Inside Elbow Grease, NYC's Hands-On Accelerator | Dan Teran, Gutter Capital

Host: Dan, welcome to the show.

Dan Teran: Thank you. So excited to be here.

Host: Uh, you guys just announced something. There was pretty big news. What did you guys just announce?

Dan Teran: Yeah, so we announced, uh, earlier this week, uh, that we have closed our third fund. So we raised a $75 million fund. Three. And, uh, as of this week, applications are open for Elbow Grease, um, which is our accelerator based in New York City. Um, we ran the first cohort earlier this year. Uh, started in January, was a huge success. And so, uh, we decided that we needed to do it again. So applications are open, uh, right now and they'll be open until, until about August.

Host: So why start in an accelerator? Like, there's literally 100 accelerators and people just kind of make fun of why there's so many accelerators. Like, why, why start one?

Dan Teran: Yeah, I mean, I think it's, it's a good question. Um, for us, this was about a year ago that we started thinking about it. Um, well, a couple things. One, we saw companies today are just able to do a tremendous amount with very little resource. And so for a venture capital firm and an early stage venture capital firm, I think we found ourselves asking the question, how do we make the argument to founders that they should partner with us? Um, I think a lot of our industry should be asking themselves that question. Um, yeah, and a lot of investors go out of their way to say they actually don't add value. They say the best founders don't need help. Um, you know, we're going to stay out of your way and that's fine. But in a world where you don't need capital to get to a million in AR, and therefore you don't need capital at all in a lot of cases, um, that's a really fraught pitch. And so, you know, we see even since we started the first program, you know, seed prices continue to explode. I think I saw there like 25, 30 posts now, um, which is, you know, more than double where they were a year ago. Which is just like, that's what happens when you don't need money to get serious traction. And so for us, like, a lot of what we were thinking was, um, how do we make sure that we're relevant to founders at the earliest stage in their journey. Um, and then the other piece is, you know, as a firm, we are very hands on by nature. So, ah, a lot of our companies work out of our office down at Canal Street. Um, we do a lot of the recruiting, building the early teams. Um, and so we're kind of doing a lot of this Hands on work already. Um, and when you do that and you step in at the seed stage, you know, often you're stepping into a lot of decisions that have been made, uh, without you at the table. And so for us, you know, our thinking was, why don't we just get involved as early as possible in the, in the journey of the company, um, and be a part of those early decisions, you know, uh, and if they're, they're good decisions, great. And if they're not, then we'll help, help resolve them. But, um, we just found the earlier we get involved, the more impact we can have on these companies. And so, you know, the only way that you can really attract people at the first kind of instance of company building is a program like this.

Host: And the name sounds pretty apt than elbow grease. Like you're getting, getting your elbows greasy. I guess you're rolling up your sleeves. Actually.

Dan Teran: Yeah, we found, it's on, it's on the website. But we found this amazing. I was kind of figuring out names for, for the accelerator and it came across this quote from Andrew Marvell in like the 1600s and it was the first, uh, the first instance of elbow grease in the English language. Oh, really? Um, and he says, like a few brawny fellows in the corner, uh, with mere ink and elbow grease are worth more than a thousand systematical divines with their sweaty preaching. Something like that. It's pretty close.

Host: Interesting. And you. So he's just probably made that phrase up back, uh, in the.

Dan Teran: Yeah, it was like from a poem or something. And we just thought like, wow, that feels like very gutter, like very essential to our brand. Just, you know, mere ink and elbow grease. Um, and so it stuck. Um, that was the name that we went with. And you know, now there's like an identity around it. The founders call themselves greasers. It's, you know, taken on. Yes. Their word, not ours. Uh, it's taken on a life of its own and uh, it's a lot of fun.

Host: Uh, and so the accelerator, is it like a global thing? San Francisco? Like where, what's like the location of this thing?

Dan Teran: Yeah. So we are, you know, my partner James is a lifetime New Yorker. I've been in New York for 16 years. I built, managed by Q here. Um, we're very much a New York based firm. Um, we have an amazing office down on Canal street, which is in Chinatown in New York. Sort of gritty part of town, um, where we've been for many years now. So we have two floors that is home to about 15 companies about 70, 80 people depending, uh, on the day of the week. And it's an incredibly vibrant sort of hub of builders, founders ranging from, you know, companies started last week to series B and beyond. Um, so the Elbow Grease accelerator is hosted at Gutter Headquarters, um, which is a really special part of it. So you've got everybody working in the same space. Um, and one of the things that's unique about our program is like, you know, companies graduate as in the program ends, but, you know, we're not kicking anybody out and in fact, we want them to stay. And so, you know, we had eight companies in the first elbow, Greece in Q1. And of those eight companies, I think about half of them still work out of our office. Two of the companies relocated to New York, um, because we were able to convince them they'd build a bigger company faster if they're working alongside us. And so that's become a big part of the draw as well. I think, like, if things keep going at this pace, we'll be taking another floor of the building pretty soon.

Host: Oh, uh, and how many floors are in this building?

Dan Teran: Uh, so the building has an interesting history. Um, it was actually was my office before managed by Q when I was at Pre Hype and then Barker Box, uh, before they went public, took over the sixth floor of the building, and then the fifth and the fourth and the third, and they actually took over this entire building in Chinatown. Um, and then they went public and Covid hit and they moved to the financial district and the building just sat empty. And so we were able to take over the lease from them tail end of COVID times, um, and have subsequently taken another floor. Um, so yeah, the building has some good history to it and, uh, lucky to have it.

Host: So you're taking up two floors, you have a couple. Sounds like you have four more to expand into.

Dan Teran: We'll see. I mean, if they get leased up, we're out of luck. But it, uh, hasn't happened yet.

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Dan Teran: Yeah, I mean our approach is pretty different. It's very hands on. And I would say if you take the number of accelerators and you kind of boil it down to are they led by founders, um, who've built and sold companies in recent memory actually know how to do the thing that they're advising people to do, have done it? Well, um, the universe gets pretty small. And then if you say, um, is it a, uh, is it on location? Are you physically working with the people? Are you spending every day, you know, in and out with these people? It gets even smaller. And then if you say, is it a small batch, say like, you know, less than 20 companies, um, is there one to one mentorship? Like, is there actual tangible value add? I'd say there actually aren't a lot of programs. And I think what you see from the insane numbers of applicants to some of the more scaled accelerator programs, like literally 20,000 people applying for 200 spots. Um, I think there's actually just, like, way more, uh, uh, supply of great founders that are looking for help than there is or demand from great founders that are looking for help than there is supply of accelerated programs that can actually help them. Um, and that was part of our insight when we started Gutter was there's amazing founders, um, tremendous potential. Um, but maybe they don't come from tech. They don't have deep networks in the tech world. They haven't built a company before, and with a little help, they could do incredible things. And so that was what we set out to do with elbow grease. But, you know, I think the short answer is, uh, for the type of work we're doing, I think there's like, actually not. Not a lot of great options, and there's plenty of room for more, honestly.

Host: Yeah, it's kind of one of those things we were talking about earlier. Like, there's tons of podcasts, but, like, are there any actually that good? Like, do you even listen to that

Dan Teran: and think the same thing?

Host: It feels like any category where you could argue that there's so much of a thing. Yeah, it's probably even more prominent if it's something where, like, you can't even name a specific one. Like, if somebody. If someone's like, oh, I'm starting accelerator, and like, oh, name another accelerator. And they can maybe name like, one or two. But there's like, there's so many of them, but they can't name any.

Dan Teran: Totally. And I think, like, you know, so many people we talked to said, you know, we tried this years ago. It didn't work. And it's like, what did you try? It was all remote. Or it was like, you know, uh, it was like this one theme, and it's like, okay, well, what was the programming? It's like, we had a couple speakers, and it's just like, you know, I

Host: feel like hone it in basically. Like, you're checking boxes. Yeah.

Dan Teran: And I don't even, you know, everyone's intentions are good. It's just like, you know, we do things our way. And like, you know, basically people had the same. Approached me with the same logic when we started the fund, which was like, does the world need another venture fund? And it was like, I don't really know, but we've been doing a thing. We have like, a, uh, practice in terms of, like, how we work with founders, how we invest, you know, the level of concentration, the services we provide. And like, from what I can tell from the founders and the performance of the companies, it's going very well. So we're going to like, you know, raise fund to do that. And I would say, you know, the accelerator is kind of the same thing,

Host: but so same then with the fund too. That's kind of the pitch like every VC has pretty much is like Seattle's value. We roll up our sleeves, uh, whatever people say. You probably heard this pitch a million times before. So like you're saying that most people don't actually, or I mean, you tell

Dan Teran: me you're on the, uh, you know, you work with these people too. It's interesting because I had some of the best investors in venture, I would say, like, um, Satya Patel, uh, at Homebrew Hunter. And Satya led my seed round when they were, you know, the emerging manager, uh, back in the day. And it was like super lucky kind of life changing experience. Not only because they were great investors and board members, but then they were like incredible mentors when we were starting, um, starting our fund. Um, but if you look at like the average seed investor, I think we realized this more. I realized this more after managed by Q when I was advising other founders and looking at the experience they were having at the board level with these seed investors who, you know, respectfully had done nothing but work at venture firms, um, didn't have a lot of credibility when it came to operational decision making and frankly like had no interest in being involved in the operations of the business. Um, and so, you know, we just take a really different approach, um, which is, you know, a lot more hands on, um, and a lot more qualified to be hands on.

Host: Yeah. And so you're saying that they don't, a lot of people don't take an operational approach. What's like the chasm that you've, I guess, crossed? Other people are not crossing in terms of like rolling up their sleeves and getting the elbow grease.

Dan Teran: Yeah. I mean, so it kind of, it always starts with getting aligned on the goals. So we work really quick, closely with founders. Um, we're big believers in OKRs, which I know is a controversial topic.

Host: Yeah, that's a hot take. That's like a big tech hundred thousand employee type of thing.

Dan Teran: Yeah. You know, it doesn't matter the size of the organization. Um, saying what you're going to do and then either doing it or failing and learning something is really important. And so I think obviously the earlier you go, the okrs need to be held lightly and you need to accept that like you're going to be wrong. But I think A lot of companies wander for a long time because they're just not explicit about what is the actual thing we're testing right now, what do we want to learn this week, this month, this quarter, and just have an honest conversation about what's working and not. And so hitting okrs in a pre seed stage company is not the same as at a public company, but it's actually about enforcing a cycle of learning and I think it's actually super valuable. Um, so it starts with the goals and then from the goals we start to work closely with the founders of what can we do to help them hit the goals. And so from the first fund we raised, we knew that talent was going to be a big factor. Um, I think we talked previously about companies like uh, Opus and Biki that were in our first fund where in both cases I was advising the founders really closely during COVID before we started the fund, I helped them to recruit their founding team. So in both cases introduced them to their two co founders. Um, and we saw that drive tremendous inflection in the business. They're both thriving today. Some of the top performers in our first fund, um, and it was like taking these super smart, principled, mission driven operators that didn't have great networks and software and actually just matchmaking them with really great technical and uh, in one case technical and product co founder, in the other case, uh, technical and sales co founder. Um, and so we kind of have been able to replicate that at scale with the fund. And so, you know, you ask like, what does it actually look like? What do we do differently? My partner Richard, who runs Talent, uh, at Gutter and was previously my head of talent at Managed by Q, he has now recruited over 100 people into the portfolio. And you know, our portfolios are very concentrated. So it's only 14 companies per fund. Um, so four years, 100 people recruited, less than 5%. Regrettable attrition. You know, a typical gutter company will reach the series A. And we've actually hired like two thirds of the team, which I don't think literally any other investor can say. And I think when you're making a pitch to founders, like, that's pretty differentiated.

Host: Yeah. So then what does the recruiting help typically look like from a venture fund? Like, because if I've never heard this before, this sounds great, it sounds awesome. But like other people are telling me the same thing, that they help me with recruiting.

Dan Teran: Yeah. So actually like Richard is a recruiter. It's like what he's done his entire career. He was head, um, of talent for me, managed by Q. He was head of talent at Primary Ventures and then Alma M briefly after. And so his goal every quarter, his okrs, because we, you know, we take uh, our own medicine, um, is a certain number of critical hires. So it's usually like on the order of five or six critical hires per quarter where we're sitting down with the portfolio, we're prioritizing the most important roles across the portfolio. And Richard owns the goal. So, you know, he's already hit his OKR for, for this quarter. He's hired six people, um, but he's working directly with the founders to troubleshoot, you know, what are the most critical roles. And then he's going out there and helping find that person. And a lot of times, you know, these founders don't have strong networks. He's able to build them. Um, can talk about one hire in particular that was an exciting one. We invested in a company called Farm Evo, which is based in Karachi, Pakistan. And one of the markets they sell into is the silviculture, uh, timber market in uh, like forestry in Canada, um, and now in the United States. And they're in the process of relocating to New York. They're going to work out of our office. But they needed to hire someone to run uh, you know, business development for these timber operations in Canada. And Richard was able to, you know, basically immerse himself in those networks, meet all of these people, get referrals. And we've now made I think two or three hires for them in the US Um, to actually run, you know, the go to market for these timber operations, which, you know, I don't think that's like a level of kind of uh, embedded operations that many venture funds are willing to undertake or would frankly have the capabilities to.

Host: Yeah, I feel like a lot of, A lot of the value add is it's. They'll help you if they feel like they can invest more capital. And they really, to your point of, you know, they're not an operator. If I'm being really critical thinking about this, like it's basically they see it as a lens of like, can we clip some management fees, raising capital to put into this business? I mean that's, it's. The business model of a venture firm is like raising capital, deploying capital, both of those things. So it's almost like the, the startup is kind of like just a conduit

Dan Teran: of doing that essentially totally well. And I think for us, the other thing that's important to note is because we're so concentrated we own, um, for our top positions we own like 30% of these businesses.

Host: I was going to say you got some that are like in the 30s.

Dan Teran: Yeah. So we have pretty significant ownership which means There's a real ROI case for us and for RLP's, for us to be rolling up our sleeves and making these key hires, making customer introductions, helping to open new markets, whatever, you know, whatever the plan calls for. Which is like if you own like 2% of a company, it's not going to be worth it to make a hire. But if you own 30% of the company, it kind of changes the calculus of your decision making. Um, which points to a really, you know, hands on model.

Host: Yeah, because when I think about this, if I'm thinking about what the incentives are, if I own 30% of a company and it's valued uh, at like 5 million, 10 million, 15, whatever. It's just like a first round, early stage company and you're, you're owning like 30% of it or whatever. That change from like let's say the company goes public or whatever, it's worth like $10 billion and you invested 2 million or something in that first round. You own 30M, maybe gets to lose a little bit, but you own like 20% of the company. At a $10 billion valuation, we'll say it's worth 2 billion. So your state goes from 2 million to 2 billion. I'm making all these numbers up but like you, the amount of money that you make as a firm is just like absolutely astronomical.

Dan Teran: That's the hope versus like a lot

Host: of the model is like, you know, you only own 1 or 2, 3, 4%, like whatever this number is. But the way you actually make the money is as it's going, you like put more in you, it's like a much shorter time frame too. So it's less of like, hey, we're going to get started, hire some people. Four years will raise a series A when like we get this thing cranking or however you want to think about this versus well it looks like this thing's going to go public in 18 months. Like we invest a couple more times before that happens.

Dan Teran: Yeah, we have, I mean we have a very unusual strategy. We arrived at it through doing you know, over 100 like 110 angel investments ourself before the fund. Um, and James and I were, we were the biggest investors uh, in our first fund and, and almost the biggest in our second fund. But you know, we're much, we're a much bigger part of the capital base than the typical, uh, venture gp. Um, and so when we're thinking about the strategy, we're really thinking about, like, what would we do with our own money? We know, based on our experience, the returns are the best the earliest you go. Um, and I think there is sort of a myth about diversification in the industry. You know, our own primary research, looking at a Data set of 25,000 venture investments from the 90s to today, which have had long enough to basically, um, achieve outcomes, um, we found that the returns, just talking about variance, uh, the returns to diversification, um, basically falls off a CLIFF after like 10 investments, which we ended up doing 14, because 10, you know, is scary to LPS. But the. So you have, like, there are modest improvements to the average return, but the variance kind of flattens out. And so our view was you get modest improvements to the average return, but you don't contemplate the cost. And the cost is when you have 40 companies in a fund, you can barely remember their names. And so for us it was like, the cost is very clear, which is like, there's a degradation of the founder's experience. If you're saying that you're going to actually move the needle for them.

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Dan Teran: I mean, it is like. I think this is the one thing I've learned from James, who, you know, my partner. James spent, uh, nine years as a professional gambler. And I would say that is like the most hardcore education and risk management because you, you have to always be ahead or you blow up. Um, you know, I think it's like 1% of gamblers get ahead and 1% stay ahead. So it's, you know, very few people actually, uh, retire from gambling, you know, not owing somebody else money. Um, so we did our own primary research. We had 110 investments of our own. And then we actually, through an LP, got a data set of 25,000 investments. And so we did primary research to figure out what the right number was. Um, and our conclusion was, yeah, after 10, uh, obviously it's uncomfortable. The optimal strategy is often uncomfortable, which is kind of the biggest thing that I've learned from James.

Host: So then what's happening with the 11th and the 12th and the 20th and the 30th investment? What happens to the returns at that point? And the psychological. Why would people do it anyways?

Dan Teran: Basically, diversification is not bad if there's no cost to it. So I would do 1,000 investments in a fund if there was no cost to it. But the cost is that you can't actually know what's going on in the companies. You can't build meaningful relationships with the founders, and you certainly can't like, do things that change the outcomes at the companies. And so our bet was that like the ROI of us actually doing stuff was going to be higher than the cost of having, you know, fewer positions.

Host: Yeah, it's something I'm, uh, challenged with right now too, is like someone kind of need help, needs help with something you have. So Much else going on. And you, you like, you got to help. So I have like one company where we're. I'm trying to help them get the first couple of customers. So we're trying to do like 20 like pretty intense customer research calls together, get a bunch of people to talk and it's going to take a ton of time. And like, I want to do it.

Dan Teran: Makes you a better investor too.

Host: Oh yeah. And at the other point it's like, you know, company might be raising a, uh, series A or whatever, series B. And like, you want to help. Somebody might be looking to like hire a new head of marketing. You want to help. I also have all my own shit going on. Like a multiple other things like, like personally or with Banana, with the podcast, you know, after the LP update, like tons, all this stuff going on. So if you have a thousand investments, it's like you just literally can't do anything.

Dan Teran: Yeah. M. You have to like, your strategy has to be not doing anything, which, which didn't feel right to us and also wasn't suited to our skill set. You know, like there's not a lot of, you know, precedent. Seed investors forget elbow grease, precede and seed investors that will lead rounds, take board seats and have actually built and sold a company before. And so we needed to have a strategy that actually allowed us to like, leverage our competitive advantage, which is, you know, being able to roll up our sleeves and build companies alongside founders.

Host: Yeah. It feels like the strategy makes sense when the companies are later and don't need your help. And it's just like you're uh, giving them 100 million bucks, whatever. Like they just need a big chunk of money and it makes more sense to be super helpful super early on. You need to be more concentrated. But then it just gets scary thinking of like all, uh, right, you made 12 investments and the data says there's a very high chance of these will all go to zero and you will lose all the money. So it's almost like people just don't do it.

Dan Teran: But I mean, so to look at it from another perspective, so the unicorn rate, like the percent of companies that raise a seed that become unicorns, like bounces around. But say it's like, you know, two, two and a half percent.

Host: Probably a lot higher today, like right now.

Dan Teran: Sure. So like two and a half percent though? Yeah. That means that if you have, uh, you know, the average seed Fund probably has 40 companies in a 40 company portfolio. Statistically, if you are average, if you have no, if you have no picking skill you got one. Can you imagine pitching an LP with your like, why do you have this number of companies? Because I'm average. Because I actually have no edge in picking. Because if you're twice as good at picking, then you should have half as many companies. You know what I'm saying?

Host: Yeah, that's fair. And so is that what you did when you were raising the fund? Like, did you go out and say like, we're just better at picking than

Dan Teran: everyone and we're not necessarily a picking, I would say at helping. I mean it's important to note that like our first two fundraises, first one in particular, were brutal. Nobody believed us, nobody thought it was a good strategy. I think like, you know, so what

Host: was the pitch at the time? Like what did it kind of look like?

Dan Teran: The pitch was like a highly concentrated hands on venture fund, you know, like it was um, you know, Richard was part of the picture in fund one. So we had the talent capability. We had a few case studies of companies where we had made a big impact, but they were early and you know, like now all of those companies I mentioned are post series B and like, you know, uh, still on a venture trajectory. And so it's a lot clearer that like, you know, we're capable of making a big impact and that we're good at picking good companies. Um, but at the time, you know, they were still all. We raised the fund to lead seed rounds at 4Runner, BIKI Opus, we did Faraday and Fund 2 and those were all companies that I was advising prior to the fund. So there just wasn't a lot to point at. And I think you know, I obviously had a good run as an operator. We had you know, uh, a nine figure exit. Uh, but like it wasn't like the world's greatest outcome in venture and obviously like we sold to WeWork, it then exploded. So people weren't looking at me like uh, you know, top, top, top tier operator. Yeah. So I don't think we were getting credit for that. Um, and we had a funky strategy that like, you know, a big learning from raising from LPs is like the funkier you are, the harder you make it for yourself. Which doesn't mean that it's like the wrong thing to do, but it is like these people are not looking to take risks.

Host: Yeah, because I think, I don't know, I don't know what this like chasm is of when you cross of like, okay, now you're legit and we, we trust you and we think you're really Good. But it's. I feel like maybe I'm Jeff, I'm just making up um, a number. It's like, you know, you invested, started a company and either built or invested when they were starting it, now it's crossed 100 million in run rate. It's like a real business. Whatever.

Dan Teran: Totally.

Host: So like if you invest in a series A or series B, when it's like 15 million or 20 million, like it takes a year to get to

Dan Teran: under like, whatever, and you have a lot more data, uh, you kind of know what's going to happen in the next year or two.

Host: Yeah. But like if you're investing like we're starting the company, some R and D gain a customer is. It's like four years later and it's like not super clear yet.

Dan Teran: Totally.

Host: And it might take like another couple years and then you might have a company, you might have another, you might have like another one. So yeah, to your point, it's like, you know, like you open up your, you know, your coat and it's like, here, look at all these hits that we have. It's like totally still kind of in this weird gray area.

Dan Teran: And it's like it's a, A, uh, business where. Satya. When I had dinner with him when we were raising fund one and I asked him sort of like, what's the one piece of advice that you'd give to me that like, you know, I might not listen to, but I should, um, and he was just like, you just have to know that you don't know and you won't know for a long time which ones are going to be fund returners. Um, and you know, he used the example of Q which like at one, at one point they thought was going to be a big fund returner. It ended up being like, fine, but, you know, nothing, nothing to write home about. And there was, ah, chime ah, which in their portfolio which you know, has. Is gone public, whatever. They really struggle, you know, they've talked about this publicly, struggled to raise. I think it was the series A. And, and so, you know, was a much bigger outcome than Q orders of magnitude. And they didn't know that until like, until the out years. Um, um, I spoke to a GP yesterday who told me, you know, they have two multibillion, uh, companies in their first fund and it was literally seven years until they thought they were even going to make money on them. Which is just like, that's insane. I was like, oh, fuck, we're on year four and a half. Yeah, like we Might not even know.

Host: I think the thing that's super challenging is did you. So you raised the first fund in 2022 or 21?

Dan Teran: Uh, we raised the first fund, yeah. In 21.

Host: Okay. Because, yeah, the thing when you think about what a 2020 or 2021 fund goes through, it's like, it's that. Where it takes really long to like, know that the companies are working, but then there's also like a. You invest in the summer of 2021 price, which was too high objectively, so that the, the valuations being paid just has to get cut way down. In addition to. You actually have to make the progress. You have like an un, an extra, you know, thing going against you of like the outside world saying, oh, this is working. Like, instead of it being, uh, a 5X, it's like, you know, you did a down round in the, uh, seat round or whatever, and it's like, you know, you barely break even even though the company's actually doing well. So it's like just a tough. It's really hard for all these different things to go. Right.

Dan Teran: Yeah, no, we were, I mean, the second fund got easier because we were fortunate to have a really great, um, first fund. And despite 2021, we're. We're very disciplined on price and so, um, continue to see really great performance there. But, yeah, it was a brutal, it was a brutal year for a lot of funds.

Host: Yeah. Uh, and so you mentioned talking about 2021. How has the hiring market changed between now and then and then even like before with managed by Q? Like, just. Have you seen the hiring and recruiting game and challenge that founders are facing out there? Like, how's it kind of evolved over time?

Dan Teran: Yeah, I mean, I think we've kind of seen it ebb and flow. I would say right now is as competitive as we've ever seen it. Um, including, like, you know, there were some real go go years, uh, in the, in the late teens, um, and managed by Q where it was really competitive for engineers. And then obviously Covid years. Um, but, you know, if you ask Richard, hiring engineers with some experience today, it's like completely counter to the narratives of like, you know, there's going to be no more jobs for engineers. It's like, no, no, no. These engineers just become game 10 times more valu because of how much code they can ship. Um, and so why would you not want to hire, you know, twice as many engineers, not. Not get rid of them? And so it's, um, incredibly competitive for people who have experience. And I Think we're seeing that kind of across all, all roles. Like, even in sales roles, you know, if salespeople are more productive, then the best salespeople are worth a lot more. And so, you know, we're seeing that we have to move faster to offers on candidates that we're excited about or they're going to get scooped up literally within a week of being on the market. Um, um, it's like it's frantic. The pace of hiring right now is, is, I guess, like that would be how I would sum it up is it's frantic.

Host: Yeah. Okay. How do you, how do you navigate that? Like, how do you make a good hire bad? Like, what's the generaling the process, like, knowing if somebody's a good hire or not?

Dan Teran: I mean, it really depends on the role. Um, obviously, like, there's a technical evaluation for if someone's, you know, software engineering role and even for like sales, you know, or definitely doing kind of mock presentations where people actually having to pitch so as much practical as you can possibly do. And then obviously references are like a huge part of the process, really. You know, being exhaustive and finding out what it's like to work with someone, ideally trying to find a bad reference, just trying to get the edges of like, what the person is really like. Um, similar for our investing process. You know, it's like, obviously you're not going to know what it's like to work with them until you hire them, but you can get pretty damn close if you talk to enough people.

Host: Hmm. And I think one thing you mentioned was you talked about Managed byq. If we can just talk about for a couple minutes, I know there's some interesting stuff to pull out there. What was it really quick for people who don't know.

Dan Teran: Yeah. So Managed by Q was a combination of, uh, vertical software for the office manager and a marketplace of commercial services. So things like cleaning, maintenance, IT security, administrative, staffing, all the things that go into running an office where you were able to book, manage, pay, uh, through a single platform. And so, uh, we started in New York City. Um, you know, at our peak, we had thousands of offices using our platform to run, to run their office operations. Um, we went from New York to Chicago to San Francisco to L. A. And then we launched a third, uh, party marketplace and were available nationally. We acquired a French company, um, which had some, um, some software capabilities that helped us to go global. Um, and ultimately, you know, we reached a point and this is like, you know, dating ourselves. This was, uh, 2019. And it really Was the case that if you went into a startup's office in New York, it was like they were either in a WeWork or they were in their own office and they were using Managed by Q. Um, and so, you know, oversimplifying, but that was sort of the logic that made WeWork want to acquire us, which they did in 2019.

Host: Interesting. And I think it was a bit of a challenge fundraising for Managed by Q. But you also had some amazing investors. What was the process like of fundraising initially?

Dan Teran: Yeah, I mean we actually, we were pretty lucky. So I was at pre hype when we started the company. We raised like a $400,000 pre seed round. We were fortunate to have um, folks like Scott Belsky in the precede. And it was actually Scott that introduced us to Homebrew. They had raised their first fund. And so for the seed, like we weren't even going out to raise. We didn't have a deck. Um, we met Hunter and Satya. They were excited about what we were doing. And you know, because we were uh, when we onboarded a customer, we were taking over the cleaning service, which is kind of the largest line item for a facility. And so we were actually able to grow to a million in revenue really, really fast. Um, and so this was also like the heyday of the on demand economy. Bits moving atoms. There was a real obsession with software as a remote control in the physical world. Um, and we also. It was B2B. Uh, uh, they were very like high ACVs. And it was like, it was a really. Did you. The unit economics were very attractive relative to like an on demand dog walker or whatever.

Host: Yeah. Ah, because instead of like with a dog walker, you pay them like 20 bucks or something. A cleaning relationship, like it's like a retentive relationship.

Dan Teran: Yeah, they're coming every day of the week contract. And the, and the, the pitch was like, you know, once they trust us to do one thing, they'll hire us for other things. And so you end up getting like that full wedge of the facility spend which, you know, which did prove out over the life of the business where you could continue to like take on higher and higher margin. Um, and so we actually, you know, we were pretty successful at fundraising early on. Um, it got more challenging closer to, you know, to the, towards the end of the business when we were selling. But I would say that was like, had more to do with the business and sort of finding the limitations of the business model than, than the, than the capital markets.

Host: So how'd that influence sort of how you advise founders today to think about fundraising.

Dan Teran: Honestly, it had a tremendous influence because, you know, it's sort of the opposite of it being hard to raise. I was a very good fundraiser. We were. We always raised way too much money. We found ways to spend that money, and, you know, we managed to, like, sell at a price that, you know, cleared the preference stock, and everybody did fine, but, like, barely. Um, and, you know, when I look back on, like, how I would have built that business if I was, you know, more cash constrained and just, like, more thoughtful about, you know, how do we make this business generate cash? Um, you know, I think it could have been very different in terms of the outcome. And so now we are super disciplined on operating expense with our companies. You know, they typically, you know, we want companies to burn no more than 100k a month, like, really through the Series A, um, which I think is pretty unique. And until there's product market fit, like, well below that, um, to really kind of invest when things are working versus, like, hire a team and try and figure it out. Um, and so, yeah, I would say I kind of have reacted and hopefully not overreacted to my own experience as a founder, which is, like, raising too much money, I think does more harm than good in most companies. And it's in my experience, and from what I've seen, it's like, it's inescapable. You know, it's just like you're not putting the money in a different bank account and not touching it and pretending like you don't have it. Like, everybody does it. And then, like, the ways that it's destructive, um, are sort of insidious. So, like, if you hire a head of marketing, uh, an expensive head of marketing and an expensive cfo, uh, and an expensive head of hr, it's not like they're bad or they're bad intentions. It's just that they want to talk to you. And if you're talking to them, you're not, like, talking to customers and you're not building the product. And so those people all have a role in companies at a certain scale, but I would say you kind of as a founder. And I think the. This, like, AI led founder mode kind of renaissance of, like, founders as individual contributors is totally pushing against the grain of that. And I think it's changing in a really positive way. But, like, my experience of it was like, you can do a lot of things that feel like you're being successful as a founder, and you're like, oh, and I'm talking to all these executives all day, and I'm managing a team, and all of a sudden, like, you wake up one day and you're like, I'm not, like, building the product or closing deals. And like, that's probably true of, like, you know, public company CEOs, but I would say for like, you know, a Series A founder, you should probably be closing deals and building the product.

Host: Yeah. Well, because a lot of the bigger the company is, a lot of your okrs are. How many people on your team are you managing? Not necessarily. Like, are you closing sales, increasing revenue? Like, it's just not necessarily your job per se. So it can definitely be, like, a little distracting. I would say, especially. Especially if you, like, have influence coming from there. Like, how many people are on your team.

Dan Teran: It's funny. It's like, now, I think it's a flex to have as few people as possible, which is awesome. Um, it's especially awesome as investors. It used to be, like, you know, a point of pride that you had, like, oh, you have, like, 35 people on your team at the Series A. That's a lot of people. And then, like, you hired 100 people in a year. That's amazing. You must be an operational genius.

Host: And you must be doing well because you're doing well. Yeah. And it's the same of, like, I feel like it's kind of like this trope of you go to, like, a tech networking event, you meet someone, it's like, oh, like, how much money did you raise? Like, that's like the first question when you meet someone. It's like, what? You didn't even ask their name or whatever.

Dan Teran: Totally.

Host: That's the thing people care about.

Dan Teran: Yeah. And it is, like, so not the right thing to focus on. It's obviously like, ah, it is a powerful tool in certain companies, and it is, like, certainly, um, necessary to accomplish things in certain companies. But we're just seeing, like, so many of the businesses in our funds are, like, you know, break even modestly profitable and growing on, like, crazy venture scale trajectories. And it's just like, it's no longer the indicator that it used to be that things are going well, to be raising lots of capital.

Host: So the guy who helps you hire people is saying, you shouldn't hire that many people. It's interesting. I mean, it's good. I mean, it's interesting.

Dan Teran: Totally. No, I mean, it's like, we want to hire, like, excellent, excellent people and then get a ton out of them. You know, we don't need to hire, uh, an army.

Host: Yeah. That's fair. Uh, and so we talked a little bit about. So Managed by q was like, 2019, I think. How did 2019 go? What was like, the series of events throughout 2019?

Dan Teran: Uh, yeah, it was a long time

Host: ago, because I think you were acquired by WeWork. It was April. Ish.

Dan Teran: Yeah. Well, I'll give you the high level, and then we can drill in, as is interesting. So we sold in, uh, April 2019, which was. It was almost like five years to the day, um, that we launched the company once. Um, we sold. As part of the deal, I became the head of corporate development and ventures at, uh, WeWork, which was kind of overseeing a broad portfolio of stuff on the WeWork side. So I actually left Managed by Q. My head of product became the CEO of Managed by Q. He reported up to me. But, um, I went to work at WeWork every day, like, literally, uh, from, like, the day we closed the transaction. Um, I worked at the WeWork headquarters, did, like, you know, a worldwide tour, traveling to Asia to visit kind of the regional leaders. Um, was trying to do a lot of things in a very short amount of time as the company prepared to go public, um, which, you know, now, historically did not happen, at least at that time. Um, and then, like, October, late October, I believe it was. Um, I left We Work, uh, and so that was, like, the end of. End of my tour of duty. Um, the company failed to go public twice. And just, uh. Uh, I think the. The CFO came to the conclusion, and I agreed with him that, like, everything that I was overseeing needed to be divested pretty much immediately. Um, and so, as a part of that, they also divested themselves of me, um, which was, like, probably the best thing that ever happened to me. Um, you know, it was basically laid off from WeWork, uh, within, like, you know, a month or so of COVID Covid happening.

Host: Wow. And you actually, I think, tried to buy back Managed by Q, is what I did.

Dan Teran: Yeah, it was crazy. Um, I refer to it as my. My attempt to break into prison. Um, and I'm glad that the guards were on duty. Basically, like, you know, we work was doing a fire sale of all of the companies they had acquired. Um, and, uh, Seth from Conductor, for example, bought back Conductor for, like, nothing. I don't know the exact details. Um, Kevin Ryan partnered with, um, David, uh, Siegel to buy meetup, and they just sold it again. Bending spoons. They did incredibly well. Um, uh, Flatiron School was spun out, and so Managed by Q was also on that list. And, you know, there was a period of time where I thought we'd get a really good deal, be able to buy it back for nothing, um, and, you know, continue raise some money for that, for the, um, forward operations and continue building kind of the vision of what we had. Um, I think because I was the one, uh, it was my team that was overseeing the divestitures. They, they paid a lot of attention to how competitive the deal was. And there was a, ah, we had a YC backed competitor that had raised some money and was insistent on buying Managed by Q from WeWork. And so they basically bid up the deal to a point that, like, it didn't make any sense. Um, I, I dropped out of the process. Um, I told the guy who was running the process that they didn't need to inform them that I was out of it. And so they ended up bidding against themselves to a number that made no sense. Um, and, you know, Managed by Queue ended up getting sold to a competitor sometime in February of 2020.

Host: Um, oh, man, what a time for that.

Dan Teran: It was like crazy. It was like, literally like the day that it was declared a global pandemic. Um, and yeah, how lucky am I to not have been, um, you know, running a money losing Managed by Q, uh, and office services business going into like, you know, the end of the office as we know it.

Host: Yeah, I think you told me that every single WeWork acquisition was a stock deal except for Managed by Q.

Dan Teran: Uh, there was large stock components to all of them. The one thing that was unique about Managed by Q was that we negotiated it such that every employee got all cash and at close, um, which, you know, I think is a contributing factor to why so many of the Managed by Q team members still, uh, work with me in our. In our orbit today.

Host: Yeah, I think you mentioned that there's 40 employees that still work in like, the gutter orbit. I think.

Dan Teran: Is that probably. Yeah, it might be slightly higher today, but yeah, 35, 40, last time I checked that work, you know, within gutter companies and probably, you know, six or seven that are founders.

Host: Oh, nice. Okay. And so, like, around this time was when you started. I mean, so all this went out. Covid happened. Did you, like, were you in Asia still? You moved back to New York. What'd you do during COVID when Covid hit?

Dan Teran: Uh, so I was in New York. Um, yeah, I was. So I had, uh. When the deal closed with WeWork, um, the way that I got my employees paid with all cash is that, um, um, I made a deal with Adam. That I would defer 80% of my compensation to the escrow, which was literally just, I think like a way to, to, to punish me. Um, um, but basically I didn't get like any cash at close. Um, um, I got enough to like put a down payment on an apartment and move into it. Um, but then as things really started to hit the rocks at wework, I realized, um, you know, if we work went bankrupt, um, and I wasn't able to recover that cash, like might not be an apartment I could afford. And so I literally spent um, Covid in an empty apartment in Tribeca. Um, um, I was like, I felt like it would be bad luck to buy furniture because that would mean I'd never get paid. I did, but for the grace of God, end up getting paid, uh, eventually, but just to set the stage. So I'm in New York, I'm in this empty, uh, loft department alone. I am unemployed for the first time since I was 14 years old. Um, James and I had done a bunch of angel investments prior and so there were a lot of New York based founders that were hitting me up for help with various things. Um, you know, at this point, if we're like February of 2020, the managed by Q, the remaining managed by Q engineering team that was acquired by this company literally all walked out and they're kind of like, um, ready to suit up for the next tour of duty. Um, and I was advising a few companies. One of them was Opus. Um, Rachel from Opus introduced me to Abhinavit. Biki was another was Biki. Um, and really where kind of all this started to come together was uh, Opus was originally selling uh, English as a second language over SMS for kitchen workers in New York. Very, very nice.

Host: That is like the most niche. Very niche.

Dan Teran: Yeah. Rachel. Rachel is amazing. She ran training for Danny Meyer's restaurants and she was teaching ESL in kitchens. So turn that into an SMS based service. And then when Covid hit, obviously that's not something that restaurants are paying for. Um, and she had the idea to turn it into basically Covid safety training for all deskless workers because there was a huge need for it. There was nobody doing it.

Host: And she had the infrastructure.

Dan Teran: She had the infrastructure, but she didn't have the world's best software engineering team and just didn't have the team really to make this happen at scale. And we wanted to get it to everybody. And so I put out a call for volunteers to the managed by Q team that were sort of on the beach, uh, uh, figuratively of Course. And we had a Zoom meeting on a Monday, I think it was. And it was crazy. It was like 15 people showed up, like incredible engineers who I'd worked with for many years who were kind of like, let's do this. Um, and, uh, Jeff Silver, who is the CTO and co founder of Opus, was part of that crew. Um, Vince Lee, who now is at Gutter, but was the co founder and had a product at Opus. They basically all joined up. They ended up hiring a bunch of the best engineers from. Managed by Q. And they've built an incredible business at Opus. Doing now it's a, uh, mobile first, multilingual, uh, LMS for frontline workers with a lot of other functionality for kind of, um, managing large distributed workforces. Um, but that was sort of the genesis. We then all moved into, uh, this abandoned building, uh, in Chinatown, which is not the one we're in today. It was across the street, which, um, literally, like there was four floors. The second floor was a, uh, was like a foot massage parlor. And James and I literally.

Host: Was it active or empty?

Dan Teran: No, it was empty. Like everything had been abandoned from the building. But there was a lot of. I guess a lot of people liked it because James and I were on the second floor. The floors were so tiny. They're like the size of this room. So everyone had their own floor, but people would walk in at least once a week looking for a massage. Like, like. Like someone came in once in a suit and he was like, I took the train all the way down from Yonkers for a foot massage. Like, what do you mean? And I was like, he probably could do it if you want, but, you know, um. But it was amazing. Like, we like, you know, it was. New York was locked down. It was like deep Covid. These companies were like going through the ringer trying to save their businesses during COVID And I was like, let's do this. So James and I moved into the office. Richard started working with us. We had Vicky there, Opus there. Faraday was, uh, there, which is in our fund too. And um, we all kind of went through that time together. Um, and we started to kind of build that muscle of working really closely with founders. And at the time we were introducing them m to other investors to lead their rounds. Um, and at a certain point, um, a bunch of these companies were raising at the same time. And, um, Forerunner, actually, which usv, uh, did the A, Wellington just did the B. It's one of the top performers in our first fund founded by J.T. white, who, um, I Think you spoke to who? Um, uh, was my head of design at Managed by Q. They, uh, were raising a seed, and he kind of came to us with the opportunity to lead it. And James and I just had this moment of like, well, what are we doing if we're not doing this? And so that was. Fast forward to 2021. That was like August of 21. And we raised fund one September, uh, October. And, you know, I think I wired the money to for. For that opus and Becky before we'd even raised the fund, because we were like, we're just. We're doing this. We're all in. And that's kind of like the genesis of the firm.

Host: Interesting. And so did you, I think it'd be called, like, warehousing it essentially, like, you give them your own money and then you raise capital. You probably made a contribution to the fund. When you say you're. When you were the biggest investor in the fund.

Dan Teran: Yeah, yeah, yeah.

Host: Okay.

Dan Teran: That was sort of like the whole fund one was wild in that we were like, we didn't know how big it was going to be. We weren't sure how much we were going to be able to raise. But we just keep having these opportunities and we just kind of kept committing capital and then figuring out how we were going to fund it. And like, you know, obviously, like, we could have figured it out all personally, but it would have been, uh, you know, we would have been quite extended. Um, fortunately, we were able to raise and ended up raising, uh, we set out to raise 15. We ended up raising just under 25.

Host: And I think you funded a decent amount of it with James. You say he was a professional gambler, funded some of it with gambling proceeds. Like, okay, so how does that work?

Dan Teran: Yeah, so James, uh, James has an interesting background. So we met at, uh, Johns Hopkins. Um, we actually met on the rugby field. We both played rugby for Johns Hopkins. And we built a really strong friendship over, you know, uh, over a few years at college. We both were studying economics, we trained together, um, became good friends. We both moved to New York after college. James had a startup, uh, that I did some of the design work for, um, and that company ended up not working out. James started playing poker on the Internet to support himself. Um, he was doing pretty well at it. And this was like the very. The dawn of daily fantasy sports. He heard that poker. That daily fantasy was like poker had been like, 10 years ago. There was just basically people betting real money with no level of sophistication. And he tried it out and realized that there was a huge opportunity to build uh, uh, a more sophisticated kind of operation to play the game. So we had a five person research team working for him generating unique data sets. He did his master's in computer science at Hopkins. Uh, he's a software engineer. He was building software to help him play the game basically to predict athletes performance, to predict his opponent's behavior and uh, to size bets which are also kind of roughly the three things you need to do while in venture. And so yeah, he became the biggest winner on sites like DraftKings and FanDuel. He did it full time for nine years. Um, I feel like I barely saw him during that time because it's kind of an antisocial, you're just sitting at a bunch of monitors all day kind of job. But he approached me in 2016 or so with the idea he basically was making so much money on those sites that he could no longer uh, invest it efficiently in the game because if you are more than 3 to 5% of the market, basically everyone just copies what you're doing. Um, and so he came to me with the idea to start investing in venture. I had an amazing network of founders. I was the guy that people were sending their founders to help with fundraising, either make introductions or to work on the pitch. I'd been successful as a fundraiser. Um, and so yeah, 2017 we wrote our first check to Ryan dennehy@electric AI in his C round. Yeah.

Host: So I think uh, just one more comment on that. So James's uh, LinkedIn says he's like a world champion in both football and basketball. Fantasy. What does being a world champion in fantasy sports mean?

Dan Teran: Yeah, so they had, I don't know, I'm sure they still do this but they have like world championships. And so I think it was like in football he won the DraftKings, uh, World Championship. I think he was a runner up in basketball. But it's interesting because you know, it's hard to know for sure if you're the best in the world because obviously like you don't really know everyone's numbers but at the top it's a pretty small community of people and so literally all of them are RLP's. And so I've, I've, I've gathered over the years of knowing these guys that James was, was very good. They're all making more money now that James stop playing. They're thrilled he's doing venture, they're making

Host: more money and then they can give it to you guys.

Dan Teran: Yeah, yeah, yeah.

Host: Um, and so the name of the fund, Gutter Capital, uh, it's obviously pretty intentional. Namer Capital. Where's Gutter from?

Dan Teran: Yeah, um, it's funny. Um, so the real story is in 2016, um, we still have this email. Um, the real story is I don't really remember how we came up with the name, because James sent me an email. Um, this is. I was still running, managed by Q. And he said, you, uh, know, I envision a situation where, you know, we invest my gambling winnings into venture, and basically, like, I can do the investment diligence and analysis and risk management, and you can, like, you know, work with the founders. So, like, it was very prescient. It was kind of what we're doing now.

Host: And.

Dan Teran: And I responded, like, literally in six minutes and said, fine, we'll call it Gutter Capital. And that was it. That was like, that. That was where the name came from. So originally we were like, we didn't want our names on people's cap tables because we were doing a ton of angel investments. And so we started, you know, Gutter Capital, uh, llc. Um, but at a certain point, it was like, it was on 110 cap tables, and founders kept coming. You know, we would be talking to the founder. Oh, you're Gutter Capital. And it was like, people VCs would be like, oh, I see you in all these cap tables. And so it started to take on a life of its own. Um, and I think, um, my wife is an art dealer, uh, and she would tell you that it's, uh, an institutional critique. Every venture fund wants to sound as prestigious as possible. And we felt like it was very integral to us and how we are and what we're like to have a fun name that almost intentionally sounded, uh, unprestigious. Um, and one of our LPs once said, which I liked. Uh, you know, actually, LPs hate it because they have to, like, go to their investment committee and say, we're, um, we're suggesting a $10 million investment. Gutter Capital. They hate it. Um, and we had one LP who said, um, if you call yourselves Gutter Capital, you better be good. And I thought that was like, uh, a really nice, succinct way of putting it.

Host: Yeah, he just reminds me of, like, like garbage. Like, Gutter. Like, the most non unsexy, uninstitutional, like, throw them in the gutter kind of

Dan Teran: a name, which is.

Host: I mean, I think it's good. Sounds like you're in the gutters, you're cleaning out the Gutters, you know, you're. You get it, you're getting in there.

Dan Teran: Yeah. I mean, I think ultimately it's. It's, um, you know, it's a brand, and brands are kind of whatever life you breathe into them. So it's working for us right now.

Host: You, you got the fund together, you got the name 20, 21. First couple deals, first couple companies got this thing going. What was it like in terms of, like, raising money for a fund versus the company? Because you just said you're pretty good at fundraising.

Dan Teran: Yeah.

Host: Sounds like Managed by Q was a breeze to fundraise. You're helping founders, people are introducing you because you're good at fundraising. What was it like? Raising. Raising money for the fund.

Dan Teran: Yeah. Um, it was like getting punched, uh, in the face. Um, it was crazy. I actually, I was pretty. Arrogant's a strong word. But I was confident going into the fundraise because, you know, as a founder. Yeah, I started Managed by Q when I was 24. We had always raised more than we needed, um, on great terms. I was good at it. Um, and I assumed that raising for the fund would be similar. Um, and we had done it before. We had one, ah, hundred ten angel investments, really strong performance, all top quartile, if not top decile every year. It was good. And then we started trying to actually raise. And I think the biggest insight that I had from M, what it's like to raise as a founder versus raising as a. As a gp. Um, as a founder. You know, when you're pitching good VCs, they want to believe you. They want to, like, sit on the same side of the table of view and, like, and see what you're seeing. You know, they're like, compelled by your vision. Um, and I think that LPs are trained to look for reasons why you can't do it. I felt like everyone we talked to just wanted to tell me why we couldn't do it. Um, um, which was not my experience as a founder. VCs would ask, like, constructive questions, but, like, even ones that I didn't want to work with were like, you know, wanted to be like, how big can this thing get? Not like, are you sure you can lead around? You know, it's like, is that a real question? Like, why would founders want to work with you? You know, just like, we kind of would just get these, like, uh, sort of antagonistic questions and, and I think a certain. For a certain type of lp, we're just, you know, we weren't what they were looking for. Um, you probably experience this as well. Um, you know, spin outs have been in vogue for as long as I would say. You and I have been in the venture business. And, like, for a lot of LPs, it felt like they would take the call. But, like, as soon as they learned that I didn't used to work at Sequoia, they were never going to invest, or I didn't used to work at Andreessen or whatever. Um, and so, you know, I think my. What I found was that. And James and I say this all the time. You find your people in this business, and I think we really found ours. We have some incredible LPs. They're not, you know, the usual suspects. Um, because we're not the usual suspects. But, like, that's also kind of awesome about this business because hopefully we're going to make them a ton of money.

Host: Yeah, that's fair. Yeah. To your point, I mean, my deck is like a bunch of memes. Yeah, yeah. I make, like, here's some examples of some memes I've made. And, like, some, like, a lot of lps are like, what the fuck is this?

Dan Teran: Yeah, yeah.

Host: Like, they're honest. Like, can't. Like, they're just like, this is not a. This is not a strategy. This doesn't work.

Dan Teran: But I think authenticity is like. I mean, it's cheesy, but it's like, authenticity is the only strategy that, uh, the older you get, I think the more you realize that, like, and the more confidence you have to, like, live this way. But authenticity is the only strategy that ever works in anything. If you're trying to be the best in the world, you just can't do what someone else is doing. And, you know, I think we've just kind of leaned into that. Like, we got through the hard fund raises now, like, they have gotten easier. Like, with this most recent fund, um, it was really gratifying because the first two funds they took, we hit the time limit of two years, and we didn't hit the target either time. Um, and for the Fund 3, which we just announced this week, um, we hit the hard cap. The target was 50, so we hit the hard cap, and we did it in, like, three or four months. Um, and that was like, uh, you know, there's. The hard work is ahead of us, obviously, but it kind of felt like very nice that there are LPs who've been following along and we're just kind of like, we're open to seeing that it could be true that, like, our strategy is working. And I Think a lot of LPs are like, this doesn't look like what other people are doing. You didn't used to work at these firms. Uh, best of luck.

Host: Wow. Uh, uh, and I feel like you have these legendary LP letters. I didn't get to read all of them because they're pretty long.

Dan Teran: Very long. Thanks for looking at them.

Host: Why do you write these super long LP letters? Who cares? What's the point of that?

Dan Teran: Yeah, James and I both are big writers. We draw a lot of inspiration from people like, um, the other people who've written amazing letters or some of the best investors in the world, all the way back to John Maynard Keynes. Incredible writer, incredible thinker. Uh, obviously like Buffett. Incredible writer Howard Marks. Um, we draw a lot of inspiration from people who put a lot of thought into the written word. Um, and it's like, it's kind of a way for James and I to really get on the same page. So we alternate who's writing it every quarter. And, um, that's a good approach. Yeah. And it's like we fight like cats and dogs about like, we're really, we really care. You know, I think you probably got that from the letters. We really care. We take the job really seriously. We take the responsibility really seriously. We take our commitment to our founders really seriously. Um, and the letter is where it all comes out because, like, we're, we write these really detailed letters. We do a lot of, like, proprietary analysis. And him and I have to get really in sync on like, what, how we're communicating things. And I think we find like, every quarter. And this is true in any partnership. There's just stuff that, like, you thought you're on the same page about. You sit next to each other all day. Uh, but, you know, it really comes out in the letter. And so that's a really great part of the process. Um, for me, it clarifies my thinking and my messaging. And so I, it is, it's grueling. You know, like the latest one that I sent you, like, I literally had a board meeting in Atlanta. I went a weekend early and just stayed in a hotel room the entire weekend and wrote. And I still didn't even get like, anywhere. And, you know, it's always a 40 hour process. Um, but I think, you know, it's, it's fun to have a small community of LPs that really, really read them. You know, people look forward to them at this point. Um, and then they really know us. They're like, they really know what we're doing. They really know why we're doing it. They kind of are following along the journey. And for fundraising, it's like a nice. It divides the world. Because I feel like most people don't read, and that includes LPs. Um, but for people who read our letters, I would say anybody who actually reads the letter, either they invest or we have a really good conversation about where they think we're wrong and we might learn something, which is also an awesome outcome. So I kind of just think it always pays to have a perspective. Um, because either, uh, you sharpen your own point of view and you give people a target to shoot out if they think you're wrong, and then you can have a discussion about it, then you learn something.

Host: Yeah, that's really like, they know exactly. They almost, like, know what you're going to say in some cases. And they can, they can like, jump to the second or third order or level of, of the discussion versus just like, you know, tell me about your portfolio or, like, totally. Where do you get your deal flow from?

Dan Teran: Yeah. And I think you also just get into this habit of being wrong. You know, it's like if you have a point of view all the time, which, you know, James and I have a point of view all the time. Um, um, and you tell people, like, you're just going to be wrong and like, uh, you get really comfortable and, you know, being vulnerable and sharing exactly like, where you were wrong, where you were right, what you're doing about it. And then people don't mind, like, you know, engaging with you on, like, how it's going, versus, like, I'm an LP and a dozen funds from before we started this. And it's like the updates are all kind of the same. You know, it's like, um, GPT led, you know, market, uh, analysis, and then like, very rosy updates from companies that, like, they clearly don't really know what's happening at the company.

Host: Oh, no. Yeah, I had1.1LP told me. He's like, I can tell you just like, actually, like, really understand what the portfolio companies are doing. It was, like, kind of surprising to me.

Dan Teran: I was like. I thought I was seriously. Which I get if you have, like, you know, if there was 100 companies, I wouldn't know what they all do. Yeah, it's just like, it's too much to remember.

Host: Yeah, that's fair. I've kind of gotten m, man. Like, I'm. I'm kind of. I've been kind m of trying to figure out what the right pace is. I've been slowing down a little bit just from like the current macro state of like what's happening in the market. Like I'm just going a little bit slower than I would otherwise. But like, I feel like the pace is like one or two a quarter roughly. I don't have as big of checks as you guys do. I don't promise quite as much.

Dan Teran: Yeah.

Host: Um, but I've been like, kind of trying to get into like what's like an okay state of how many new companies I should be investing in. Founders, I should be really starting to help to the extent of really actually knowing what's going on and then also like being the one where they like text you like, hey, we want to uh, like with the company I mentioned earlier, like we're, we, we identified about 20 different potential customers I think I can introduce them to and it's gonna be like a pretty hands on like

Dan Teran: you learn so much doing that though too. You get m, you know, empathy for the operator. Like uh, it's amazing we do that in the investment process. We basically have a rule that if we can't, we basically play the sdr and if I can't generate uh, a couple meetings for you from my network or even just like cold outreach, it's probably going to be very hard for an SDR to do this. Um, and so we learn a lot when we source those calls and we actually try to pitch the product to someone. Um, but we also show the founder what kind of partner that we're going to be, which gives us a lot of leverage in the deal.

Host: Yeah, I always think a lot about just how could I actually help if I invest. And like there's actually been some cases where like I just like don't really think I can do anything and I don't really get this and I don't really like, I don't have a strong opinion on it. And like I think about is like the shower test almost where it's like if I'm in the shower while my mind wander to like the thing that they're doing and like I just like come up with something totally that could help in a way.

Dan Teran: Yeah. Yeah. I mean you get like amped by thinking about like, oh, I could do, you know, like that energy is really positive because I mean it just carries through everything in the relationship.

Host: Yeah. So the, this one I mentioned, I can probably say it's, it's. They're basically making like health insurance for startups. Just like better health insurance products. Like when you think about like the wave of neo banks that came for startups and made banking a little better. Yeah, they're trying to do the same thing with health insurance. It's like a really big problem and it's like very down the fairway of just like. Pretty sure I can help you with some stuff. I don't know anything about insurance. You know, nothing about it. Uh, aside from that, it sucks. Yeah, I guess I'm exaggerating this a little bit, but I can be super helpful of like, hey, I know like a ton of people that literally just say like, hey, you guys should switch to this because better product, cheaper. I mean, it's like the whole. The holy grail, of course. So, um. But yeah, it's like I just been thinking about this for a while. Like, I was thinking about my first ever mortgage payment for my first house I bought in grand rapids, Michigan in 2015. It's like $444 was my like all in mortgage payment, which was like, you know, the taxes, insurance, the actual like debt payment, the interest and principal payment, my current health insurance premium that I pay every month. Married with two kids. It's like $2800 or something like that.

Dan Teran: Wow. It's just like, that's crazy.

Host: Insane. Like, people complain about the cost of housing, it is expensive. But, uh, I was reflecting on this like a month ago and I was like, man, I pay so much for insurance. Like 2015 me would be absolutely blown away by what my like current insurance costs. It's just nuts.

Dan Teran: And you don't have a choice. You just like barely even think about it.

Host: Yeah. And like, you don't have a choice. You barely think about it until you go to the doctor and like, oh, by the way, this is still $700 for this thing. I mean, plus, you know, we think you might have cancer. But like, come back in six months and we'll see if it got worse.

Dan Teran: Totally.

Host: And you'll pay $700 again. And you'll pay 2800amonth every month between now and then. It's just crazy.

Dan Teran: Yeah, it's uh, it's a broken system for sure.

Host: So, speaking about interesting problems in the world, one, uh, thing you mentioned before is that you would never do managed by you again if you were to. If you were to start a new company. You wouldn't do it. Um, so why do you say that? Like, what would you actually be investing in right now, today?

Dan Teran: Yeah, Well, I think the managed by Cue Point, it has a lot less to do with like the problem and more I'd say to do with me, it's just like I spent five years of my life focused on office management. I don't think it's like one of the most pressing issues facing the world today. Um, there were ways that we made it interesting and I loved our customers and our partners and working with small businesses in the marketplace and that stuff was all great. But I just feel like I've kind of, I've uh, lived that chapter of my life. I'm happy to like, you know, we have uh, a company that just went through elbow grease that's doing, uh, AI agents for the back office for commercial, uh, service companies. And like, I'm happy to open up my Rolodex of, you know, large janitorial companies for them. Um, and like, you know, so I'm still happy to like, keep a foot in those worlds. But I think if I were to build another company, probably wouldn't be around office services just because, like, I'm trying to hold myself to a high bar of, uh, what are the meaningful problems for me to solve personally.

Host: Yeah. Um, what kind of areas are those that you're most interested in right now?

Dan Teran: Yeah, so for the first elbow grease, um, we had a focus on sort of like real world problems. So energy, real estate, construction, manufacturing, small business, um, government. And those have, that's kind of historically the themes, um, that we've invested in. Um, I think because of AI, the entire economy is up for grabs. And so we're kind of moving away from just doing vertical software which we, you know, vertical software marketplaces where we had a lot of domain experience and what we thought were like, we thought those categories were the most underpenetrated by software and therefore the most interesting. I think that's still true with AI, but I think, you know, given sort of the proliferation of LLMs into the entire economy, you're just going to see like literally every industry turnover, um, who are the dominant players. And so we're really broadening the aperture today. Like as an example, you know, we were angel investors in, uh, Cure Hydration, which is like a hydration supplement, you know, one of those sachets you put in your water.

Host: Um, I'm pretty sure I had one of those last night actually.

Dan Teran: Oh, amazing.

Host: Pretty sure was Cure.

Dan Teran: It's like, uh, I'm a very proud investor. We were angel investors and I just joined their board, uh, post series B. Um, because Lauren, the founder, is a good friend. She's amazing. Um, and it's sort of like these are not, it's not the type of company we would have invested in Gutter, you know, two or three years ago. But like, you know, there's kind of a why now? For everything with AI um, given that like the cost structure of every business has changed. And so, you know, we're trying to keep a really open mind. And so for, for anybody considering applying to Elbow Grease, uh, we're just like, if you're doing your life's work, we need to know about it. And I think like, you know, there's just a much broader universe of uh, what could work now that couldn't work before, what could be interesting now that wouldn't have been interesting before. And so, you know, we're, we're have historically done a lot of kind of real world gritty stuff like field services, manufacturing. We're kind of open minded today.

Host: So what does a Gutter founder look like? Like, is that something you guys can think about?

Dan Teran: Yeah, that is something that is probably the thing we think about the most. Um, you know, when you're investing at such an early stage, you know, to your, to, to our conversation earlier on concentration, it's like, it's the most important decision is like who's the founder? Because you've got to want to be in the trenches with them for like a decade, um, for uh, our model to work. Um, and so the kind of at a high level we think about exceptional, um, level of drive, high um, integrity and good judgment. Judgment's kind of the hardest thing to evaluate, but it's the most important thing. I, um, mean you can really only do it experientially. So like, do they have a history of making good decisions? Do they understand a good decision from a bad decision? Can they talk about mistakes comfortably? Can they tell you what they learn from mistakes? Do they focus on process, not outcome? There's like a lot of stuff that goes into it, but judgment is really, I mean the beauty of Elbow Grease is like our intention is to lead the next round and so we get to watch them make decisions like nonstop for 10 weeks. That's like a, uh, really good way to evaluate that. Um, but I would say, you know, Elbow Grease and Gutter founders tend to be, you know, it doesn't need to be like the central casting Silicon Valley founder. We're not obsessed with second time founders. We think they're, they're overrated relative to first time founders. Um, we don't mind if people don't have a technical background. We, we almost prefer people have a deep connection to the problem they're solving. Um, and like A deep commitment to the industry we're in. Um, we have. Ah, yeah, I mean I mentioned, you know, Rachel from Opus is a great example. She was like literally teaching English as a second language in kitchens and Danny Meyers restaurants like doing that nights and weekends. She was so driven to improve the life of frontline workers that like there was just nothing that was going to stop her. Um, you know, Abhinav is the founder of Biki. Uh, his, his mother in law, uh, owned Indian restaurants. It was like her problem he was solving when he started Biki. Um, we see those types of uh, stories across the gutter portfolio. Um, we want people who have an authentic connection to the mission that's not

Host: going anywhere that makes sense. Yeah. Are there any things that you wouldn't, wouldn't do or I don't know, like red flags or something like that? Like anything where you just like shy away a little bit or.

Dan Teran: I um, would say we're really interested in founders that are called to solve a problem. And so I would say um, broadly we have not been historically excited about crypto gambling. Gaming, uh, advertising, sports, like things that um, or maybe charitably, uh, more nice to have than the need to have and in some cases uh, create more problems than they solve.

Host: Yeah, could see that. Yeah. Well, it's interesting that with James like gambling background not having done any of it.

Dan Teran: Well, I think like part of the reason that he wanted to quit was like, I think it has become, you know, it's become a lot more common knowledge that there's pretty negative externalities of those businesses. You know, it's often people who can't afford to lose the money.

Host: Yeah. And so you mentioned he, you do all this analysis related to that, but then also now sort of on portfolio construction stuff. Like so, uh, I know you guys kind of use a lot of AI to like make things run more efficiently, but I know you also are very much not leaning into like using AI to make all the decisions. Like where's the line? Like what do you kind of use it for? What do you not use it like personally internally at the firm.

Dan Teran: Yeah. So our investment process uses I would say very little AI today. Um, because at the very earliest stages when you're doing these founder assessments, so our investment process probably doesn't look that different from other people's. I would say the things that are unique is like heavy emphasis on customer calls and so talking to a lot of their customers, but also just like prospecting and finding net new customers that we can pitch on the problem. I Think one of the advantages that we have as you know, people who have founded businesses before is like I kind of know what it feels like when I'm pitching someone vaporware and I'm like they're definitely going to buy this or like if they're like being nice to me, you know, it's like I've just been there before. Um, and so that's like pretty unique part of our process. And then the founder assessment is like, is kind of like the full thing. We've evolved it over. The founder assessment is a, is a thing. Um, um, we've evolved it over the last three, four years. And the way the shape it takes today is I do like a 90 minute interview with, with each founder and James does a completely different script, completely different 90 minute interview, um, with each founder. And we're kind of assessing the things that I mentioned earlier along with some other things. But that's like um, and it's intensely personal, biographical, also walks through career walks through scenarios, decision making. It's like, you know, it's meant to really assess for the founder on a number of dimensions that's pretty unique and differentiated. Um, and something that we keep building on. We also, you know, not only do we not use AI to evaluate it, we actually have another human, um, a guy named Josh Levine who's a, um, expert in the Enneagram as well as a CEO and founder coach. Like all he does is work with founders and he actually reviews the founder assessments, grades them for us. And then we have sort of an independent third party who's who has actually evaluated every founder that we've invested in or almost all of them at this point. Which we can then go back and have a really spirited conversation comparing you know, the founder in hand to historic investment. So that piece is like pretty, pretty unique to us. Um, and also like pretty low tech all things considered.

Host: Yeah, because I've had this like internally, I mean it's just me like in my head almost debate of. You see all these people, like people talk about like you know, in the next 18 months the investment process is going to be totally AI. Like the VCs like good luck, you don't have to interface with them at all. And you almost like apply, you do all the stuff, give them your data and the VC is just like, it just shows up and they just, I guess they like maybe decide if they should do it or not or it's like automatically deployed the capital.

Dan Teran: I'm not sure. There's just especially maybe at later stages when there's a ton of data. I think you can usually, I think AI is probably pretty good at deciding what you shouldn't invest in. You know, there is just like rules based things that like you don't want to be, you know, if the, if the net revenue retention is really bad or like whatever, like the growth is really bad. You know, there's just like things that you can, you can determine. And so I think with, with elbow grease, like, you know, as we think about using AI in our process, it's certainly not going to be like selecting companies. I think it could help filter down. But ultimately there is so much nuance to choosing people and missions. And I feel like the AI is not a great bullshit detector. We have tried, so we've tried to do the founder assessments using AI and someone will say, um, I have a ton of integrity. And the AI will be like, this guy's 10 out of 10 on integrity. The AI is very easily fooled. It's like, well, how do you know? He said so.

Host: Yeah, exactly.

Dan Teran: And obviously you can like tune it beyond that. But like, I think that is sort of like generally what it's like. And it's like, it's just not at a point where it's like in the same room with the person watching how they're sitting, are they fidgeting when they say it? You know, it's like, how credible are they in this thing? How much conviction do they have in this thing? And those are all like, uh, it's like when they're talking, am I like, this is a guy that I want to work for, a gal that I want to work for. Like, I don't think that the AI is going to be able to figure that stuff out in the near future. Um, and so still, still room for guys like us.

Host: Yeah, well, there's a lot of. Because the AI is just like whatever data is out there that it can find, like it's using that, the data to make a decision. And you know, you can have, I guess you could say like, you know, is this a good market or not? Whatever, give me a market map. Give me all this like research that you've done. But then the founders actually like there's like a new data point that like, yeah, the ACVs are five times bigger today. Or like there's a new.

Dan Teran: It's also like the founders are using the AI, uh, too. So they're not going to present you with a market that's like bad. The AI says it's bad. It's like, no, the AI is probably Going to say all the markets are pretty good because the founder used the AI to like, describe the market to you. Yeah, you know.

Host: Yeah, that's, um. I had one founder. He's. It's a pretty funny conversation. He was just like, yeah, by the way, like, this isn't in Claude. Like, whatever. It was like, he was like telling me, like, there's a couple times you mentioned, like, I know you probably just like threw this in and like, it just spit some stuff out. Like, you can't figure this stuff out using Claude. Like, he specifically knew what. Because it's probably. He's just gotten the same things over and over again.

Dan Teran: Yeah, yeah.

Host: From people. And so he kind of like, I actually didn't do this. Like, I didn't talk to Claude at all before I talked to him. So, like, it was. I just thought it was kind of funny because I was like, I didn't know this anyways, by the way.

Dan Teran: But I think like, the, I mean, at this stage in the game where the LLMs are useful is to help point out things that I might be missing. But it's never like making judgment calls. And so we have an app that we built that basically every customer call, uh, every reference call, all the transcripts get pulled in and it starts to like, it has a blueprint of what would a complete investment memo look like in terms of the volume of information about competitors, about the market, about the founders, all these things. And it just kind of is like, helps us make sure we didn't miss anything. But the answer is always like, you need to do another customer call with someone in this segment. It's not like it, you know, it's not like you should invest or you shouldn't invest.

Host: Yeah. And so when you do these customer calls, what do they look like? Like, what are you looking for? Because you mentioned that you weigh quite a bit on what the customers are saying.

Dan Teran: Yeah, I mean, we are asking basically like, you know, I have a background in design. Um, we put a heavy emphasis on user research. We're basically doing a user research call. You know, we want to understand, um, them and their world. Sort of like, you know, who they are, what their job is, you know, how they're compensated, what, um, how their, how their job performance is evaluated. We want to know what are their software tools they use, what does their kind of universe look like, um, how did they first learn about the product, uh, why did they agree to take the call? Um, ultimately, like, how was the hiring, uh, the purchasing decision made? So, like, you know, who holds the budget, who made the decision, et cetera. And then, like, very specifically, like, when they made the argument internally, what was, like, the value they said it could provide? Has it met that value? There's, like, little user research, things like, you know, what do you do right before you use the product? And, like, what's the first, you know, tab you open after you use the product? Like, kind of understanding what's at the adjacencies, which gives you a sense of, like, what else might be up for grabs. And then obviously, like, the. The most important question is, um, how upset would you be if it went away? That's kind of the whole thing builds to that very question. Because we've had people literally who are like, I'd quit my job if they took it away from me. Um, and we've had people be like, I'd use this other thing. And you're like, oh, I see, that's bad.

Host: Yeah. Interesting. Because ultimately the value of the company comes from customers paying you money. And what is that worth?

Dan Teran: Yeah. And lock in is derived from there not being suitable alternatives.

Host: Yeah. So I think. I mean, I think that's, like, super underrated. I think a lot of it of it about is, like, the company is just the value of the cash flow you get from customers. Really, at the end of the day.

Dan Teran: Totally.

Host: It's like super simplified way of, like, just extracting in one sentence. But, like, it's super important. Like, what.

Dan Teran: And the durability of those cash flows.

Host: Yeah.

Dan Teran: And, um, the ability to expand them over time.

Host: Exactly. Like, what does this look like? How much money can you get from them over time?

Dan Teran: Yeah. Um, because I think a lot of times with like, pre seed, you know, one of the things you got to look out for is like, are they like, I love Steve. We love him. He's great. He does whatever we ask. And it's like, but the product, like, what do you use the product for? And they're like, well, whenever there's an issue, I just talk to Steve. You know, it's like, oftentimes really amazing. Great founders are great, you know, great a client service. And so you kind of want to make sure that, like, the product is the thing they're valuing. Not like an expert person to talk about. That could still work, but it's like, that's the kind of nuance that you only get when you, like, really talk to the customers, talk to a lot of them.

Host: So a little bit of a slightly different topic. Uh, how has New York tech changed over the past? I don't know, 15ish years. Is that the number? I don't know how long you've been in it, but yeah. How's it kind of evolved over time? What's the difference? You've seen?

Dan Teran: Um, I think it's a lot bigger. Um, it's funny. So I started managed by Q in 2014. Um, and you could fit every founder into a room and they kind of did. So you saw the same people over and over again at every svb, um, dinner and whatever. Um, so it was very, uh, small and intimate and we really knew each other. Everyone was in the same offices. That changed hands and so, you know, it just had a very kind of like cottage industry feel to it. Um, I think the biggest things that has changed though is at some point in the last, it was probably like 10 years ago. I think like Google was kind of like LED the way. But Google, Facebook, Amazon, they all realized that, you know, it's kind of the opposite of like, uh, you know, the, the post war era, you build the factory and the town springs up around the factory. And now it's like you need to build the factory where the talent is because they're just going to live where they want to live. And everyone wants to be in New York City. I mean, not everyone, but like, this is, I would say, pre AI boom. It was like when people, when smart kids are graduating from college, you know, all things being equal, I think a lot of people wanted to be in New York City. It's very vibrant. It's got an amazing, uh, cultural community. There's just like so much happening here.

Host: My daughters want to be in New York and they're nine. They should, you should bring them. Why do you want to be in New York? And it's like, it's like the propaganda of totally.

Dan Teran: It's like every other show on television.

Host: Yeah.

Dan Teran: Um, but so that happened and then, you know, Amazon opened a huge office here, Facebook opened a huge office here. Google, you know, bought the um, uh, St. John's terminal and like, has another huge office here. Now they have the whole Chelsea market. So basically what happened was those companies hired tens of thousands of software engineers in New York. And so we went from just having like, no software engineers period, to actually like a pretty well trained workforce. And I think that has definitely unlocked a whole nother kind of level of the game. Um, and then there's been some huge, like, you know, MongoDB, uh, DataDog, uh, Squarespace, uh, like there's been some pretty big Internet winners, um, that are Oscar, uh, so there's like, you know, none of those companies really existed, um, when I got here. And now there's like, you know, a pretty big ecosystem and I think of like, real. Real, you know, Datadog is a good example where it's like, it's a real, you know, software business. It's not. It's like a highly technical product. Um, and the kind of like, meme when I started out was that New York was like, only, you know, it was like E Commerce.

Host: Yeah. In like, brand consumer.

Dan Teran: Yeah. I mean, that was sort of. Yeah. A lot of the D2C stuff for sure, kind of came and went.

Host: Yeah. Have you. Did you say that you invested in a CPG company though, on Cure?

Dan Teran: Yeah, Cure was like an angel investment. We did a ton, um, of sort of branded CPG as angels. And honestly, like, have done pretty well there. Um, yeah, I mean, like, another one that we invested in is Angels. That's an incredible business is Rowan, which is like piercing studios for. For little girls.

Host: Like Ear.

Dan Teran: Yeah. Uh, amazing business. Um, you know, branded consumer services. Um, Louisa, that the founder and CEO is a good friend and LP in the fund as well.

Host: So this is like Claire's, the one we used to go to in the mall.

Dan Teran: Totally. It's like the Claire's killer.

Host: Okay, so like, Claire's, that's, you know, made for the modern day, not in the malls.

Dan Teran: Totally.

Host: Um, okay.

Dan Teran: Yeah. So I think New York there is because you have industries that are not tech here. You also just do have a lot more interesting kind of diversity of businesses. Um, obviously like the, you know, Casper, uh, like CPG era didn't exactly end well. But I think, um, for this AI moment, with the cost of building a company really kind of driving down to zero, there's just like a lot of opportunity here.

Host: Well, speaking of building, do you have any opinions on building a board early on? Because you guys invest super early.

Dan Teran: I do.

Host: What do you usually recommend?

Dan Teran: Yeah, I mean, I mentioned earlier that I was really lucky, um, to work with Satya Patel. Um, he. He. He joined my board when I was 25. And so, um, they were known, um, for being dogmatic about forming a board at Seed, which used to be a big taboo. Um, founders would tell you horror stories about, like, you know, losing control. Um, and. And also just being kind of a pain in the ass, like, um, extra work. Um, what I experienced firsthand, um, sort of at Satya's direction was that like, the board meeting itself made me a better CEO. It forced me in the same way, writing our quarterly letters or like taking the medicine. It was like, it forced me to get organized once a quarter step off the trail, reflect on progress, have a strategic view in the business, have like a reason to ask all of my functional leaders to like, generate materials that made them have a view on the business versus just like plotting along. Um, and then you really, you can get insight from a board who can hold you accountable to like, what was the plan? Like, what did you say you were going to do? What happened? And even if things are going well, it's really important to drill into the things that didn't work because you're calibrating as an organization a bunch of stuff. It's like, uh, what are the things that we say we're going to do that never actually happen? What are the things that we're not good at because we don't have the right people? Um, and then you're also making it like you're normalizing, talking about failure, uh, as part of the company's culture, um, which I think is really important. So that kind of moment of reflection. So we are dogmatic about forming the board. We have board meetings starting at pre seed, which is like, much lower overhead. There doesn't need to be a formal board because, uh, it just makes more legal, more legal bills than are required. Um, but it's seed. Yeah. And it's usually that seed is usually me and the founders or James and the founders.

Host: Is it? So, yeah. What's. What's like the appropriate amount of like, work to put into this? Because based on what you just said, somebody could say, man, this sounds like kind of a distraction if I'm a pre seed stage company. Like, what's, what's like the appropriate amount of kind of like effort and like triangulation going into this thing.

Dan Teran: Yeah.

Host: Do I have to make a deck and like, write a bunch of. Prepare a bunch of stuff? Like, how many, how much time should I probably spend? Because it could be a lot, honestly, in some cases.

Dan Teran: So it's a good question. Um, basically it's no work if you're, if you're running the organization well. And so what I mean by that is what we tell founders and like, what we coach founders on is if you are using okrs to run the business. And by run the business, I mean you have a weekly meeting with your team, and the okrs are the lens through which you talk about progress. And when you write your monthly investor update, that's the lens through which you communicate it. And then at the end of the quarter, you have a Board meeting. And what does the board meeting do? You review the quarter's performance through the lens of the okrs, which you have already graded because you use them every week. And you literally, like we give a, uh, document to founders on how to run a gutter board meeting. It's literally performance against plan what's going well, which is the things that are green. And then you spend 80% of the time on what's going poorly, which are the things that are yellow and red. And then what are we doing next quarter? Which is usually an answer to the things that are going poorly. It's like our hypothesis of how we're going to make those things go well. And so if you uh, now if you set okrs and then you don't have the infrastructure in place to actually measure them, and you never talk about them and you don't even know remember why you set them, then at the end of the quarter it's like a mad dash to kind of make some stuff up to present to the board. But if you actually have an operating cadence and you use it to run the business, it is like literally no work at all. Maybe there's some strategic topics that you want to prepare for because you actually want some input into a new direction. But I think the meat and potatoes of it is really, really dead simple as long as it's being used around the business regularly.

Host: It almost sounds like if I'm a founder who's pretty on top of it, I have some investors I catch up with semi regularly to just keep them up to date asking for help on some things. It sounds like that's basically what this is at the end of the day.

Dan Teran: And the founders who it really benefits are the ones who are not on top of it, you know, like, I mean, I, I just say that from experience. Like I was never, I was never an organized person. Um, and I got religion around it because I, you know, became a CEO as like a 25 year old and needed to figure it out. But it was like I, uh, had one like very bad board meeting that I remember. I kind of like blew up because I didn't have good answers to questions. I was defensive and I was like, you know, Satya was kind of like, well, let's make sure that doesn't happen again. And I was like, right. And the way to make sure happens again is just to like be prepared. And being prepared just means like never being unprepared.

Host: Yeah. I mean, honestly, being prepared is like such an underrated strategy.

Dan Teran: Well, it's just like it's not the preparedness that matters the most, it's just like all the implications of always being on top of your shit.

Host: Yeah, like I had one, um, my very first job at school, I worked at a bank, uh, lending money to small businesses. And we had this thing called credit committee where every single person on the credit team met and like discussed the loans that were coming through. Someone usually presented it. We had like, uh, there's different teams and each team had a meeting the day before going through the deals, like the loans they were going to push through. And I don't know, I mean it's like pretty low stakes stuff. But I remember one of the times I, my lender that kind of worked with, because I was the analyst just like asked me to kind of like present the loan. I don't even remember what it, what it even was, but I just remember like I, I just wasn't prepared to do that. Like, I forgot what it was. And he like, he like asked me to do it right there and I was just like, I just like made something up. Honestly, it was terrible. Like it was a disaster.

Dan Teran: Yeah.

Host: Um, and it like, I've never actually really like reflect on that until right now specifically. But, but like that was probably my, my worst moment of like not being. It happens at work and like it's kind of embarrassing honestly, because usually I was pretty on top of things.

Dan Teran: Well, that's like you evolved these operating systems for yourself to not feel like that again. I mean that was my experience of it. And so when I'm trying to impart this on founders, it's not like there's not friction because it is a little bit of a pain in the ass, but it's just like you're going to raise the next round and if you come in with just these bulletproof decks from every board meeting and every update, you know, even if things aren't perfect, they're going to look at how you operate and they're going to be like, this is a team that like makes commitments, follows throughs on commitments and when they don't, they learn from it. Um, and that's kind of like all an investor is looking for. Obviously the business has to perform versus like, you know, if you set goals and you never address them, like that's what they're going to get, you know.

Host: Yeah, yeah. Because most cases it's not going to be. You show up and meet someone and just right there they invest, like just immediately. A lot of people like to see those like line, the line going up over time, totally. Right. And the more you can do to like, synthetically give that to them, whether it's a chart of the revenue going up or like some metric, some okr or, and, or literally if you can't get to know them over a long period of time, maybe it's like, hey, here's like two years, eight quarters of board meetings. Like, here's what it's like.

Dan Teran: I love those. Like, uh, as a material, like, I mean, you know, usually the companies are pretty new, but I'm like reading those and like from the beginning, chronologically and seeing how a company sets goals, identifies a problem, proposes a solution, executes on the solution, that's not enough problem anymore. Now something else is. It's like if they can, if a organization has demonstrated or founders demonstrated that that's just like how they roll, that's going to happen like all the way to being a public company CEO. Um, because the whole thing is just like identifying, diagnosing and solving problems over and over and over again.

Host: And speaking of, uh, like how you guys specifically do things with founders, there's one thing you do, um, with the carried interest from the funds.

Dan Teran: Yeah.

Host: What, um, do you do that's a little bit different than most people?

Dan Teran: Yeah. So we wanted to have a model. We knew that the fund's going to be very concentrated. We're going to have this dense community of founders. We're all going to be in the same space and everyone's going to be pulling for each other. Um, we wanted to have, for our founders to have a shared interest in each other's companies. Um, we actually, like, we're pretty strategic in that. You know, we didn't tell any of the Fund 1 companies that we were doing it until after we invested. We didn't want this to be like, I think it's a really bad pitch. You know, it's almost adverse, selectiony to tell someone that you're going to give them equity in your fund.

Host: Like, if you fail, you'll still make money.

Dan Teran: Yeah, yeah. That's not what we were trying to do. Um, we were trying to reinforce the behaviors that were already happening, which was, um. Oh, we like hired an amazing engineer. But we had another candidate who was great. Do you guys want to meet him? Um. Oh, you're raising a Series A. I just finished my process. Here's my list. Here's who's good, here's who showed up unprepared, like, they're a waste of time. And like, I'm happy to make the intros because Intros are always better for coming from founders than from, from VCs, um, you know, or even like, we have a lot of companies that have kind of overlapping industries and they help each other with customer introductions or like, you know, intelligence in the market. And so we wanted to incentivize, uh, those types of things that were already happening. And yeah, I mean, it's worked out great. I mean, who knows what it actually does. And if people would just be doing these things anyways, I think they probably would kind of people. They are. But as a, as an investor, it feels really good to know that if we, you know, if we shoot the lights out and have get are so lucky because I think, you know, past whatever, 10, uh, X, it's like, it's lucky. But if we're lucky and we have like a generational fund, you know, all these founders are going to, uh, you know, participate in that. That's like, also pretty fun.

Host: Yeah, it sounds like the founders at Gutter, they do really stick out for each other, try to help each other. There's kind of a mantra like, the best founders don't need help. I don't know. I don't know if we really talked about that much earlier, but what's, what's your opinion on like, I mean, it sounds like maybe they do help, but,

Dan Teran: I mean, I think everyone needs help. Right. Like, what a crazy thing to say that, like, the best founders don't need help. Um, I think like, the history of Silicon Valley is actually littered with the opposite. You know, like, um, you know, Don Valentine famously, uh, when I think Nolan Bushnell introduced, uh, Steve, uh, Jobs to him, he said, why did you send me this renegade of the human race? And he introduced him to Mike Markkula. And without Mike Markkula, you know, we might not have an iPhone. And you see kind of a similar thing play out at Google with, uh, Eric Schmidt, where John Doerr gets involved. It's just like people like to say that the best founders don't need help, but I think like, often what they're saying is they're not interested in doing the work to help founders or they're not qualified to do. And I would say a lot of investors are not qualified to help founders. But I just think that it's kind of silly to say the best founders don't need help. I think history tells a very different story. And if, like, you know, uh, if Steve Jobs isn't the best founder, then I don't know who is.

Host: Yeah. Do you think it comes from the best Founders don't need help because most of the help that investors give is just like not helpful.

Dan Teran: Well, they might not need your help, you know, like not, not you, not you specifically. But like, yeah, they definitely don't need help from m. Somebody who's like never really done a relevant thing. Um, but it's like, do they need help like hiring an engineer? If you can like pull that forward a quarter, like could it change the trajectory of the company? For sure. Like you know, introducing co founders. It also depends on like who we're talking about. There are like some founders do just have a ton of experience and they probably don't need my help. Um, but that's not really like the archetype of the founder who we're typically investing in. Um, and even in our case like we funded second time founders and like they don't need help, but they certainly appreciate it. And that certainly like is impactful to the business where like we can pull in, you know, the right customer at the right time or the right investor at the right time. So I just think it's very um, kind of lazy and self serving to say that the best founders don't need help. And I also think it's like a pretty poor strategy for a venture fund to like brand themselves as not willing to do anything.

Host: Yeah. Well, it's interesting that uh, like the heyday of this with Tiger, like that was almost the branding of like they don't help you. It's great. Yeah, I love that they just get, get away from me, which is like, I guess some people do actually like that, but maybe it was because they had such bad experiences with the overarching hand of like meddling with things almost in a way.

Dan Teran: Yeah. And also it's like people might like that but like did it go well for them, you know?

Host: Yeah. And actually they actually do help. Like honestly like what I used to do a lot was I would email Tiger and be like, hey, do you guys have. Because they just had all these like this data, like they're, they're uh, the Bain would do for them. I'd like, I asked like, hey, do you guys have any, any research on this? And they send me like a 60 page deck, like a ton of stuff on some market which I thought was pretty helpful. And then I also knew if they didn't have anything, that was also a signal to me of like it could mean it's just like a bad market, like it doesn't matter, it's not significant. But auction like always, like no one's Paying attention, overlooked. This is like an interesting spot.

Dan Teran: Totally.

Host: I remember I had one. One specifically where I think that, like, it. That has gone pretty favorably. Like, specifically. That was like. Honestly, part of my thinking around this was like, felt like a really. A lot of it was really good, but there's just like, not a lot out there. And literally no one was talking about this, this. And I just. I was kind of like, man, I just, like, don't know it was a good idea or not. Like, just like, stupid. Like, it's just not even a good opportunity. Um, and so I think you had one other crazy thing that you've done. You've gone surfing with Adam Newman. Uh, and Is it Laird Hamilton? He's like a pro surfer. Is that his name?

Dan Teran: Yeah. Ah, yeah. Laird is like, um, he's like the most famous big wave surfer, uh, in the world. Yeah. This was like, um. I can tell this story because Adam has told it publicly, much to my chagrin. We, um, were in the middle of negotiating the deal for, um, the sale of the company. This was New Year's of 2019. And Adam was like, I'm going to Kauai with some of the leaders. You should come. Um, and I had to be somewhere. And so I literally flew to Kauai, which is very far from New York, um, for like a 24 hour period. And I got there and he was like, oh, like, meet us here. And I get there and it's, um. Uh, pretty sure it was Laird Hamilton's house, which is, like, on this river up from. From Hanalei Bay, which is like a, um, beach. Um. Yeah. And I get there and they're like, in the sauna, and we're doing like, the sauna and the cold plunge. And they're like, come on, we're going surfing. And I'm like, great. We're like, getting the cars and realize that there's like this river with the Jet Skis tied up. And everyone's like, hopping on the Jet Skis. And they're like, oh, no, just hop on. We have a board for you. And I'm like, I'm a fine surfer. I'm not like, a great surfer. And they had this like, you know, little, tiny, short board. And it's like Laird's crew and they, like, take you out on the skis. I've never done this before. I've never, like, you know, surfed off a Jet Ski before. It's like, very.

Host: Oh, you served off a Jet Ski?

Dan Teran: Yeah, yeah, yeah. No, these are like. They're like towing you into, like, 20 foot. It was crazy. It was. It was a very crazy thing to do.

Host: Okay.

Dan Teran: Um, but I was trying to get this deal done, so I was like, I would do literally fucking anything.

Host: Risk it's out, sounds like.

Dan Teran: Yeah. So we go, like, ripping out, um, and we go to, like, the far end of, uh, Hanalei Bay. And, you know, they're, like, kind of just, like, gunning it into these waves that are, like, as big as a house. And the guy is kind of like. I was like, I don't really know what to do. Um, he was really nice. Um, and he was like, you know, I'm going to slap your leg, and when I do, like, you go. Then, like, you don't wait. You don't hesitate, because, like, you know, the ski can get caught in the way of whatever. And so you, like, dump onto your chest, and then you're going down the face of this huge wave, and you kind of to get up, like, immediately.

Host: Yeah.

Dan Teran: And I was like, what happens if I fall? And he was like, you just, like, go underwater and count and wait for the board to start to pull because you might swim in the wrong direction. You know, it's such a big wave that you kind of don't know which way is up. Um, and I was like, and then what? And he's like, uh. He's like, and then I'll pick you up. But, like, as soon as you get up, grab. There's, like, a foam thing on the back of the jet ski. He's like, you grab on because the next wave is coming. And so you. You get up, like, half drowned. Because I did get crushed by these waves. I was not very good. And you grab onto the back of the jet ski, and then they immediately gun it, like, into the face of a wave, and you have to get over before it breaks. And, like, literally, Adam's jet ski got caught. And I just remember seeing his jet ski gets thrown like a rag doll. He jumps over the back of it. And, like, we were out with, like, Laird's crew, and Laird had seen this happen from, like, the gas station. And he came out on his jet ski, was like, everybody okay? It was, like, a very surreal experience. But, like, sorry, make a long story short, I did end up. I was. I. Adam's like, do you want to go in? Because I just kept getting pounded, and I was like, no, I'm going to get it. Like, I had to get it. Um, and I ended up, like, catching one beautiful wave. Like, you know, most of the way in, they actually like, there is footage of this, because, of course, Adam had a drone out there, like, covering the whole thing. And, you know, I was like, uh, it was whatever. I was, like, trying to just get through this experience. And then, um, you know, six months later or whatever, Adam's announcing the acquisition to the entire global wework. And I'm like. He starts launching into it. I'm like, oh, God, he's going to tell this story, because the one. I was just embarrassed I was surfing with him. It was kind of like, is that the highest leverage thing for the business? Um, and then he just kind of keeps going about how he knew that I was the right person after he just watched me get crushed by wave after wave after wave. And this is in front of my whole team, which didn't know that this happened.

Host: It was, ah, that grit, that founder grit.

Dan Teran: I mean, that was, like, what he was trying to get across while also just like, really taking me down a notch, you know? Um, no, it was fine. Um, yeah, and it was just a wild experience. Um, and, uh, you know, one that I'm not dying to repeat. But, um, yeah, it was. It was. It was cool.

Host: But didn't you cut yourself once surfing, and then you went to JT's wedding the next day? Is this the same thing, or.

Dan Teran: No, No, I mean, that was the day. The day of JT's wedding. Um, JT's wife, Caitlyn, is amazing. It's like a good friend. She, like, she was very adamant that we could not get hurt. It was like, the day of his wedding, she actually was adamant that JT could not get hurt. And we went surfing on a very stormy day in Little Compton, Rhode island, and I, like, very stupidly paddled into a closeout, and I felt something on the back of my head. And I just remember, like, getting tossed in the waves. And I get up and, um, I kind of felt the back of my head, and I was like, please don't be bleeding. Please don't be bleeding. And my hand is just, like, completely covered in blood. And so I'm, like, paddling in. Uh, I'm getting, like. It's so stormy that, like, it's very rocky there, and the beach is just throwing rocks at me. It's like, it's making fun of me. It's like the surf is just throwing rocks at me while I'm paddling in. And then I go to my car, and there's, like, some family in the parking lot, and they're like, do you need help? And I was like, no, no, no, I'm fine, I'm fine, I'm fine, I'm fine. Um, and I'm bending over because I put the keys, um, uh, on the hub, the wheel. Um, and so I'm trying to find it, and every time I bend over, blood just dumps out of the back of my head. And I literally, I'm starting to get lightheaded, and I just can't find where I put my keys. And this family's just standing there, and they're like. I was like, actually, you could do one thing. Could you actually just find my keys for me? And they, like, you know, they like, feel the perimeter of the wheel wells. They find the keys and they're like, do you want us to take you to the hospital and you go somewhere? I was like, I'm fine. Just like. And they're like, the fire station is, like, just down that road. And so I drove myself to the fire station. I walked into the ambulance bay, and the guy's eating a meatball sandwich, and he's like, can I help you? I'm in a wetsuit. And then I just turn around. He's like, oh, fuck. And I was like, I just don't get up. I just wanted to know, do you think I need an ambulance, um, to get to the hospital, or can I go myself? And he's like, it's kind of a toss up. It's just straight down that road. He's like, if you want to give it a shot, you know how to reach us. And I was like, all right, fine. So I drive myself to the hospital. I walk in, I get like, nine staples, maybe it was 19, um, down the back of my head, and I'm like, rushing to get out of there. And I literally, like, you know, go to the, Go to the hotel, uh, shower, and literally arrive, like, as JT's wedding is started. Yeah. Um, and so anyways, um. Yeah, a lot of, uh, surfing mishaps.

Host: I've had one slightly less, um, had open bleeding thing. It was in the winter in Michigan. Uh, I was, I think, trying to move my garbage bin to the curb. It was, like, buried in, in snow, and I was, like, shaking it, trying to, like, pull it out and that I was not paying attention, and. Icicle.

Dan Teran: Oh, my God. This is like a, uh, Final Destination almost. Yeah.

Host: And I didn't even realize, like, really what happened until, like, later. But, yeah, the ice school came down, like, hit me in the head, and I was like, oh, man, that kind of hurt. And I, like, move the garbage to the curb. And then I got to work and my head was, like, still kind of sore. And the other intern, like, that I was working with on my team, he's like, dude, what happened to your head? And apparently it was, like, bleeding like crazy. It wasn't quite as bad because I need to get nine staples. Um, but it was like, I realized afterwards, like, holy shit, I had high school fall mat. Like, I could have died.

Dan Teran: That's serious.

Host: It was, it was wild. Um, anything else you want to talk about? Or should we end it on that?

Dan Teran: No, I mean, that's like a pretty dark, uh, way to end it, but feels, uh, fitting. You know, it's a very gutter. Gutter ending.

Host: Yeah, you're. It was literally from the gutter. She's attached to the gutters.

Dan Teran: There you go.

Host: So it's actually a perfect way to end it.

Dan Teran: Awesome. Well, thank you so much. This has been a, ah, really fun conversation. I'm sure people, uh, got more than they bargained for.

Host: Yeah, this is a lot of fun. Thanks for doing it.

Dan Teran: Awesome.

Host: Thank you and I hope you got what you bargained for. Thanks again to this episode Sponsors Flex Upgrade your business banking and credit with the link in the description Numeral. Put your sales tax on autopilot@numerl.com Amplitude for AI analytics. Just ask Amplitude and Merge. Secure AI access for every employee with Merge. If you enjoy this, please, like, comment, subscribe and share this with your friend who should apply to Elbow Grease. Make sure to check out the back catalog of over 100 episodes with the founders of companies like Rob Robinhood, Sweetgreen and Mercury, and investors like Gary Tan A lot Gil and Chathan and Erica Benchmark. Tune in over the next few weeks for conversations with Charles Hudson at AH Precursor, Peter Rahal at David and Hans Swildens, whose secondaries firm Industry Ventures was recently acquired by Goldman Sachs. If you don't want to miss any of these, subscribe to my newsletter. The split links in the description to get each episode plus a transcript emailed directly to your inbox every week. Thanks again for listening. See you next time.