out next steps. Thanks in advance!
Michael: How did you come to start Reformation Partners? What propelled you and your Partners to start the firm?
Andrew: As background, my Partners and I were all at FirstMark, one of the largest early-stage funds on the east coast, prior to founding Reformation. The most recent FirstMark funds — announced just this month — are $380M (early-stage) and $270M (growth-stage). FirstMark is a generalist Series A firm and was a very early investor in Shopify, Pinterest, and Riot Games, among others. The firm has done extraordinarily well, and I was fortunate to be part of its rapid expansion in both AUM and brand recognition
My partners at Reformation (David and Jim) both joined FirstMark around the same time I did. We were there for close to 5 years together. I had a great experience at FirstMark but realized that venture is a very one-size-fits-all model. You're in the business of looking for the extreme outliers, so you're underwriting to multibillion-dollar outcomes for every investment because you're taking high-risk, high-reward shots on net with the goal of driving one or two amazing outcomes (like Shopify or Pinterest) to make up for all the zeros.
At FirstMark, we'd see a lot of great businesses with really good metrics, but we would mostly pass on them because of potential market size and lack of potential for a “venture-sized” outcome. My (now) partners and I at Reformation wished we could invest our own personal capital in these companies because they are really great businesses, but were precluded from doing so.
These companies are probably not going to be the next unicorn. But, in our opinion, they have a much higher likelihood of being somewhere in the $50M to $500M exit range. On a risk-adjusted basis, we thought those would be great investments. The problem is, in venture, 5-10X returns don't really matter (especially for a fund with hundreds of millions of capital to invest). If a firm with a large fund gets a 10X return on a $2M investment (or even a $5M+ investment), it’s not going to really move the needle on a ~$400M fund.
For FirstMark, even a 10X return on a $15 million investment or a 20X return on a $5 million check is only going to return a third or a fourth of the fund. They really need every investment to have the potential to become a fund-returning investment. Additionally, we realized that every early-stage investor was underwriting to these types of outcomes, and therefore we believed there is a huge gap in the market for early-stage, capital-efficient companies that are growing, in many cases profitably, but don't fit the traditional venture model.
Venture capital has done a great job of branding itself as an asset class for early-stage companies. Venture capital seems very glamorous and sexy and it seems like raising venture helps your company, but in reality, raising venture often forces you to grow very quickly, neglect profitability, and grow the top line, all to raise more money to do the same thing over and over again until you go public or get acquired. The problem is, most companies just never reach that goal. There are only 10-15 companies a year that exit for $1B+ in enterprise value, no matter how many companies are funded. To be clear: there is a very real need for venture capital in the market and it is the asset class that drives the most innovation. Companies like SpaceX, Uber, and DoorDash could never have been built without VC; however, those companies are the exceptions, not the rule as most companies don’t share these companies’ characteristics.
At Reformation, we believe there are far more of those than those that fit the VC model. These companies are also too early for growth equity and too risky for debt. The venture debt guys who would lend to businesses at this stage are really just underwriting the venture equity. We at Reformation are not the only ones who have realized this: we're actually seeing a lot of people on the debt side come to market to address this issue, like the Clearbancs and Lighter Capitals of the world.
We [Reformation] are going to be a $20M fund. We've closed on more than half of it earlier this year and got to market. Our mission is to invest in the best capital-efficient businesses. We look for companies that are roughly $1M-5M in annualized revenues, growing well, have high margins, and don’t need a ton of cash to grow profitably. We won’t invest pre-product, pre-market, or pre-revenue as that is more of a venture style risk. We typically invest $500K to $1M, look to own roughly 10% of a given company, and tend to get involved very heavily, particularly on finance, operations, and go-to-market.
I personally help a lot with go-to-market among a bunch of other things. From a timing perspective, COVID has been really interesting because it has brought valuations down and brought competition down. On a macro level, I think COVID is going to be phenomenal for us because a lot of hyper-venture businesses are hurting. If you're building a profitable company, you don't have to worry about downturns like this nearly as much as venture-backed companies do. So, I think longer term, a lot of companies will gravitate towards our line of thinking.
Michael: I recently read a few blog posts, by Alex Danco and John Luttig, discussing alternative financing / funding models for startups. I definitely agree with you that these models will grow in the next few years.
Andrew: I actually wrote my own little post a couple of weeks ago (check it out, here). I agree with both of those pieces. It's funny because one on hand, I think this notion of financing sources for great non-venture businesses is becoming more of a mainstream thought, unlike when we started Reformation two years ago.
On the other hand, when I talk to Managing Partners at VC firms, some of them will completely get it and some will think it’s an investment model that will never work. My belief is that the ones who are not interested have made a lot of money with this power law investing style of venture capital and don’t have a reason to consider anything else.
Michael: Why is the traditional venture model not the right fit for all startups? How does Reformation offer an alternative route of financing for companies who aren’t a good fit?
Andrew: If you look at venture capital, there is a very explicit business model to back companies that can become unicorns. Their economic model is to invest in a bunch of companies and end up with one or two that basically return multiples of the fund. The rest of the portfolio companies will likely go to zeros or be 1-3X returns.
For obvious reasons, most companies don’t fit the criteria to become a fund returner. Many of these companies can be really good businesses but should not raise venture capital. When VCs put money into a business, there is an implicit, not explicit, agreement that they are basically shooting for a boom-or-bust binary outcome. A lot of founders would be very happy building a $50 million business that they sell and own 80% of. A bunch of founders would be very happy building their business, growing it profitably, and paying themselves really well. However, venture doesn't allow for either of those outcomes.
Venture often requires you to continually raise capital for faster growth and higher valuations. What we are trying to do at Reformation is basically provide companies with an alternative financing source that aligns with the goals of the founder, striving for realistic outcomes via potential M&A opportunities, or just profitable growth where we can get some liquidity out over time without forcing a founder to sell their company.
I don't think venture is bad at all; my Partners and I were (and still are) venture capitalists and venture capital plays a very important part of the ecosystem. It's great for companies that are in winner-take-all markets, with really large TAMs, and very defensible business models. But, venture is not the right fit for most companies because most companies do not have all of those characteristics.
Michael: Definitely, that’s a really interesting perspective. I know the firm is based in New York City. What are some of the benefits of the NYC tech and startup scene?
Andrew: We've all been in NYC for a while. One of my Partners was at Insight Partners for 3 years and then FirstMark for 4. I actually did my undergrad at NYU, dropped out of school to go work at TechStars and RRE while I was an undergrad, and then spent five years at FirstMark. My other Partner was at Goldman Sachs and then FirstMark.
On a personal level, we all have deep networks in NYC. More broadly, I love that NYC is very multi-industry. You have media, pharmaceutical, consumer, and finance companies, whereas other markets may be more centered on one specific industry. From an investor perspective, there is obviously a lot of LP capital in NYC. From a tech perspective, the rapidly expanding presence of Google, Amazon, Facebook, etc., is really helping the ecosystem.
Silicon Valley is amazing and definitely the Major League of the startup ecosystem, especially with respect to technology, but being a bigger fish in a smaller pond, whether starting a company or a fund, gives you good positioning. I am fortunate to now have many great relationships on both coasts (via Stanford and NYU), which has already been very advantageous for Reformation.
Michael: Why did you want to go back to school and get an MBA? Why Stanford GSB?
Andrew: I’ll answer the second question first. GSB is an amazing school for entrepreneurship and venture capital, which is the industry I knew I wanted to continue my career in. I thought GSB was second to none in that regard. I also realized that in New York, where I knew I wanted to build my career, there are very few people who have great networks on both coasts.
Using business schools as a proxy, there are so many people from Harvard and Wharton running venture firms in New York, including FirstMark. But, there are probably fewer than five GPs at funds that went to GSB (that number may be higher now, but that was the number when I left for school in 2018). I think a lot of investing is about having a unique angle and a unique network. I figured if I can build a great network in Silicon Valley and then come back to New York where I already had a great network, I would have a very valuable combination of relationships that could be a competitive advantage.
On a personal level, I've lived in New York my whole life and wanted to experience California. It has definitely been a fantastic life experience, especially with the perfect weather in Palo Alto, and it's going to be tough to come back to NY in that respect. The last thing that drew me to GSB is that it is a much smaller class than some of the other top business schools. I probably know 90% to 95% of my GSB class. From an NPS perspective, I am definitely a 10 out of 10 in terms of recommending GSB to someone!
In terms of why school, I knew I wanted to start a fund at some point. I actually didn't know it was going to be around this thesis, which came through having many conversations and doing a ton of research. But, ultimately, I knew I wanted to start a fund, so I made a list of everything you need to start a fund. I literally wrote it all down, to the basics: capital, network, access, relationships, credibility, track record, ability to conduct due diligence, etc. All of this stuff is important.
When I was at FirstMark, I was thinking of the next best step I could take to fill in as many of these gaps as quickly as possible. I felt that business school, and GSB in particular, would allow me to fill in a lot of those gaps, while also giving me free time to fill in the remaining ones. Thankfully, after 2 years that hypothesis has definitely come to fruition.
Michael: I couldn't agree with you more about what you touched on there, especially the benefits of having a network on both coasts. Back to Reformation, I'm curious, are there certain spaces or sectors that the firm focuses on, or does the firm have a generalist approach to investing?
Andrew: My Partners and I are fortunate to have spent time at FirstMark, which is a generalist fund that invests across different stages and looks at different types of business models. Reformation looks like a generalist fund, but we have a few areas that we think lend themselves really well to our model.
The first would be vertical SaaS — industry-specific SaaS with very specific use cases such as SaaS for managing golf courses or SaaS for a specific company segment. Application SaaS is another area: for instance, a point solution for a specific problem, or applications built on top of Shopify, or applications built on top of Salesforce. Those are business models that we think have a few characteristics we like. First off, again, they are not massive TAM markets, which means that they're probably not a fit for venture. Yet because of that, there's a lot less competition because they are operating in smaller, less sexy markets with fewer venture dollars circulating around.
If you build a good product in one of these spaces, you have a great chance of gaining lots of market share. That's one area. A second area is consumer products. I have always believed that most consumer product businesses should not raise venture because there are few that will be able to realize $1B+ valuations. In the private markets, there are a bunch of unicorns that are B2C eCommerce companies. But, I'm talking about actual exits or IPOs, and I think there will be very few of them.
There are many reasons for that. One, we all know that CACs have gone up like crazy, which makes it really expensive to acquire new customers. There is a lot more competition and fewer barriers to entry now than in the past. It's never been easier to start one of these eCommerce brands, but it's harder to scale them because barriers to entry are so small. Also, there are a lot of different consumer preferences. Micro or niche brands can appeal and be $80M to $100M revenue businesses, but that's where they cap out because consumers have so many niche interests and I don't think mass market is a thing anymore. There are also not many huge strategic buyers for companies at the $1B+ threshold.
For those reasons, I don't think consumer products companies should be raising tons of venture capital because they’d have to grow really fast and, again, neglect profitability while burning a lot of capital. Ultimately, they hit the top of the S curve and plateau and are layered in a lot of preferred equity. At this point, the founders own 20% of their business, or less, and the founders don't have a path forward because their company is overvalued arbitrarily by VCs and no one wants to buy them for that money (or invest in them at that valuation)
I think a lot of these DTC companies have priced themselves out of M&A opportunities and are going to be in a lot of trouble. A third area that we've looked at is media, although we haven't found the right type of business yet. Media is no longer a fit for venture. Vox, Vice, and Buzzfeed all proved to not be great venture businesses because people don't like paying for content and don't click on ads. It's really hard to monetize.
With that said, I think there are definitely interesting opportunities to build really solid media businesses that are 10’s of millions in revenue, whether it's through subscribers or unique business models. Think of Morning Brew or TheSkimm (if they didn’t raise VC). Again, that would not fit the venture profile but could certainly be a good business for us.
Michael: Super interesting. Looking at some VC funds that focus heavily on consumer, off the top of my head I'm thinking of Forerunner and Lightspeed, do you think these firms focusing heavily on consumer still makes sense? Or, do you think that consumer as a whole just really doesn't fit the traditional VC model?
Andrew: Regarding Forerunner, I actually think they've come out and stated that they're not really pitching themselves as a consumer fund anymore (or at least their website has no explicit mention anymore of consumer). They're very smart. Their first fund was a smaller fund; they were much earlier in the lifecycle of DTC and consumer products, and, of course, hit it out of the ballpark. The dynamics that existed during their first fund are no longer there.
They have a much bigger fund now, which means writing much larger checks and striving for much larger returns, which they know, better than anyone else, is not what consumer is set up for at the moment. Their site used to be “consumer, consumer, consumer,” but I’m pretty sure now they don't pitch themselves as a consumer-focused fund anymore.
Of course, you see a lot of consumer logos on their website, but they are looking at so many other things now, too. Some of it is consumer and consumer digital, but I know they are also focusing on health and wellness and other sectors, too. That's just one data point.
Lightspeed is still doing a bunch of consumer, although maybe pulling back. They've done a lot of celebrity-driven consumer brands. That actually, from an investing perspective, makes a little more sense to me. Looking again at the venture dynamics, if they do ten celebrity-driven consumer brands, it's very possible one of those becomes Kylie Cosmetics, which is obviously a venture-size outcome. It depends on what kind of consumer brand you're building but there are obvious ones that shouldn't raise venture such as apparel and specific accessories and, honestly, most companies. If you're a celebrity-driven consumer business, maybe venture is the right path.
If you look at Lightspeed, I think they're in Lady Gaga's brand, they were in Girl Boss, and they are in several other celebrity brands. I just don't think consumer fits the venture model, and I think a lot of these firms shift away from consumer because they are realizing the returns really aren't there. Interestingly, the two companies, off the top of my head, that have unicorn potential, not just unicorn valuations in the private markets but the potential for $1B+ exits, are Allbirds and Rothys, which is very interesting because they are both in the same category. Other than those, I can't think of any that are doing as well (nor do I know if those 2 are still growing as fast as they had been previously).
Michael: I think that's a really interesting perspective. These next few questions focus on advice for our subscribers, the majority of whom are undergraduates, just like me. What advice would you give a current student who wants to work in tech and maybe even start a company?
Andrew: From an operating perspective, as someone who's been an investor, I don't know what my advice is worth on that front, but I would say if you're interested in "breaking into” tech, not as a founder, I would go work at a Series A or B or C business on a very high growth trajectory. I think the value of being attached to a great brand and being able to be at a hyper-growth business will expose you to a lot of different phases, in addition to having a big enough company where a mentor can help train you.
I would also say, from a financial perspective, it's arguable that joining a company later on is actually just as beneficial as joining early, in many ways, because you don't have to bear as much dilution. Depending on where you're coming in, you’ll get a pretty good brand, less risk, and shorter time to liquidity. A lot of people think joining early is an advantage but in reality, except for rare cases like Uber, most early employees are not going to reap tremendous benefits over later employees. Obviously, there are exceptions, but my advice would be to join one of those hot growth-stage companies. I think there's a lot of value there.
In terms of starting a company, I would just say I wouldn't start a company just to start a company. If there is a really specific problem that you want to solve, I would do that. If you had an idea and you're really excited about it, I would go do that. But, if you're just starting a company for the sake of starting, I would just go work at a startup for a few years first. These days, many startups give employees free time to work on their own projects, and you can learn so much by being around other talented people at startups.
One of the best pieces of advice I ever got, from someone at Foursquare many years ago, was that the best network in your career will not come from networking with people or going to events. Rather, it is actually going to be the people you've worked with. For me, this has obviously turned out to be true because my two Partners worked with me at FirstMark.
People underestimate the value of working at an amazing company. If you go work at Coinbase or Airbnb or whatever the new hot company is, it’s going to be attracting tremendous talent. After spending two years there, you could find your amazing co-founder or your next investor. That network will follow you for the rest of your life, which we are already seeing from all these different mafias. It’s actually not too dissimilar from the value you receive at a top tier business school.
Michael: Really great advice! Do you have any favorite tech-, startup-, or venture capital-related books or podcasts that you would recommend to our subscribers?
Andrew: Honestly, I try not to listen too much to podcasts and hang out on Twitter because I find it quite distracting. I try to be an independent thinker; I think that's how you end up making great investments, versus listening to what everyone else says.
Of course, I think The Twenty Minute VC is very good from an educational perspective, to understand how VC firms and specific investors think. I would definitely recommend a podcast like that. From an investing perspective, not even just VC, I think The Outsiders is a great book. It’s one of Warren Buffett's recommended books; it's all about capital allocation and the importance of being a great capital allocator both as an investor and as a CEO.
Good to Great is another classic. The Leonardo da Vinci biography is an inspirational one that shows you how curiosity leads to inventions. Da Vinci was probably the most curious person ever and, as a result, the best inventor ever. There are amazing insights in there, both for investors and for founders.
I just finished reading The Fountainhead, and I think it probably spoke to me more than any other book. It is a controversial book because Ayn Rand is a very controversial figure. To me, The Fountainhead and its main character represent the visionaries of the world, people who go out and do things for their own sake because they believe something should be done and believe in the work they're doing and don't listen to anyone else. You have all these other people out there who are criticizing your work and are really just doing things to be perceived as great by other people, but actually the people who move the world forward are the ones that are doing things they truly believe in because of the value it drives for themselves.
Thanks for reading! We hope you learned a lot from Andrew.
**Please note that our interviews may be edited for length, content, and clarity **
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