Turner Novak (Founder of Banana Capital)
Turner gives advice for students and talks Snapchat, TikTok, and Clubhouse.
|Roshan Chandna||May 10||3||1|
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Interview Guest: Turner Novak (Twitter: @TurnerNovak)
Role: Founder of Banana Capital
Previous: Prior to launching Banana Capital, Turner was the head of venture capital investments at Gelt VC, where he invested the firm's second fund. Prior to joining Gelt, Turner was a member of the Afore Capital investment team, where he focused on pre-seed companies. Turner previously worked in credit, private equity, and corporate finance, and helped oversee a $1.6 billion endowment.
Quick Note: This interview was recorded via a Zoom call between Turner and Roshan (that's me) in December 2020. The conversation was updated in early May 2021.
Roshan’s favorite quotes from the interview:
On why Turner loves investing: “I talk to people smarter than me, read about cool stuff, and learn from founders I've invested in about things they're doing. I like that, as an investor, you're exposed to a lot of different things. I like making bets on other people, their companies, and their aspirations and dreams.”
On Snapchat’s ads: “[Snapchat’s] ad prices are really cheap. You can probably make an argument that they will never be as good as Facebook. But even if you get them from being 20% as good to 50% or 75% as good, all that incremental revenue falls to the bottom line. Then suddenly, they go from barely breaking even to generating billions of dollars per year in cash.”
On Tik Tok versus YouTube: “Tik Tok is essentially YouTube 2.0. If you were to recreate YouTube today, it would be Tik Tok. If you think about YouTube, it's all horizontal. Why are you switching your phone and watching it horizontally?”
On Clubhouse reducing friction to go live: “The way I look right now, I probably wouldn't go live on Instagram or Twitter. I probably need to fix my hair and stuff like that. With Clubhouse, as long as your voice sounds good, you just press the button and you're live. There's less friction to go on and create and talk to people. So I think it was almost like a cheat code to create liquidity in live sessions of some kind.”
On growing a Twitter following: “If you set up a new Twitter account and started saying things like, "audio is the future of social media," "creator economy," people would say, "this is old news, man, you’re not teaching us anything here." But if you were to come out and say, "farming on the blockchain is a trillion-dollar opportunity because it will revolutionize tomato harvesting, and here’s my thoughts and evidence on why it will work." Someone may read that and say, "wow, I wasn't thinking about this, but maybe I should pay attention to blockchain farming and follow this person.” Essentially, just talk about things that few people are talking about.”
Roshan: To begin, can you please discuss how you came to launch Banana Capital and what type of companies you focus on?
Turner: I launched Banana Capital in 2021 to invest from pre-seed to pre-IPO. I tilt consumer, but am ultimately sector agnostic and invest globally with a bottoms-up approach. I've invested in South America, the US, Canada, Australia, Europe, Africa, and Southeast Asia, and have had a lot of conversations with companies in India lately. So global, cross-sector, and cross-stages, but tend to skew early.
Roshan: Can you briefly summarize your background prior to starting Banana Capital?
Turner: For my first job, I worked at a bank doing commercial lending. I lent money to small businesses like factories, restaurants, real estate developers, etc. It was interesting, but you're lending people money; it's just not what I wanted to do. I've always wanted to be an investor. I was always fascinated by the intersection of investing, business, and technology, how that was changing business models, and talking to people, almost treasure hunting –– that's what makes up VC. I was in Michigan, so what I did was get a job working in a nonprofit's endowment. I was an LP investing in, not just venture funds, but every single asset class and learned a lot. I was there for three and a half years.
I started writing online, tweeting, sharing my thoughts on things, meeting people, meeting up in New York or San Francisco. It was a two-year process, but eventually lined up five interviews all at once and ended up making the jump into working part-time for a pre-seed firm called Afore Capital. I helped them for a summer and then met my partners at Gelt, where they had a real estate firm with about $1.5 billion in assets and wanted to raise a venture fund from their existing real estate investors. So, we had a small fund focused super early, small check sizes, not leading rounds or anything. Usually just trying to have high conviction and typically not competing in really hot rounds. We tried to find companies before that happens, kind of in the sweet spot.
Roshan: Can you talk about the most recent investment you're involved in and what made you so excited about it?
Turner: Yeah, there's this company in Latin America called Facily. They do e-commerce for the low end of the market in Brazil. It borrows some different elements from Chinese e-commerce companies like PinDuoDuo, or this company Shihuituan which does in-person pickups from locations (like mom and pop shops). They figured out a way to profitably serve the massive, bottom of the market in Brazil. Really interesting product, growing fast, and it's at the intersection of many different things I'm interested in. That's probably the most exciting recent investment I've made.
Roshan: What's your favorite part of investing at Banana Capital?
Turner: I just love investing. It’s a game to me. I'm a tech nerd and investing nerd. Especially right now with COVID, I get to just hang out on the internet for 10+ hours per day. I talk to people smarter than me, read about cool stuff, and learn from founders I've invested in about things they're doing. I like that, as an investor, you're exposed to a lot of different things. I like making bets on other people, their companies, and their aspirations and dreams.
Roshan: I'd love to get your thoughts on the growth and business models of a few different companies. I've heard you talk about Snapchat, a bunch so let's start with that.
Turner: Snapchat is the product that young people in the Western world use for a lot of their communication. That makes it really sticky. They don't necessarily make money on messaging, but they also have another business where it's all the content. The number of people watching premium content on Snapchat in the US is actually more than the number of registered accounts Netflix has in the US. So it's extremely culturally relevant, and a lot of people watch this stuff, just no one really talks about it because no one above the Snapchat age really cares, honestly. So it flies under the radar, but it's a super profitable underlying business. You're selling digital advertising, and each time you do one more dollar in sales, it's near pure profit.
They've essentially cloned Facebook's advertising tool and even gone as far as doing what Facebook did where marketers are practically on auto-buy. They say, "run this campaign for me if you can guarantee that I'm going to make money from it." Snapchat did the same thing. So if you look at how much money Facebook makes in certain countries –– especially looking at how much Instagram makes in a certain country –– Snapchat has the same number of users and the same "total number of ads" that you could possibly show on a screen in a certain day, or in a certain year. It's pretty comparable in all the markets where Facebook generates most of its revenue and cash flow, which is how you value a business. And Snapchat just doesn't have as robust of an ad system yet. Their ad prices are really cheap. You can probably make an argument that they will never be as good as Facebook. But even if you get them from being 20% as good to 50% or 75% as good, all that incremental revenue falls to the bottom line. Then suddenly, they go from barely breaking even to generating billions of dollars per year in cash. I think that's slowly been reflected in the stock lately.
Another thing was that they had an Android app that practically didn't work for the first eight years of the company. They finally re-built it in 2017/2018 and launched it in 2019. And you've seen their user growth start to come back. When you're really thinking about it, if about 85% of the people in the world use Android, you're not going to be able to make a big product solely on iOS. So, that's kind of why they really only ever worked with teens and people who had iPhones, which were essentially people in the US, the UK, etc. Just so happens that those are high LTV and high revenue users, so it's worked out for them.
They also have a lot of different things and some other products they have coming online, like Snap Gaming. It's essentially a gaming platform for people to publish on, monetizing with video ads right now, the same thing that goes in their content product. They have this whole back end for creating AR experiences, like the AR lenses that we see, which right now are just these silly Snapchat lenses. They have some advertising revenue there, but it's essentially what augmented reality apps will look like. They basically have an app ecosystem built inside Snapchat. I just don't think many investors talk about it or realize it. They have this Snap Kit platform. I don't know the exact most recent numbers, but there are probably close to 150-200 million people who use their Snap Kit, Snapchat login to log into other products monthly. So you kind of start thinking about how Snapchat becomes a platform. They just signed a deal with Unity to plug in Unity's ad inventory into Snapchat's ad-buying tools. And again, nobody really talks about how big any of these numbers are because it's mostly kids that use it, so it's outside most investors radar.
I think about it as they've basically cloned Facebook's ad tools. You can just say, "I have a product I'm trying to sell, I'm trying to make money, I'll pay you if you can guarantee me sales." That's basically Facebook’s business model, and what Snapchat has now done too with their ad platform. So we're in a time where, if you're an e-commerce company, not even a venture-scale one, but you're just a dude who sells watches doing a couple million in revenue a year. If you can take $500,000, dump it into Snapchat, take another $500,000, dump it into Facebook, and get $1.5 million or $2 million in sales from that, you'll do it. And that's pretty much been a lifeline for many people over this whole collapse of physical in-person shopping during COVID when we've seen the shift online. It's performance-based marketing. And I think they're probably in third place behind Facebook and Google in terms of scale in the US with massive inventory that can do good targeting, maybe fourth depending on how you classify Amazon. We've seen companies like Reddit, Twitter, and Pinterest start to have success and beginning to ramp up their ad businesses, but they don't have the same hyper-targeted direct-response ad systems built that Snap has.
So I think Snap has a really long way to run. Their business model about salespeople going out and closing deals with Pepsi and getting them to spend a million dollars like we're sticking banner ads on the app. It's people who are actually getting ROI that's hyper measured. You have sales coming in on your Shopify store as you're paying the money to the advertiser –– to Snap. I think it's going to completely catch people off guard over the next couple of years as they scale up.
Roshan: Now, I know you're a Tik Tok creator yourself, I'd love to hear your thoughts on Tik Tok next.
Turner: Tik Tok is essentially YouTube 2.0. If you were to recreate YouTube today, it would be Tik Tok. If you think about YouTube, it's all horizontal. Why are you switching your phone and watching it horizontally? People are making 20-minute videos on YouTube, there's like five ads shoved in the best videos –– that’s not a good experience. Creators have started to make YouTube content specifically for TVs and watching on your computer and your big screen, which is probably smart for YouTube. I think something like 30% of all YouTube consumption now happens on your TV. So there's still some on desktop, still some on mobile. Tik Tok is purely mobile. And the whole thing is optimized for no friend graph. It's all algorithmic discovery, which is a lot different from how some of the existing major platforms work. And it's all optimized for mobile for both consumption, and also for creation. Almost all the creators who are really big on YouTube, they edit on their computer, they're shooting on a camera, etc. Versus on Tik Tok, for the most part, it's just shot on your phone, it's edited on your phone, the creators are mobile native, and they use and understand the product. If I were to recreate YouTube in 2021, it would be Tik Tok.
If you think about what ByteDance, the company that owns it, has done in China, they've done a really good job of using that product to layer into other things like longer-form content. They have a service called Watermelon Video, I don't know why it's called that, but it's like Netflix or Amazon Prime, where you've got this longer form stuff. They've also got like a music app that's doing really well internationally. It's not quite like Spotify. It's more of like a karaoke-type app. But essentially, it's the same thing: you're listening to music. They basically use Tik Tok (or in China, Douyin) to start getting into other things, like they're really big in gaming in Asia. It's similar to what Tencent did –– started with WeChat, then got into games. I think US iPhone users use Tik Tok for 133 minutes a day. Think about that. They control two hours of your time per day. That's pretty crazy. They're using that to push people into other products that they control and can monetize. So they're not just owning that screentime of a user; they're taking over their whole phone consumption. Instead of owning one behavior, they're owning the whole user. Instead of owning a person's short-form video consumption, they're owning their media consumption, which isn't just videos. It's probably going to be music, podcasts, watching longer-form movies, all that kind of stuff. I think too just about Tik Tok's core product –– they're videos, five to 30 seconds long, and you have a built-in natural ad break super frequently. Versus on YouTube, it's a 20-minute video, there might be one or two ads, or they try to shove a bunch of ads in there, and it randomly cuts off the video. It's not natural at all. Versus Tik Tok, it's all built-in. The ad breaks feel natural. It's like scrolling the feed or like watching stories where –– they're ads, they suck –– but it doesn't feel as forced because there's just a natural opportunity for it.
I think unless they get broken up by the government, they're gonna be the biggest company in the world five years. Their core mission as a company is to eliminate search. That's Google's thing. You need to search. Not just on Google, but also on YouTube. It's also Amazon's thing. You go on Amazon, and you search for what you want. They're probably going to end up embedding shopping and shoppable moments all within Tik Tok and making it so that you see interesting things and buy them. It's hard to explain if you haven't experienced that yet, especially with the way most people shop in the West. You go to Amazon or Walmart or wherever, and you search. They've always been my sleeper pick to be the biggest company in the world. It feels inevitable unless they get broken up by the government, which is a possibility.
Roshan: The last company I'd love to get your thoughts on before moving on is Clubhouse.
Turner: I've always been less excited about audio over video. Some people say that audio is more intimate. There's different ways to think about it. The way I look right now, I probably wouldn't go live on Instagram or Twitter. I probably need to fix my hair and stuff like that. With Clubhouse, as long as your voice sounds good, you just press the button and you're live. There's less friction to go on and create and talk to people. So I think it was almost like a cheat code to create liquidity in live sessions of some kind. It's all audio right now. They'll probably continue to get more into recurring rooms. They'll probably get into paid room. If you open it up now, every day it's like, "Top Hot Stocks to Buy," "How to Make a Million Bucks in a Year," "5 Tips for E-commerce Success," that kind of stuff. You can picture a world where people will charge for access to that kind of room. That content seems cringe to some people, but that's also what a lot of people use social media for. There are stock day trader Facebook and Discord groups that are very popular. We'll also see a room where it's a hip hop artists and all their groupies, and they're just hanging out, talking about hip-hop related activities. I guess what I'm getting into is that I think they figured out a cheat code to get people to go live and reduced the friction to do these things. I fully expect them to get into video eventually. I think they'll get into live streaming, like paying for sessions on audio and the live streaming side, being able to buy things from streams, all that kind of stuff. They won't do that immediately, but they'll keep leveling up the user base. They did a great job getting the black community on board early. If you really think about it, the black community in the US drives culture, and Clubhouse had some of the most influential people in media and culture just hanging out on it as it was scaling. They thought it was cool to just go on and talk smack to other rappers, and you can listen in on it. So it's a unique experience. I really don't think they're gonna stay in audio forever. I think it's just too limited. I think it's a really interesting way to build up a user base. I wasn't particularly excited about it at first, but once I thought about it more, I think it's essentially a cheat code to create liquidity and live interactions and events and then get into much more monetizable and exciting things down the road. The better opportunity long-term is to get into video.
There's a publicly-traded company worth a billion dollars in the Middle East called Yalla, which started with audio group chat rooms. Then they got into group chats, there's a feed with messages, and you can share pictures just like Facebook or Instagram. They got into games where you're also live talking to people, but you're playing fun party-type games like rolling dice or word games. So that's also a direction Clubhouse could go. I don't think that's quite as exciting, so they probably won't do that. There's a couple other companies where you're kind of going live with your friends. There's a European one, also popular in the US, called Yubo. It's a similar concept where you're going live in joinable rooms, but it's more video-first versus right now Clubhouse is audio-first. Yubo is also much more focused on teens –– there's almost no teenagers on Clubhouse, and there's almost no adults on Yubo. It's a weird dynamic because they're opposites in a lot of different ways but almost converging in a sense.
Roshan: What advice would you give to a current student who's interested in going into venture capital?
Turner: To be a good VC, you need to have access to companies that other people don't have access to, to have the insight of when to invest, and you have to convince the founder to take your money. So you need to know that these founders and companies exist, have the founders want you involved, to give you their wire instructions, send you the docs, and say, "sign these, send me the money." And then you need the insight to say, there's hundreds of opportunities like this every day, these are the five that I'm going to do this year or this quarter. That's really hard. So you want to try to prove that you have all those skills.
If you're going for more of a junior role in venture, like your first job out of school, your job is basically to save the partners time and money. They just need you to help with a bunch of blocking and tackling: screening pitch decks that come in, doing a first call with a founder, finding markets to pay attention, helping them focus their time, etc. It's basically a firehose of 100+ opportunities a day. What five should I pay attention to in one day and spent 5-30 more minutes on? What five should I talk to and have an hour-long conversation with this week? And then which one company should I invest in this month, quarter, or year (depending on the strategy)? That's hard to do. So your job is to prove to people ahead of time that you can do it. One of the best ways is probably to just start writing online about a certain niche or something you're interested in. Try to get or show domain expertise, use that to start talking to founders or people in the industry. Deal flow is the lifeblood of VC. So anytime you know about a company that's raising money, if you would personally be interested in investing, you should tell other VCs about it.
Let’s pretend its March of 2020 and you know about this company called Clubhouse, and no VC’s knows about Clubhouse. You could write a couple of paragraphs on why you think it will work or be a publicly-traded company one day. You can start sharing that with some VCs. Most of them will probably not respond because they get a lot of messages like that, but you’ll get a few that read and respond. A few might even take you seriously and talk to the founders, and one might actually invest. Then they’ll say, "wow, this random kid just helped me get into the hottest startup of 2020. I want to keep talking to them! Maybe I want to hire them one day because we're probably gonna make a bunch of money from this investment." That's just the mindset of most VCs and how they think and how and why they hire. So it's basically, can you prove that you have that access and that deal flow? And then can you prove you have the insight of which are the right ones to invest in of all the opportunities, because there are tons, and it's hard to. There are so many great founders, so many great ideas, and it's just the nature of it that some of them will work, and a lot of them ultimately won't. Part of it is luck, too, but figuring out which ones to actually invest in is the hardest part.
Roshan: Lastly, having a pretty big one yourself, what advice would you give to students looking to grow their Twitter followings in the tech and startup space?
Turner: I'd tweet about interesting things that no one else is talking about yet. If you set up a new Twitter account and started saying things like, "audio is the future of social media," "creator economy," people would say, "this is old news, man, you’re not teaching us anything here." But if you were to come out and say, "farming on the blockchain is a trillion-dollar opportunity because it will revolutionize tomato harvesting, and here’s my thoughts and evidence on why it will work." Someone may read that and say, "wow, I wasn't thinking about this, but maybe I should pay attention to blockchain farming and follow this person." Essentially, just talk about things that few people are talking about. It might seem like you're screaming into the void, but over time people will take notice. Find the top accounts in your niche, reply to them, maybe turn on notifications, try to meet people that way. You can also play the engagement game posting lower-calorie tweets, but I’m not sure you build the right sort of credibility. If you're a college student trying to get in, you want to show credibility in new areas that aren’t widely discussed yet. That's what my playbook was, and I’d recommend it if you can pull it off.
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