00:00:27 (Alastair)
Welcome to another show of Seed to Success, and I'm really excited on this episode to have a VC in the room. With Audrey Miller from VC or venture capital firm, Tapestry. Tapestry, I think, is a relatively new VC, so it'd be great to unpack that and learn a little bit more about Tapestry, yourself, and also, I'm really hoping we start to unpack what you look for in a founder and what that whole process looks like of investment. So I think the H1 on your site is all around backing technical and repeat founders across Europe and the US. So, Audrey, welcome.
00:01:07 (Audrey)
Thank you for having me.
00:01:07 (Alastair)
If I've not butchered that too much in terms of Tapestry, can you give us a 30 second pitch about Tapestry as you would talk to a founder?
00:01:15 (Audrey)
Yeah, sounds good. So thanks for having me. I work with Tapestry VC. We are a seed and pre seed VC firm that focuses on backing technical and repeat founders. So we really get involved with founders at the earliest stages of company building. Practically, we invest about a million dollar check size and we invest across Europe, US, between EU and UK. We consider ourselves to be what we call a global boutique investment firm. Global because we invest not just in one geography and boutique because we're now five, as of this week, people on the team, and we really like to get in the weeds with founders and work pretty hands on. So each founder really gets a pretty unique experience with the firm and we like to get pretty hands on.
00:02:14 (Alastair)
And tell us a little bit more about Tapestry in terms of the number of companies in your portfolio. And also you've given us a little bit of insight there, but what really makes you unique versus other VCs out there?
00:02:28 (Audrey)
Yeah, sure…
00:02:28 (Alastair)
Which don't always get a good name. From my experience of kind of catching up with you, you seem much more on the side of the founder and much more interested and engaged than maybe some others that I've had the privilege of catching up with.
00:02:48 (Audrey)
I think, well, there's a lot of layers to answering that question. I think personally, part of it probably comes from having had my own founder journey. And so I do have a lot of lived empathy with the founder experience, at the earliest stages. My startup ended up failing and hopefully I'm a better investor than I am founder, investing in companies that don't have that same outcome. But I do have a lot of empathy for founders that are going on that journey, really investing all of their time into one idea. I always find it kind of interesting that investors get to sit on one side of the table with a portfolio approach to risk and investors, sorry, I should say, and founders really are putting all of their eggs in one basket. So I think having empathy for that actually, I hope at least makes us better investors rather than worse. And what makes us unique? Look, I think if the bubble of years past 2020, 2021 taught us anything, it’s that capital can often be considered a commodity, and in very founder friendly markets, I think it's easy to think of VC firms as just capital providers when if you really kind of break it down to its essence, that is what we are. But I like to believe that at Tapestry we are able to provide more than just that. We really care about the community that we're building around our founders. And by focusing on repeat founders, we have a pretty unique community of founders that have really earned their stripes. And I think that it allows them to build at the edge and have the credibility to build businesses that are really kind of N+1, but really innovative.
00:04:52 (Alastair)
I really want to get into what you look for in a founder, and especially why it's repeat founders. But before we do, I think you alluded to it, can you just kind of dig in a little bit more or explain a little bit more? Is it the power law, the the way you view a portfolio versus a founder? Because there's sometimes, I mean, there's two different perspectives on two different opposite sides of the table that try and come together in one partnership, but actually they are coming from different perspectives. So can you kind of explain a little bit more about the power law from the perspective of the VC?
00:06:23 (Audrey)
Completely, I read a stat once that said the best funds have the highest loss ratios. Now, I think that take that with a grain of salt. Obviously, if you have an 100% loss ratio, you're not going anywhere. But I think the target for some of the top decile returning funds is 70% plus. So if you think about that, we try and target, call it ten to fifteen investments a year, at least, out of our first and second fund. And that means that seven of those ten don't necessarily need to be fund returners, so long as we have one to two that really crush it. That's the portfolio model, that's the way that investors operate and how they think about risk reward trade off. When that's a number on an excel spreadsheet that's easy to stomach, that's an easier pill to swallow than if you're the founder whose business is literally running to zero, and you're the founder whose credit card debt is going up because you're putting everything into your business.
00:07:28 (Alastair)
So let's get into founders, the founder psyche, and what you look for in a founder, because I mentioned earlier, and you've all said it, is that you look for repeat or technical founders. And I'm assuming there's an overlap there in terms of what you look for if you have like a venn diagram. But let's start with the repeat founders, what is it about a repeat founder that makes it so attractive to you and to Tapestry?
00:07:57 (Audrey)
Okay, so I think repeat founders, we would classify a repeat founder into kind of two archetypes. One is what I would consider a serial entrepreneur, someone who has built and sold multiple businesses. And then the other would be a founder who has helped build a leading category winning business and is going off to start a new business in the same space. I consider that repeat because you're playing off the same playbook.
00:08:30 (Alastair)
Shared the journey still.
00:08:30 (Audrey)
Yeah, correct. What is unique about this founder archetype? Whether that past business was successful or not, they often have earned their stripes, right? So they know the common pitfalls to avoid, and they often know at least a bit better what path to pursue. Practically speaking, they can draw on previous networks for hiring, right. They often come with a playbook of pipeline for enterprise sales. They can draw upon previous people they've worked with for engineering hires. And so it often makes what are some of the more challenging things for first time founders a lot easier. And then, practically speaking, we dug through the numbers and the fundraising process actually does look a lot different, too. So repeat founders can often raise up to 40% more in the first fundraise. Interestingly, from a valuation perspective, you also pay a bit of a premium. Dilution is not any more or less, it's pretty on par. But what that means is that you can go further with the first raise because you have enough capital to fully fund until a Series A. The other thing I'd say is, on average, we find that repeat founders go after bigger problems, and as an investor, that's really exciting. So Bobby Healy, for example, former founder of CarTrawler, started Mana Drone Delivery. It's a business we've backed since the seed. It's literally a business that is working on delivering goods via drones in cities, live in a few cities in Ireland. And so that's one example of many in the portfolio of founders that are really going after technology on the edge and really the next new thing.
00:10:48 (Alastair)
Why do you think it is that they go for something much larger? Is it confidence, or is it they have a bigger risk appetite? And maybe those go hand in hand, but is it both of those, or is it something else?
00:11:05 (Audrey)
It's something I think a lot about, because a rational human would say, like going after drone delivery, going after AI software, building with builder AI, going after contactless checkout in stores with standard cognition, which is another of our portfolio companies. These are, I mean, you could call them crazy bets, right? If you look at the repeat founder archetype, you could answer that question one of two ways. If their past business was successful, they have a cushion, right? Which means they're probably…
00:11:40 (Alastair)
Financial cushion?
00:11:41 (Audrey)
Financial cushion. And not just financial, but also kind of social and kind of mental cushion, right. They don't tie all of their success to this one idea because they've had success in the past. And so I think there's an element of why not swing for the fences? The other way you can answer that, particularly for founders who may have had two or three at bats that have not worked, is if I'm going to go big and go home, I might as well swing for a home run, right? I'm using American baseball terminology, which is ironic because I don't think I've ever been to a baseball game, but it's a risk reward trade off. And if you're going to do something as crazy as founding a company, you might as well do it in a TAM that's worth it.
00:12:37 (Alastair)
And investors love that, because regardless of the seven out of ten that might not happen or might fail, it gives you a greater chance of having that one out of ten, because they're swinging for the fence.
00:12:47 (Audrey)
Totally. I think one of the things that is in pretty much every single pitch deck I see is a TAM slide. And it's really easy to kind of not pay attention to that number, because it's often pulled off of a McKinsey report or CB insights. And the number itself doesn't matter so much as the kind of qualitative size of an industry. And this gets a bit into what we look for. We look for Big TAM, and that doesn't mean it needs to be… whether it's 50 trillion or 62 trillion doesn't matter so much as how many people really want what you're building, and how big could this get? I think that one of the heuristics we often think about is path to £100million revenue. So every time I'm kind of speaking to a founder or thinking about a business, I will ask myself, what is the path to 100 million in revenue? If you're selling a software application for £50 a year subscription, you need 2 million people to want that. Right? The price of the product doesn't matter so much as the number of people who actually want it and how big of a business you're planning to build. And to get back to the point of repeat founders, I think, anecdotally, I see them going after bigger TAM businesses.
00:14:20 (Alastair)
Yeah, okay. The other kind of key partner you look for is a technical founder. So what are the differences and the similarities between a technical founder and a repeat founder? Because in a technical founder, I guess you could have a repeat founder, or you could have a brand new founder.
00:14:39 (Audrey)
Yeah, I think the similarity is both archetypes live on the edge of technology and care about novel ideas. The reason we also back technical founders is, well, there's several reasons. A lot of the folks on our team are technical, and we like to get into the code base with founders. We're writing code alongside them. And I think that, particularly in Europe, that's actually a differentiator for us as a fund.
00:15:14 (Alastair)
I've never come across that as such a hands on… you see it in the boardroom, you see kind of getting involved there, VCs getting involved in more in decision making, more in, say, projections, but I've never heard of that before.
00:15:26 (Audrey)
Yeah, I think a really good way of building empathy, again, with founders oftentimes, these founders are just, they love tech, right? And if you can speak that language, I think that helps you get a lot further in, kind of…
00:15:45 (Alastair)
Well you’re showing a genuine passion, I guess, for what they're doing.
00:15:48 (Audrey)
Right. And then the second thing I'd say about the technical archetype is, again, practically speaking, if you're writing a $1 to $2 million check into a precede or a seed stage business, these founders aren't outsourcing development, right. What that means is they are shipping MVPs faster, they are literally building the prototypes of what they're trying to sell. And when something doesn't work, when a feature is bugging out, they're the ones fixing it. They're not hiring an engineer or a dev shop to do that. So that million dollars you're giving them actually gets them way further. And so their runway, if you think about runway, it gives them more.
00:16:35 (Alastair)
But do you see? So here are the advantages of a repeat founder, here are the advantage of a technical founder. But why don't you have a technical founder that hasn't done it before has all the disadvantages of what we talked about with a repeat founder. So I'm not saying ignorance, but they have the naivety maybe, they don't have the experience of what they've gone through. How do you then weigh that up versus a repeat founders experience?
00:17:02 (Audrey)
I mean, look, the obvious pinnacle of what we'd love is a technical repeat founder, right? I would love to have an entire portfolio filled with technical repeat founders. I think a proxy to that is being part of our Tapestry VC community, because you may be a technical founder and I may be a repeat founder, but we focus a lot on building a network around the people in our portfolio. So the technical founder can learn from the lived experience of the repeat founders in our portfolio. And the repeat founders in our portfolio might leverage the technical founders in our portfolio for a network, for hiring technical hires, or for learning about technologies they should be applying in their businesses.
00:17:56 (Alastair)
Okay, so you sought to build a community within your port… within your portfolios?
00:18:00 (Audrey)
Yeah, that's core.
00:18:02 (Alastair)
Maybe if you can answer this question for me as well, because you hear a lot about, a single founder isn't as good as two co-founders. What was the optimal number that you see between one, two, three and more?
00:18:17 (Audrey)
I actually don't have the data in our portfolio. I think, look, I came from, well, I can answer this a few ways actually. I don't have the data from our portfolio, but I know that we have invested in companies between one and three co-founders, I think, anymore and it's too many cooks in the kitchen.
00:18:42 (Alastair)
And dilution, decision making slower. And dilution as they go through that journey, they have less skin in the game right?
00:18:49 (Audrey)
And you often see when there are more than two co-founders, at some point in the journey, one drops away and that just becomes another thing you need to deal with. And the less things you need to deal with, the better. I grew up in the industry, I still feel very young in the industry, but I grew up in the industry with entrepreneur first right? I left my very corporate investment banking job at Goldman and joined entrepreneur first to try and start my first business. And they're talent investors, their whole thing is matching yourself with a co-founder. And I think I learned a lot from that experience about the good and the bad of having a co-founder. But in general, I'd say there is value in having someone to spar with so long as there is enough distance between you and your co-founder in terms of skill set, in terms of style of thinking and way of working.
00:19:58 (Alastair)
That's what you look for in founders. So you could argue that's what a good co-founder, a good founder or co-founder looks like for you. What's a good company look like for you?
00:20:09 (Audrey)
A good company…
00:20:10 (Alastair)
I guess kind of… what gets, there's a whole debate on, well, maybe this is the first question, actually. What's more important to you, the team, the product that they're building or the market? I guess product and market go hand in hand. But of those three, what do you look at in the early stages, having the most weight if you like, in your decision making?
00:20:36 (Audrey)
I guess so is the question more about kind of like what metrics we look for or what matters in terms of…
00:20:43 (Alastair)
So I think at that stage, probably less metrics and more qualitatively, when you assess a team or assess a pitch deck and go, okay, this is the team, the team of repeat founders, that's what excites me. We'll see where the product gets to, we know they'll get a product out here, or is it the product? You go, this is an incredible product, but actually the team are mediocre, but they can get there with support. Which part excites you most?
00:21:12 (Audrey)
I mean, I would say all of them, right? I often feel like the stars need to align in order to get to a yes. I really believe in founding teams, I believe in founder market fit. So do you have the skill set and lived experience to have an unfair advantage to win in a space. And then I think founders, I probably speak to hundreds of companies a year, the founders that I leave a conversation with that leave me buzzing are few. And when I find those founders, you desperately want to invest in a lot of ways. It's about how can I be part of your journey?
00:22:06 (Alastair)
I've heard that a few times recently is the unfair advantage. What is the unfair advantage of this team or of this company or. I love that phrase, I think it's really good, it really sets them aside. You mentioned pitch decks before…
00:22:22 (Audrey)
I'd say just on that point, I say unfair advantage, and the other one I think is what gives you the right to win, because it's not a right and it's an earned right.
00:22:33 (Alastair)
I love those phrases, think they're awesome. So you mentioned pitch decks, either in founders themselves when they pitch or pitch decks, what puts you off? Because you say you leave someone, you're absolutely buzing and you want to have the next conversation or you want to invest in them, what puts you off? And I'm sure you're put off by more founders or decks than you are excited about them. So what is it? If you were to distil it down, what puts you off? Or is it not a case of what puts you off, it's a case of it has to excite you?
00:23:04 (Audrey)
It has to excite me. But I can tell you what puts me off, and this is just, I'd say general advice and feedback, decks that look too corporate. There are a lot of what people call, probably pejoratively so ‘wantrepreneurs’ that have a background from you know McKinsey, Goldman etc, and are now starting a company. I mean I can say that because I was one once, but decks that look like they were prepared with 50 pages and entire market analysis. And this is like a classic one, financial projections of a pre product, pre revenue business with no team and no product market fit up to 2025. Well now 2025 is around the corner up to 2030, right? That is not what is going to convince… I can't speak for all investors, but personally me to invest. Founders that in a deck can concisely share what makes their vision unique, what answer they think they've found to a unique problem, I think work best. And then the other thing I'd say around pitch decks is, and this is not something that I've heard other VCs say before, and I don't even know if it's kind of our fund thesis, but personally I really think that your deck is your way of showing the ethos of you and your company and how you think about everything from communicating your story to user experience and design. And perhaps that's less important for enterprise products or non-consumer facing products, API tools, dev tools, etc. But I do think that there is so much competition in all categories of tech right now that if you can, in your deck showcase an element of how you think about design, how you think about user experience, by the way that your story is told and how the information is organised and how concise it is and clear, that really helps your story and helps communicate something that's not just written words on a page.
00:25:34 (Alastair)
So what I'm hearing there is communication, or communicating the opportunity, communicating what makes you different. And just communication in general is absolutely important, which sometimes goes against the grain of a technical founder, I would suggest. I'm not a technical developer, I'm an accountant right so some would argue we can't communicate that well, but that goes against the grain then, doesn't it, of a technical founder? So do you see sometimes in pitch decks that the communication isn't there, but you see something else and you kind of bypass that, or does it still put you off?
00:26:14 (Audrey)
That's a good question. So I think I would underline all of that and say, who are you catering to and what is your audience? If you are building a dev tool, you are selling to developers, right? And so it's less about convincing the designer on a team why your product works and communicating to people who speak that lingo, but it's about communicating to developers who speak your lingo. And so I think the design and comms around a consumer social app is going to look entirely different than the design and comms around fintech APIs, right. And what we often look for, and it requires investors wearing multiple hats, is can you communicate to the people you're trying to sell to effectively?
00:27:06 (Alastair)
Yeah. And I think something to be aware of is we're all selling every day, even if we're not in the sales role, we're selling something, aren't we? So let's talk a little bit about the process of investment. So we've talked about pitch decks, but what does the ideal… because sometimes what I sometimes hear from founders is they don't hear from a VC for a long time, they get ghosted or then they hear from them. So let's debunk some of that, right. What does the ideal process look like from the other side of the table and what goes on in that process?
00:27:43 (Audrey)
Yeah.
00:27:44 (Alastair)
Because it's not always tumbleweed and things are moving along. So what does that look like, ideally, from your perspective?
00:27:54 (Audrey)
I think any investor that tells you they have a formulaic process, or any investor that follows a formulaic process to coming to a decision or diligence, is likely missing out on really interesting investment opportunities. An example would be if you were a founder and you came to me after a first call and said, okay, so what's your process for investing? How am I going to get to a yes or a no, right? The real answer is that depends on a lot of factors. That depends on how quickly you're trying to raise. That depends on where you are in your fundraising process. The ideal is I really subscribe to Mark Suster’s view on lines vs. dots. So if I have one meeting with you, and I am kind of being strong armed into a yes or a no, you are just a dot, right? If I have the benefit of being able to see you in a 30 minutes Zoom call, and then a few weeks later meet you for a coffee, and then a few weeks later start to build a line of where your business is going and how you operate as a founder, how you communicate, your responsiveness. That provides me with so much more data about not just your company, we can see where your numbers are going over the course of that time, but also about you as a founder who's going to be leading a team of people. And when possible, I like to have multiple data points on a founder before coming to a decision. So that's the first thing I'd say about what does the investment process look like? I'd say it's bespoke and it depends. Obviously, there's things that we look for in that, and the advice I'd give to founders is anyone who can run a process like a process, because it is a process, is doing it better. I remember when we would in investment banking, you're working on large transactions, and there it's all about being really organised around conversations you're having, follow up and running a process with structure. And oftentimes at the pre-seed and seed, a founder doesn't think about it in the same way. But when I see founders that have targeting lists of investors they want to meet and columns of last date interacted, and what the follow up was, what they've sent them, what Q&A they've sent back, that gives you so much confidence that these people have… or these founders have a hold on their business. And in turn, I think it actually leads to a better outcome for them because they're not wasting time with investors that are for example, Series C investors that are never going to invest in a pre-seed. They're not wasting time with consumer only investors when they're building a fintech company. And they get to be targeted with their approach, which is more efficient for their time, and as a founder, the most important thing is your time.
00:31:16 (Alastair)
And I'm assuming that your repeat founders are much more organised than new founders?
00:31:23 (Audrey)
More organised…
00:31:23 (Alastair)
They will run it like a process. They will use a CRM or an Airtable mocked up as a CRM, or kind of track things a little bit more because they've had the experience of doing that in the past.
00:31:31 (Audrey)
Completely.
00:31:32 (Alastair)
Yeah. How about on the flip side, if I can ask, all these dots that you have to connect the lines in between, do you also use a CRM to map all that, or is it more haphazard?
00:31:45 (Audrey)
We do. We are a very data driven fund and we care a lot about making sure that we are organised. We're a small team, and I think if my team were to hear this, they'd laugh because I'm probably the least organised of everyone. But they are constantly reminding me to make sure to post to the rest of the team on everything that each of us are learning. And if you think about it, it's really easy to do the investor job as a lone wolf. You can focus on your sourcing, you can focus on your companies and your pipeline and your investments and helping those grow, and just put your blinders on. When you're working with a fund, you need to have a team approach and a team mentality. And I think that that's helpful even to the individual investor, because then you learn from the investors around you. So we care a lot about growing the institutional knowledge of Tapestry by making sure that we are communicating and leveraging each other and each other's networks and each other's experience. I feel really lucky that the fund feels a lot like a family, and we are always helping each other with our own portfolio companies. We are helping each other with intros for our founders and making sure that we're covering each founder like a team. So one of the greatest things I think about Tapestry is you know, I may be leading the deal into your company, but you're going to get the support of everyone else on our team. And if I don't have the right connection for you, Alex does, or Patrick does, or Dave does, and I think it's exponential then, you know the reach of who we can connect you to.
00:33:40 (Alastair)
That's sometimes hard to scale… I don't know where Tapestry is going in terms of number of people, but with five now, I think you said this week, it's a lot easier to do it when you can get your arms round and you can be in a huddle like that. But it's obviously a lot harder to still take that same value, have that same connection and share all those updates when it is a smaller, close knit team, versus multiply that by three, four, five. Then actually sharing everyone's portfolio, everyone's conversations in an all hands, is a lot, or disseminating it somehow through the firm is a lot harder to do.
00:34:12 (Audrey)
I guess you're asking all the hard questions, definitely. I think a lot about Tapestry, we invest in repeat and technical founders globally. We are a boutique global investment firm. So yeah, you're right., if you are a global firm covering the planet with five people, now, that seems like an impossible task. But what we do by focusing on technical and repeat is we are kind of separating, sourcing and selecting. We can source from the globe, but that doesn't mean we need to speak to every single founder in the globe, because we are selecting technical and repeat. So we are actually narrowing our world to a more manageable size. If we were talking to every single founder across every geography, you'd need a bigger team. With four, now five people, it's actually a lot easier. And we all have, I'd say, our swim lanes. I focus on fintech and consumer tech for the team, but we're all quite flexible in terms of helping each other. And then I think, honestly, it's just communication, like making sure that we're posting everybody on the team about what we're doing. Like any company, not just investment firms, is really important.
00:35:39 (Alastair)
Having more dots is much more important. Having a story to tell, really, rather than chance encounters and understanding a founder, their mentality, their vision, a lot better, helps you. What happens then? What's the decision making process like for you guys? I think that would be helpful for founders to understand kind of what's taken to an investment committee, what conversations are had, who vouches for someone. I think understanding that a little bit more would be really interesting.
00:36:14 (Audrey)
I'll give you a few things that we will always talk about, but like I said, each investment we consider is going to be a bit different. In no particular order, does this business have a large TAM, right? So how big can this get? Referencing people that founders have worked with before to make sure that they reference well, that's incredibly important. We'll often ask founders to give us names of people that they've worked with, and sometimes we'll back channel ourselves. Founder market fit, making sure that the founder has a unique right to win. Moat, what is stopping Google from building a business exactly like yours with the resources of a large public company? We're global, so does this business scale outside of not just your core geography, but cross border? I want to give you practical answers...
00:37:28 (Alastair)
As someone, maybe that sources and speaks to the founder. Are you working with the founder to go, yeah, this is what the TAM looks like. This is what your right to win looks like. This is what your moat. And then are you taking that thesis and presenting it to an investment committee? Sorry, investment committee is maybe a term. I know there's five of you, but effectively an investment committee that makes the decision. Are you doing it like that or is it done in a slightly different way?
00:37:54 (Audrey)
Yeah, I'll kind of walk you through, at least as formulaic as I can, how it goes. Oftentimes we'll have an intro call that will be like, call it 30 minutes Zoom call. I am known for going over, so I will always go over…
00:38:09 (Alastair)
And are yours normally inbound or outbound in terms of deals?
00:38:13 (Audrey)
It's a mix. So we have an engine called Uncover that processes a lot of data and kind of both public and private sources to source deals for us. And then a lot of it comes through network that we build with angels, former founders, founders we've invested in flagging companies to us and other investors that we've worked with. But I will have a 30 minutes Zoom call with a founder. We'll go over kind of brief intros. Ideally, I'll kind of have prepped a bit for that so that I know a bit about whether or not it's a fit for the fund. Because the last thing I want to do is waste a founder's time. And then I will kind of, after that call, write up some notes and summaries of that call, and I'll go back to the team with my initial view, right. We try and kind of like red light or green light. If it's red lighted, we'll go back and we'll kind of give some feedback as to why. Oftentimes I will be able to red light something myself if I know that it's not a fit. If it's green lighted, then this is probably my favourite part of the job, it's the diligence part, it's where I can act like an investigative journalist and where I can get really smart on new topics. So that's where it is, a combination of reading a lot, talking to experts in that field and leveraging our network to get to an answer on investing or not.
00:39:50 (Alastair)
And how long will that take? How much time will you invest at that stage?
00:39:53 (Audrey)
It depends. I feel like I keep saying it depends, but we try and get to an answer quickly because we don't want to waste founders time. But sometimes it takes time because you are trying to get on the calendars of late-stage company CEOs in this space to assess the viability of a technology or to assess the commercial viability of a technology. So you're kind of collating a bunch of different pieces of information into formulating a thesis. One thing I like to do is before a second call with the founder, send them a list of questions. Here are the things I'm still debating, and give them time to prepare for that conversation so that at least the second call, and perhaps the third, is productive. I try and be as kind of open as possible with where I am at in formulating my thesis, because I also just think that helps founders learn too, about how other investors will be thinking about their business.
00:41:11 (Alastair)
Yeah, so you've done that due diligence, you've had those meetings You've had the red light, green light at previous stages. I'm assuming you have more red light, green light scenarios or miles or kind of going through those stage gates. What are those other ones until you get to the point of right, this is the check?
00:41:28 (Audrey)
So once we develop a thesis on an industry and a solution to a problem and a founder's right to win, then it's about figuring out dynamics of a deal. That's when we have to have a discussion as a firm where we want to issue a term sheet at what price, if there's a price set, whether we want to participate at that price, if there's room for our ticket size within a round. And this is where the back and forth with founders happens around kind of orchestrating a cap table to fit in the people they want to work with. And by that point, I'd say, hopefully we will have convinced the founder, which is a whole other part of the job, that we are the best firm to partner with for their early stage journey, such that they want to take our capital and want to work with us.
00:42:28 (Alastair)
And so at that point, will they... I'm assuming they'll have met with others within Tapestry at that point as well, so they get a good feel of the team rather than just one individual?
00:42:36 (Audrey)
So we don't have like, unanimous green lighting or unanimous IC. It's all really conversation based, but at that point, they will have certainly met with, if not the whole team, since, remember, we're small, at least two or three of us, and we'll have multiple touch points into the firm.
00:42:56 (Alastair)
Yeah, cool. So I love that detail. So I think that's really beneficial and transparent. So let's assume we've got a green light all the way and you've invested in a business. What does an ideal founder look like for you on an ongoing basis of… we talked about communication before, communication has been really important at the pitching phase and communicating the ethos of the business. What does communication look like on an ongoing basis for you? What do you want, what do you look for on an ongoing basis?
00:43:29 (Audrey)
So a few things to note. I have a theory that a founder's response rate and responsiveness is directly correlated to success in their business. Obviously, there's a lot of other factors that go into success, but founders that don't leave an email in their inbox for less than 12 hours, whether they're fundraising or whether you've already fundraised, they don't need to per se keep impressing you, but are interested in clearing that inbox, inbox zero by the end of the day. It gives an investor so much confidence, and I have seen over the course of my time in the industry, just a correlation with success and founders that have this obsession with getting things done. I think the other thing I'd say is, once we invest in a company, that's where the hard work starts, because now we need to make this thing grow. And so we don't have a formulaic way of working with founders, per se. Some repeat founders in our portfolio are following a playbook that they've used in their past business. And honestly, we can be annoying if we get too in the weeds. Others, this is their first business, and they are deeply technical engineers that may need our help with the sales motion, right. Because we've seen it before. And so in that case, what we generally do is at the point that we've invested, we kind of put each founder on like an 100 firs days plan where we talk about cadence, of how often we should be communicating... there are some founders I have weekly calls with, there are some founders that don't send monthly updates. If I were to say anything, it's probably better to send a monthly update, because at least we can then be proactively helpful. But it's about working with a founder to figure out what is the best way to help them. We're the supporting actors, right?
00:45:40 (Alastair)
Yeah. And I'm assuming in that first hundred days, you're also... It's cadence of communication, cadence of reporting, but also what type of reporting is helpful for you in terms of metrics? I'm assuming you work with them to kind of get what you want, what you need, and what's beneficial for them to understand the progress they're making…
00:45:59 (Audrey)
And what's beneficial for them to have in terms of data aggregated for when they hopefully raise Series A right and beyond.
00:46:08 (Alastair)
It starts then to get those numbers and get those metrics and track them and have that history.
00:46:13 (Audrey)
I think working with repeat founders has taught me that, that archetype understands the value of being data driven. And I often see that even at the seed, those founders are obsessive about tracking and obsessive about already putting together an equity story and thinking about what that data room is going to look like in the next round.
00:46:37 (Alastair)
We see it at flinder as well, in terms of repeat founders, they are the ones that come in earlier than any others because they know the value of having the historics set up right and setting up the stall as they mean to go on. Yeah, absolutely. In different sectors or sub-sectos of your portfolio, they're going to have different metrics. But as a VC, what's the most important metric you would want to see? And I guess cash burn, cash runway is an easy one. But what else is interesting to you?
00:47:08 (Audrey)
Often we invest pre product, pre revenue. So in that sense, metrics look a lot different, but where there is metrics to focus on, I like to think about derivative versus integral metrics. It's really difficult to make a decision based off of an integral metric. And I would consider an integral metric like total items sold, or total number of users, or total revenue in a month, right. That tells you a snapshot of a story. What's more interesting is derivative metrics. So those metrics over time. It's one thing to say you have 5 million users, but if those 5 million users are aggregated over five years, that's way less enticing than 5 million users in three months, right? Derivative metrics are daily active users, they are growth rates, changes in revenue over time, changes in margin over time. That's the stuff that I think tells a story. We like to look for what we call escape velocity, and so has a business reached escape velocity? Have they figured out the flywheel? And is that flywheel rolling? I think I'm confusing metaphors, but the idea that are you growing quickly versus growing slowly, because in VC, we're looking at the former, not the latter.
00:48:43 (Alastair)
Yeah, definitely. So looking at those metrics or data points over a period of time to give an indication of, as you say, escape velocity rather than just single points in time.
00:48:56 (Audrey)
Yeah.
00:48:57 (Alastair)
Can we talk a little bit about what's going on at the moment in the 2023 investment market?
00:49:05 (Audrey)
Yeah, it's been interesting,
00:49:06 (Alastair)
What is... I guess, kind of a few things, quite interesting. What do you see happening with, say, conversion, like conversion rates of deals that are coming in to converting into investments? What are you seeing in terms of valuations, multiples? What do you think the next twelve months holds? The depression we're seeing at the moment… there'll be some sub-sectors in the market that will be relatively immune to it and be interesting to hear what those are. But when are we coming out of this? From your perspective, what are you seeing?
00:49:48 (Audrey)
So I would say the following. I think times continue to be challenging from a macro perspective, we are in a period where cost of capital is higher than it's been given increase in interest rates, with news coming out on that, I think this week from at least ECB and the Fed. But what that means for venture is, I think, a few things. It's gotten harder to raise funds, which in turn means it’s…
00:50:19 (Alastair)
As in the LPs that invest in?
00:50:24 (Audrey)
Right. Which means in turn, from a founder's perspective, there's dryness in the capital markets, so it's gotten more difficult to deploy. I think interestingly, and I think I saw this number on CrunchBase maybe a month ago, mean valuation for pre seed and seed rounds globally has pretty much stayed constant over the last four years. So from the height of the bubble to today, I think the number was $10.9 million post. And obviously, the thing you're seeing less of today versus 2020, 2021 is the two on 26 on 55 pre with pre product, pre revenue businesses, right. A lot of that has gone away, but early-stage VC has always been countercyclical, right. There's far less correlation with public markets. I'm not talking about late stage…
00:51:25 (Alastair)
Yeah. And that's because we're further away from any public transactions. Is that what's driving that?
00:51:31 (Audrey)
It's further away from public transactions. And if you want to think on the flip side, the things that are going to kill an early-stage business are not macro factors and interest rates, it's founder problems, it's product market fit. And that has nothing to do with how Google is trading. And so from a valuation perspective, you've seen 40% to 50% on average, decreases in Series C and above and in certain sectors…
00:51:59 (Alastair)
In terms of valuation or?
00:52:00 (Audrey)
In terms of valuation in certain sectors, be that insure tech with lemonade lending businesses, certainly crypto businesses, that number is actually 90% down right at the pre-seed where you've felt it as a founder is less so on the valuation and more so on volume of deals happening and dollars being deployed…
00:52:27 (Alastair)
Total dollars being deployed, not dollars within your business? If you're one of the lucky ones… so the volume of deals that happen is less, but if you're one of the lucky ones that is included within that, you're still getting the same valuation, the same capital?
00:52:39 (Audrey)
Yeah, correct. So the total number of deals happening has decreased. And to be fair, I think 2020, 2021, you saw a lot of businesses getting funded that didn't necessarily have the fundamentals to support that. You're seeing a lot less of that now. So at the same time, I think 2022 was really the correction of seeing a lot of businesses go under that probably were on their way there and it got expedited. The interesting thing now is we've been in this downturn for twelve plus months now and it looks like it's kind of sticking. You're starting to see a lot of businesses that didn't necessarily need to, that have strong fundamentals, that are suffering as a product of softness and dryness in the capital markets. And I think that's where the investor's job actually gets quite interesting. Anecdotally, I was chatting to some investor friends that would be considered blue chip VC funds that I always assumed did deals that always looked up and to the right. And one of my friends was looking at a deal that objectively looked like it had some hair on it. And I asked point blank, I was like, I didn't realise that your fund did these kinds of things, and he said, we have this thesis now that over the next kind of six to twelve months, there's actually going to be a lot of really interesting ways to structure deals with companies that are strong businesses, but that are suffering because of ability to access funding.
00:54:20 (Alastair)
Yeah, from VCs. What's hot at the moment then? What is bucking that trend in terms of still getting the capital at good multiples?
00:54:35 (Audrey)
I'm going to go back to technical and repeat, repeat founders have an easier time fundraising I think.
00:54:39 (Alastair)
That’s non sector subsector specific?
00:54:44 (Audrey)
That's like a founder archetype that's still hot and I think will always be in terms of sectors, I think, look, I cover consumer and fintech. In fintech, things come in and out of fashion in this job and it's my job to stay ahead of what is in fashion at the moment. I think I have a personal thesis that wealth tech is countercyclical. So I get a lot of company updates from budgeting tools and investing platforms. And I find that customer acquisition costs have actually decreased over the last several months because when the market goes down, people all of a sudden feel the need to budget and feel the need to get a hold of their financial picture. And so you've seen metrics for those companies actually doing quite well. I think you mentioned generative AI, it would be obtuse of me to not talk about that. I focus a lot on enterprise fintech, so particularly when you think about, well, two things, CFO tools and then banking tech. I guess I'll focus on banking tech because it's the thing I'm focusing on a lot right now. When you think about a bank's tech stack, there's a lot of ways AI can help increase the margins of their business and grow their business. I think you're going to start to see applications of it in certain areas before others as a product of kind of regulatory necessity or issues. So I think AI today can be leveraged for things like growing pipeline, customer experience, certain financial products, where I think we're going to see it later is on things like credit assessments, lending, KYC, KYB, anything where there is a bit of kind of a regulatory landscape that is delaying innovation in those spaces. I'm working on a project right now that is looking know we're a global investor, how regulatory frameworks around AI, particularly in IP, are changing and how they're evolving across Europe, US and the rest of Europe. And it's interesting to see how each geography is actually taking a slightly different stand and being more or less proactive. And I think you're going to start to see businesses being formed using generative AI in geographies that are more kind of regulatory friendly.
00:57:30 (Alastair)
I think the wealth tech one is really interesting because it's not a case of necessarily new technology that's driving that. It's just the market is more consumers or more as an increased demand because of the macroeconomic conditions, I think that's fascinating.
00:57:48 (Audrey)
Yeah. Like I said, so many topics in VC are cyclical. And it's my job to figure out what is a trend that is lasting versus part of a hype train. Crypto, I think was part of a hype train. I actually have a thesis that with the increased adoption of generative AI and LMs, and output from LMs, crypto will actually, I'd say blockchain will actually have a renewed place of importance as an immutable ledger and as a source of truth. When you can't tell if a transaction is real or fake, or if an image is generated by a computer, a human having a repository and a ledger, of validating that, validating an image becomes important. So I actually think that there will be…
00:58:45 (Alastair)
Will resurface again but have better use cases, perhaps.
00:58:48 (Audrey)
Perhaps,
00:58:50 (Alastair)
Yeah, I think lastly, I'd love to ask you your top tip for founders. And so you founded a company, now you're on the VC side of the table and you see lots of founders, you invest in founders. What would be your top tip for founders?
00:59:06 (Audrey)
I would say think about investors as an important part of the equation. So the more you can ask for advice and learn from investors and play these conversations like, I'm just going to tell you a bit about my business, but I'm not necessarily looking for funding, I just want to learn from you and your experience with your portfolio companies. That's what gets investors really excited. Because if you look like you are asking for cash, the thing you're going to get is advice and that's not necessarily what you want.
00:59:44 (Alastair)
I love it. That's brilliant advice. Audrey, thanks so much for doing this. Where can people reach out to you and find out more about you and about Tapestry?
00:59:52 (Audrey)
Yeah. So we have a website, tapestry.vc, and then I am audrey@tapestry.vc
00:59:58 (Alastair)
Audrey, thanks so much for doing this.
01:00:00 (Audrey)
Thank you for having me.