Getting into venture capital with Lylan Masterman

Lylan Masterman - Podcast Transcript

Scott:	Hey, it’s Scott Orn of Kruze Consulting, and welcome to another episode of Founders and Friends. And before we start the podcast, let’s give a quick shout out to Rippling. Rippling is the new, cool payroll tool that we see a lot of startups using. Rippling is great for your traditional HR and payroll. They integrate very nicely. But guess what? They did another thing. They integrate into your IT infrastructure. They make it really easy for when you hire someone to spin up all the web services and their computer, which sounds kind of like not a huge deal, but actually, we did this study at Kruze. We spend $420 on average just getting a new employee’s computer up and running and their web service up and running. It’s actually a really big deal. It saves a lot of money. And the dogs are eating the dog food. We see a lot of startups coming in to Kruze now using Rippling, so please check out Rippling. Great service. We love it. I think we have a podcast with Parker Conrad. You can hear it from his own words, but we’re seeing them take market share, so shout out to Rippling. And now to another awesome podcast at Kruze Consulting’s Founders and Friends. Thanks.
Singer:	(singing) It’s Kruze Consulting’s Founders and Friends with your host, Scotty Orn.
Scott:	Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting, and my very special guest is Lylan Masterman, a bigshot VC from New York. How about that, Lylan? Do you like that intro?
Lylan:	Sure, Scott, whatever works for you.
Scott:	Welcome, man. We’ve been friends for a long time. It’s great to have you on the podcast.
Lylan:	It’s a pleasure.
Scott:	Well, maybe you can retrace your career. By the way, I’m the one who labeled you as the bigshot VC. That wasn’t how you wanted me to introduce [inaudible].
Lylan:	Not at all.
Scott:	But maybe you can introduce your career and your perspective on the VC market for the audience.
Lylan:	Yeah, so my career started academically. I was a computer science and math guy from the University of Waterloo. Through the Waterloo Co-Op system, I did six co-ops like most students do there. My fourth one was at IBM on a product now called Eclipse. Back then, it was called VisualAge for Java. Then I went down to California for Cypress Semiconductors and then Microsoft WebTV. I continued with Microsoft Research. Then I moved to Redmond to be part of the team that built the first version of .NET and Visual Studio .NET at Microsoft. That was a tremendous, legendary launch of a software product that’s still used by many people today. I was employee number 123629, literally, and that felt like a prison cell number. And so, once the economy started to bounce back in ‘02-‘03, I left Microsoft to go to a startup called AskMe. It was enterprise employee knowledge management platform. I like to compare it as a precursor to Yammer, which is a precursor to Slack.
Scott:	Yeah, actually, it is. Yeah. Yeah.
Lylan:	Employees sharing knowledge with each other. The thing is, in ‘02-‘03, the world didn’t know about the freemium business model. So, we were going to companies and trying to charge, let’s say, $400 a head for our software. That didn’t work so well back then [crosstalk]. It doesn’t even work that well right now, right? You have to let people try and fall in love with your product first. And so, we boomed. We got a lot of awards. We won a CODiE Award for most promising company, and back then, CODiE Award was the top tier of awards you could get.
Scott:	I’ve never heard of that before.
Lylan:	Yeah. Yeah, it’s back in the day. But awards and revenue are two drastically different things. And so, when AskMe started to have to do major, major cuts, I think it was part of the fifth or the sixth round of layoffs, something like that. Some of my colleagues who had been cut before me had gone on to some other company that I’d never heard of at the time.
Scott:	What was it?
Lylan:	The company was called aQuantive, and specifically the Atlas division of aQuantive. I had five of the best years of my career, or the early part of my career, there. I headed up multiple product lines simultaneously along with internationalization, along with user experience. I was too young and dumb at the time to appreciate that the senior management there paid to have the godfathers of Agile.
Scott:	I didn’t know that either. Yeah, really?
Lylan:	The people who wrote the original Agile manifesto… Right? They came in and trained us in person. So, Ken Schwaber and Ron Jeffries. Ron… For Extreme Programming, Ron would come in, and he’d spend an entire week with each little team within Atlas. So, he spent an entire week just with my little team, then he’d go and he’d spend another week with another little team, and so on and so forth. And then he came back six months later, sat with us again to tell us where we had improved and where we still had some room for improvement. Jim Shore trained us. We had the legends of Agile train us. So that was a fantastic training. Great experience about what it takes to really scale a business from the inside, from the weeds. Then we got acquired for what was at the time the largest acquisition ever by Microsoft.
Scott:	I was going to say, Microsoft bought aQuantive, right? Was that…
Lylan:	Yeah. It was a $6.3 billion deal. Yeah, it was the largest deal at the time ever by MS. And so, legendary deal. We were acquired one month after Google had acquired our competitor, DoubleClick, for $3 billion. Google’s management of DoubleClick has allowed DoubleClick to flourish, and Microsoft ended up writing off $6 billion and selling Atlas to Facebook. But for us that built Atlas, the special part wasn’t what happened post-acquisition and the politics and so on, it was building a real business that got acquired for $6 billion, and then whatever happened with Microsoft happened. From there, I didn’t want to go back to Microsoft again. I did a year or so-
Scott:	Yeah, you went a couple of tours of duty there.
Lylan:	Yeah, so that was role number four for me. And so, I’d already started preparing for the GMAT. Then when I got a good score, I’m like, “Oh, now I can go to business school.” And I was already in my 30s, so it was a now-or-never moment to go to business school, right?
Scott:	Yeah, yeah. I was like that, too. I think I was 29 when I went, so-
Lylan:	Oh, so I was 31 when I went.
Scott:	Okay, yeah. Well, it’s not that big a difference, but yeah. [crosstalk]
Lylan:	No, no. But I was probably in the top 15%, 10% in age. There’s a very pronounced bell curve with age of business school. It was our common alma mater of Kellogg.
Scott:	Yes. [crosstalk]
Lylan:	That’s how we first connected back in the day. And so, Kellogg was great, and I focused in on venture capital. And so, LinkedIn and the web wasn’t all that great in 2008, ‘09, ‘10. Again, a down economy. And so, I would just research every single VC firm I could find, because there were no good lists of VC firms, and then I would read the bios of every partner at the firm and email the one, singular partner who I had the most affinity to. And so, I would send a very custom email, very personalized, saying… Basically, I sent a very professional version of, “Hey, we have X in common. I think your job is cool. Can we talk?”
Scott:	That’s very smart. You’re kind of proving you have the skill set to be a VC right there by doing that. There’s a lot of… You got to find good deals, and finding a job is kind of like finding a deal.
Lylan:	Yeah, and building rapport and understanding commonality and how that can help build rapport. So, one of those reach-outs was to a New York CityVC who was a Northwestern alum and who was a co-founder of a company that I competed against when I was at Atlas. He was a co-founder of 24/7 Real Media.
Scott:	Okay, yeah. I remember [crosstalk].
Lylan:	So that was Geoff Judge. Geoff introduced me to Mark Fernandes at Sierra. Mark’s admin writes me and says, “Hey, Mark would be happy to have a call with you.” And I do what you’re trained to do: lie. Straight-up lie. “Yeah, a call would be great, but I’m going to be in the Bay Area in two weeks. How about we meet in person?”
Scott:	That’s amazing.
Lylan:	Right? And she said “yes.”
Scott:	And [crosstalk] that’s how you got it, kind of thing?
Lylan:	Yeah. She said “yes,” I booked my flight. On a student budget, I need those two weeks to have the cheaper flight. And I didn’t know that Sierra wasn’t keen on internships. I didn’t know that the founder of Sierra teaches venture capital at Stanford Business School. And naivete was a little bit of bliss there. By the end of the conversation with Mark, he nodded affirmatively to me, and he says, “Let me talk to my partners.”
Scott:	Oh, that’s new to me. I didn’t know that story.
Lylan:	Yeah, so that’s what led to my internship. I remember you and I, we had talked beforehand about how to have a good conversation with VCs.
Scott:	Yeah. But that just shows you that… What he was probably super-impressed with you was just friendly aggressiveness of getting in front of him, and working your way through the process, and getting a meeting with him, and then actually delivering and doing a good job in that meeting. I mean, it is literally… I’m not joking. That is what you do with entrepreneurs. You have to find out a way to get into the best companies. That’s all that matters. And so, little acts of charm or little acts of stick-to-itiveness is what makes you successful as an investor.
Lylan:	Yeah, and one other thing that he told me is that because I was already in my 30s, I’d already managed teams, he knew he could take me on for the summer and I wouldn’t be much of a burden, right? I already had the maturity, the self-discipline, the personal drive, that he could just let me fly. And if I failed, what’s the worst that could happen?
Scott:	I love it.
Lylan:	But then if I succeeded, great things would happen. So, I adored that internship, and that really brought me some conviction in venture. And from there, I applied for and was selected for the Kauffman Fellows program. I’m happy to talk about that, what it is, and so on.
Scott:	Yeah, [crosstalk] the audience will [inaudible], because Kauffman’s a pretty big deal in the venture capital world. They also produce a ton of great research, so it’s really helpful to know what the Kauffman Foundation is.
Lylan:	Yeah. So first, there’s two divisions to Kauffman. There’s the Kauffman in Kansas City, which is focused on entrepreneurship, and there’s the Kauffman headquartered in California… Kind of Texas now, too, that’s focused on venture. They both used to be part of the same organization, and at some point, there was a separation. But both organizations are still very, very closely tied. And so, for the fellowship that I’m part of, which is the venture capital fellowship… The way that I describe it to people, especially to applicants and my friends who want to learn whether they should apply, is simply, it’s a two-year program where experienced VCs come together once a quarter for three consecutive days of training on how to be the best technology investor they can be. To give you an idea of the constituency of a class, I believe the most recent class is approximately 70% partner-level or above.
Scott:	Wow. I wouldn’t think partner-level people would be going for training. That makes sense. You train for other jobs, but that’s really interesting.
Lylan:	The median age, I believe, is 36 or 37, which means you have some 25-year-olds and you have some 50-something-year-olds, and the class gels together really nicely. Two of my favorite elements of the curriculum, one was how to be the best board member you can be. Right? Not Board Membership 101. It’s assumed that almost everybody in Kauffman has been on multiple boards, knows the basics. How can you be the best? And then we spent an entire day or so on how to better establish your personal brand and your firm’s brand. That’s the kind of content that we deal with [crosstalk].
Scott:	I love the board meeting one, because you and I both have been in a lot of bad board meetings, so I think streamlining those conversations and making it more productive, that makes so much sense to me. It’s almost like managerial training for managers, like stuff you need to do to continue to get better. And that makes a ton of sense.
Lylan:	Yeah, it’s a great program. It continues to grow in size. Normally, the four get-togethers per year, two in the Bay Area, one in New York, and one international. They do deviate from that quite a bit, but that’s the general formula that I have observed. And so, tremendous, tremendous program. A lot of legends of venture either participated in the program or were mentors to people who went through the program.
Scott:	Yeah, yeah. That’s incredible.
Lylan:	Yeah, it’s so good.
Scott:	And that kind of launched you, right? You made a lot of good contacts through that?
Lylan:	Well, the way I was admitted was through a program that was then called the Finalists Program, which was an admittance conditional on getting into venture. So, while I got admitted in 2009 to Kauffman Fellows conditional on getting into venture, I only got into venture where I accepted a job offer in 2014. So, I had an offer in 2010. My mentor suggested that I turn it down. And so, I did. And so, it was in 2014 that I joined a venture capital firm and then started Kauffman. And so, all the work that I had done from 2008 to 2014, I’m building my relationships in VC, I’m getting mentors, and so on. That was all me. And more than that, I’d say that Kauffman is particularly good at providing you with a group of other like-minded people and professionals where there is trust and intimacy. It really doesn’t help launch a career, other than it makes you think differently about your little, minute actions. Right? Your little, minute actions in that board meeting, right?
Scott:	Interesting. What’s an example of that?
Lylan:	So, everything that’s discussed in Kauffman is confidential, but this next element has already been discussed publicly, so I’ll share it. We had an experienced entrepreneur come in who had just recently been removed as CEO, or promoted to chairman, of his company. And his company was a growing company, and the board simply thought that he was not the right person, the right leader, to take the company to the next level. And at one point, we talked about his board, and anonymously, he said that of the five people on his board, for his next company, there’s only one that he would want to have again on his next board. And so, we dug in on that. And of the five board members, one probably didn’t have the right overall skills. The other four did, but only one of those four actually put in the effort to try to be helpful, to listen, to care, to know the product, to know the team. You never want to be the middle three, right? The board member who just didn’t have the right skills, well, that’s who you are. That’s how you’re born. Fine. Right? But if you have all the right skills and aptitudes, and you just choose to not put in that extra effort as a board member, that’s not the right spot to be.
Scott:	Yeah. I think maybe there’s like a free rider concept in board meetings, and maybe in all meetings, but a lot of stuff I’ve been to where there’s one or two people driving it, asking the tough questions, and almost sometimes, they’re like the bad guy in every meeting even though they’re not trying to be bad. They’re just asking difficult conversations, trying to really help the company. And there’s other people, it’s just human nature, who sit in the meeting and don’t really ask those questions or participate to that degree who are on the board. Everyone needs to share the responsibility. Everyone needs to share the burden of asking tough questions and rising temperatures and stuff like that. Does that make sense?
Lylan:	Very much so. One other thing that Kauffman made me feel very comfortable with is as a board member, you’ll often have on the board someone who speaks a lot. Right? And that can be you. Great. But if that’s not your natural inclination, there’s nothing wrong with being the person who only speaks a few times, and as long as what you’re saying is smart and helpful, or inquisitive in a smart way, people around the room will respect you and will actually choose to listen to you more than the highly talkative person at times.
Scott:	Yeah, because you’re saving your bullets and saving your points. Yeah.
Lylan:	Yeah. And so it’s very, very easy to want to out speak the other person. “You’ll be recognized as the most helpful, the most engaged.” And it’s important for all board members to recognize that the person who’s not as vocal might be just as engaged. Might only ask a couple questions, might be more helpful behind the scenes, because most of the good work of a really tremendous board member is not in the board meeting, right?
Scott:	Yeah. Totally. And there’s people who are super-defocusing, I think is the other thing I’ve seen. And sometimes those are the talkers, people who talk a lot. And I tend to talk a lot, and I tend to probably be a little bit defocusing of a personality. But it’s hard for the CEO to run a board meeting and have people being like, “What about this over here? What about that over there? Your competitor’s doing this,” or dah-dah-dah-dah-dah. It’s really hard to manage all the personalities. And by the way, you work for these people as a CEO, and so you need to do it in a very nice way, and hey, when things like COVID hit, you may have to go to these people and ask for a bridge round, which no one really wants to do, but they usually do it. So, the dynamics are really interesting. So, I think it’s really cool that Kauffman teaches all this training. I learned just from sitting in stuff, and I probably could really use that training. It would actually be very helpful.
Lylan:	Something else I picked up on side discussions at Kauffman. So, I don’t remember it being discussed in the actual group sessions. One, it’s a good practice to have a phone call with the CEO before the board to prep a little bit. Good, okay, that’s kind of 101 level. But then two questions that I always ask in that phone call in advance of the board meeting. Number one is, “What is something that you expect one of the other board members to challenge you on, and how can I be helpful with you on that?” So, building-
Scott:	[crosstalk] role-playing ahead of time is really powerful.
Lylan:	Yeah. It’s also building alliance and partnership and… I want to be there for you. Now, of course, if I disagree with you, I’ll need to disagree, but if I do agree with you, at least I’ll be prepped and I’ll have time to think about in advance how I can help facilitate this discussion. And then the second question I like to ask is, “Here’s something that I plan to challenge you on. I don’t want to catch you off guard. That’s unfair. I actually want you to be thoughtful about it. And so, here’s a question I plan to ask you.”
Scott:	Yeah. I love that, because it’s also… You’re not trying to “gotcha” them. You really want a thoughtful answer, and you’re genuinely curious. So, I actually love giving questions to people ahead of time like that, so they can really think about it. I know that I’m not always the best off-the-cuff thinker as well. It takes me a little bit of time. So, it’s just a nice thing to do, and I really love the offer of “what’s something that you expect someone to challenge you on” so you can role-play with them and make them have a better performance in the board meeting, which then instills a lot more confidence, which means it’s easier to get more money down the road.
Lylan:	And by being someone who’s challenging the CEO, you’re not just a yes-person. That’s quite important. And hopefully, you build a relationship where you can partner up for multiple startups over decades. And you build that trust, one, by supporting the CEO when it’s appropriate and by challenging the CEO when it’s appropriate, and those two questions helps establish both.
Scott:	Yeah. Your point on the timeline, too, and doing things over multiple decades, is so smart, because at Lighthouse, I always felt like I really had done a great job when an entrepreneur came back to me the next time, like the second company. And it really does feel great. Often, those are actually more successful anyways, because it’s kind of their second run at things. And at Kruze, we get the same thing. We have all these serial entrepreneurs who maybe they start a company and sell it, or they end up leaving when it gets so big and they start another company. And it’s always that incredible validation of what a good job you did when they come back and work with you again.
Lylan:	I love it. There’s also when we reject an entrepreneur for an investment opportunity, but we do it in the right way, and that entrepreneur sends us some of their closest, most trusted friends who are entrepreneurs, and will literally tell you, “You’re in the first batch of VCs I’m emailing. I might not be the one and only, right, but you’re in that very first batch. I’m only sending this out to five people. You’re one of them, and you rejected me, but you did it the right way, and I appreciate that.”
Scott:	I remember I had a little lending startup before I joined Kruze, and Josh Kopelman of First Round rejected us in such a thoughtful, amazing way that I’m still talking about him in a podcast like this, because his reason for rejecting us was so smart, and he got at the one issue we hadn’t figured out how it would work, and we were kind of worried. No other rejection was even close to the quality rejection he is. And First Round had already been successful, but now they’ve done Uber and a bunch of other stuff, and it’s amazing. But that was the moment where I was like, “Oh my God, this guy’s another level.”
Lylan:	Yeah. So, did he do it by email, or over the phone?
Scott:	He did it by email, but it was clear he… It was like a two-page email. He really knew what he was talking about, yeah.
Lylan:	And so, he went in great depth?
Scott:	Oh, yeah. It was crazy. Yeah. So yeah, the kind rejection and the relationship, that can really form the foundation of a relationship, like you said. That’s really cool.
Lylan:	And those rejections are risky, and I’ll give you an example from friends. There was a famous saying, “A parent doesn’t want to hear their baby’s ugly.” Right? And to go in such great depth, you really need to nail it, because that emailed could be forwarded, and it could be misconstrued. Josh, it sounds like he has a great way with words, and so that helps reduce the likelihood of a negative impact, but still.
Scott:	He also just knew the industry really well, so he knew… That’s the big one. You said the word, though, it’s “risky.” And so that’s one of the reasons I appreciated it so much, was because it was risky, but he still did it. He still had the guts to do it and the courtesy to do it and made me better. So yeah. Very little is gained without risk, right? He built a friend for life, and I’ve never been able to repay that yet. I guess we work with a bunch of their companies, so we do repay that in a way, but I’ve never been able to go up to him and say, “Hey, man, you blew my mind eight years ago.” But I will someday. I will.
Lylan:	And you know someone as legendary as Josh, he’s probably heard that a million times [crosstalk].
Scott:	Yeah, yeah, yeah. But I’ll still tell him.
Lylan:	Still, I’m sure every time it makes him feel better.
Scott:	Yeah, exactly. Let’s cover your sweet spot. So, you enjoy investing in Series A level companies, right? That’s kind of your sweet spot? A and B?
Lylan:	Yeah, I do seed, A, and B, but then A is in the center of those three, so bell curve it.
Scott:	And so, a lot of entrepreneurs listen to this podcast. Do you have a short list criterion for a good Series A? The background for that question is people ask me… Literally every day, I get someone saying, “What do you think I need to do to raise a Series A?” And it’s helpful to be able to point to someone like you and be like, “Hey, this is what Lylan thinks.”
Lylan:	Yeah. So, let’s break it down into a few different dimensions. One is who you speak with. Every single day, I hear from entrepreneurs. “Lylan, I have all the capital I need for my next round. All I need is a lead.” Right? Well, around a year ago… Actually, I think a year ago yesterday to the date, I published an article that lists all the firms with a New York city office who lead rounds at each stage. Pre-seed, seed, A, B, C, D.
Scott:	I got to check that out.
Lylan:	And so first and foremost to the entrepreneur, if you’re reaching out to firms that don’t invest in your stage, then understand that the value of that time might be questioned. Right? From there, you need to look into sectors and so on, but at least there’s a quick filter. And then also understanding who leads and who follows.
Scott:	Yeah. Well, that was the point. When you set it up like that, I was going to say there’s a lot of people who are willing to jump on a hot company and put money into it, but that’s actually not what you need. Actually, you need the lead first before you get the follow-on money. Because I get that comment quite a bit too, like, “Hey, I’ve got a bunch of capital soft-circled, I just need a lead.” But really, in my experience, those people don’t have as much conviction, and so it’s almost like you have nothing. You have zero until you get the lead, then you really know if people are going to come in or not. That’s my humble opinion.
Lylan:	So, having your prior investors who have pro-rata rights committing to do their pro-rata-
Scott:	Yeah, that’s great. Sorry, yeah. That’s a great [crosstalk].
Lylan:	But other than that, unless there’s someone noteworthy or strategic, it’s nice. It’s not a negative by any stretch. It’s a positive, but it’s not as much of a positive as it is to say, “Hey, I have a co-lead ready,” or, “My existing investors want to lead the round. I just want to see if I can get a better deal,” or, “I want to get a different skill set on my board, so that’s why I’m going to speak.”
Scott:	Yeah. That’s a good one. That’s actually a really good one. Yep.
Lylan:	In terms of the metrics, there are some firms who have steadfast rules. Minimum 100K a month of MRR. I’ve heard that one a million times, and now that number’s been increasing. I would never want to be the investor-
Scott:	Except if you’re a super-hot amazing or great at sales, and then it’s not. That’s what confuses people, I think, sometimes. That million dollars of ARR. But then I see companies all the time that aren’t anywhere close, but the concept is so interesting, or their track record is so interesting, or they’re just great salespeople that they can do it with no revenue or very little revenue.
Lylan:	Or they’ll building technology in a very emerging area. Let’s say augmented reality, right? Enterprise tools for augmented reality. It’s hard to hit that revenue target that quickly, but if you have the right team in place with the right backgrounds and networks and other variables, that could justify. The example I like to use a lot is, can you imagine back in the day if an investor passed on investing in WhatsApp because WhatsApp didn’t hit their revenue target?
Scott:	I know. I know. That’s what I’m saying.
Lylan:	That’d be silly. You have to look at what the most important metric is for the company. For WhatsApp, the most important metric wasn’t revenue, but a lot of B2B and enterprise companies, there… Not all, but most, the primary target is the revenue, month-over-month growth of revenue. Of course, now, with COVID, growth might be a challenge, but pre-COVID, month-over-month growth. Those are important variables to look at, but what is the most important variable at Atlas/aQuantive? When we walked in to the building lobby before going to our office, there was a massive dashboard, and there were two numbers that were being tracked. One was what was the peak number of ads that we served in a second, and what was the total aggregate ads that we had served in the history of the company. And so, we knew two things. We knew that as soon as we would hit 100,000 ads served in a second, once we reached six digits, everyone had to stop work, if it happened during office hours, and it probably would, because ad serving peaks during business hours. Everyone had to stop work, and we’d celebrate the rest of the day together. And we would also celebrate every trillionth ad served. Now, we were growing and scaling the business so quickly that at some point, every trillionth ad served was happening too quickly. We had to slow that down. But yeah, for us, those were the most important metrics, but we all understood that those metrics were proxies to revenue and to success. But what it tried to do also is that it nullified the differences of different types of ads and the different revenue that we get, and it also tried to put an equal focus between the sales team, the account management team, the marketing team, the engineering team. Right? Where if it would have just been revenue, it’d put too much focus on sales.
Scott:	Brings people together, kind of thing?
Lylan:	Yeah. Whereas if it would have just been a revenue target, then the focus would’ve been on the sales team.
Scott:	That’s such a great point. I hadn’t thought about that, but that’s really genius. Ads served means the tech guys did their job and means the sales people who sold the ads did their job. That’s a really great point. I like that a lot.
Lylan:	It’s a question that I often ask startups when they’re pitching me, where I frame it as, “What’s a metric that once you hit, everyone stops and celebrates?” And a lot of CEOs look at me a little bit strange, and then I need to explain the question, but then some CEOs smile, they look at me, and they’re like, here is the number.
Scott:	That’s amazing.
Lylan:	“What do you think?” And I don’t need to give any background. We’re all right on the same wavelength, and there’s a special moment there. It’s like, “Oh.” And that helps define company culture in a way. Right? There are many, many aspects to company culture. That is one of the aspects.
Scott:	Yep. I like that, too. And I’ve found that… Because we do a lot more goal-setting now, too, and core values. We talk about the core values constantly, which… On purpose. It is part of who we are, but it also really translates to our clients, because the clients understand our values and understand what we’re trying to do. I’m just kind of curious, when a Series A startup comes in, and you’re evaluating them, you’ve got the goal question. Do you have a core value question? What do you ask them about that?
Lylan:	It’s not a question I ask at every pitch, but it is a question I ask fairly regularly. There’s one company where the CEO smiled when I asked about culture, and he said that he makes every single employee read Tony Hsieh’s book Delivering Happiness.
Scott:	Oh, that’s a good one. That’s a really good one.
Lylan:	Right? And new employees must have read the book before the first day on the job.
Scott:	Oh, that’s awesome. That’s a great screen, too. If they haven’t read it, and they show up, they’re… Yeah.
Lylan:	Right? And that is establishing culture, where even before the day one on the job, you get the idea of like, “If my CEO asks me to read this, then it must be important to the culture, and this is how we want to fit in. And this is how I go about fitting in.” And of course, when someone joins a company, it’s important to both fit in and stand out, and so I think the book does a good job of talking about both.
Scott:	That’s a really good one. I love it. I love it. So, if you were to summarize your… What can I point to in this podcast, the next founder later today that asks me what they need to do to raise a Series A? What would you say?
Lylan:	Understand your metrics, understand your numbers, understand the growth, and how all that aligns with, one, convincing investors that that’ll keep on growing, that you’re tracking the right metrics for scale, and that that’ll be also exciting for your employees and for your potential employees in your recruiting process.
Scott:	That’s a great point, too, because people don’t often connect raising money to the recruiting process. One thing that we see a lot is people are very focused on raising money, as they should be, but then they kind of underestimate how long it’s going to take them to convert that capital into actually hiring people and ramping up. And so, we constantly see companies miss their short-term goals after they raise money because they are not able to actually shift gears and execute fast enough.
Lylan:	Something I love is bootstrap businesses. It doesn’t make venture capitalists any money, but fundamentally, it’s a great business model that when it succeeds, it succeeds beautifully. The founders are in control of the company. They get to spread the wealth a little bit more generously with their employees and key management team. And it’s not unusual to hear the CEO and management team of a bootstrap company at some point choose to raise capital, not because they need to, not because it looks good for the IPO market, even though it often does, but the fact of raising from a top-tier firm makes it easier to close hiring candidates that would otherwise be hard to close, because it adds that credibility, and it helps get attention from the press and media. That extra credibility for those two elements, hiring and media, it can go a long way in helping a company succeed. And so, you do see bootstrap companies, once they’re really humming along, and they encounter those two challenges, they address it, and they raise money without needing to dilute themselves very much, because they can “control the terms” to a certain degree.
Scott:	Yeah, TaxJar did that recently really well. They raised money from Insight after they were already profitable and already just rolling. And so that is a good way of doing it. Let’s spend a few minutes… We’ve got to wrap up here in a few, but you’re in New York. You know New York venture capital market really, really well. What’s some of the trends out there? We have a ton of clients out there, too, so that’s one of the reasons I wanted to have you on. What are you seeing in the venture capital market in New York?
Lylan:	So, New York City is now an all-vertical city, in contrast to a decade ago…
Scott:	Wait. When you say “all-verticals,” it means every market of startup, you can compete effectively?
Lylan:	Exactly. A decade ago, New York was about adtech and fintech.
Scott:	Yeah, you’re totally right. Yeah.
Lylan:	Now…
Scott:	And then retail, because of the fashion houses and stuff. Like Gilt, we did Gilt Groupe at Lighthouse, and that was like, “Oh, wow, now they’re going to be an e-commerce leader in New York.” You’re totally right. Every vertical has plays now.
Lylan:	Yep. And so, on the consumer side, there’s no doubt that the New York customer is the most discriminating, and the talent to help scale a company in consumer is amazing in New York. Arguably number one in the world. I don’t know where else you would actually go. And on the enterprise side, the Fortune 500, the Fortune 10,000, 20,000, most of them have their either global headquarters or at least North American headquarters here in New York. And so, if you’re a startup, and you want to be selling to the Fortune 10,000, New York’s the best city to be. If you want to be recruiting talent and poaching from the Fortune 10,000, New York’s the best place to be. I think San Francisco’s a great place if you want to be selling your product to the big tech companies, to the FANGs.
Scott:	Yeah. Yeah, yeah. I also think New York has something else going for it, which is the media markets are really strong, and so it’s actually easier to get press there in a big way. You see companies get covered in the New York Times or Wall Street Journal or New York Magazine or things like that. So, I actually think that’s a really big competitive advantage for that market, too.
Lylan:	It really is, and it’s not going to stop. Right? And the population of New York allows the city to be very diverse professionally in a way that the Bay Area just can’t compete, right? So, in ordinary times, when you go out for dinner in New York, there’ll be an investment banker, there’ll be a marketing person from a pharmaceutical company, there’ll be a journalist. There are so many different careers in New York. I remember when I lived in Seattle before Amazon really grew, and you’d be at a party, and people would ask you what building you work in, meaning which Microsoft building. It was just assumed. And New York is the exact opposite. It’s almost, “What field do you work in?” So, I think that’s extraordinary about New York. And then something else, for a different form of diversity, New York has more startups with a female founder than San Francisco Bay Area does, despite the fact that… And I’m not talking about by percentage, by raw numbers. Despite the fact that New York has much fewer startups than the Bay Area. So, we have that edge on diversity, too. So, we have the diversity of the people, the talent, what areas they come from, and then for young talent. The West Coast has a handful of really, really top-tier schools. The Northeast has so many great schools, and now that young talent graduating from those schools doesn’t feel obliged to move to the West Coast to build a career in tech.
Scott:	You’re totally right. You’re totally right. On the women or minority founders, too, I think that’s a really great point. I mean, at Lighthouse, we did Gilt, which had a female co-founder, and Rent the Runway was founded by a woman. In our Kruze portfolio of clients, there’s tons of women founders in New York, too. So, you’re making a lot of great points. Anyone listening to this is going to be like, “I know where I’m going next.”
Lylan:	Well, I’ve put some thought behind this, and I’ve published a couple articles. Not on Medium, like on… Well, on Medium, too, but on large publications, on large media sites. And the first article I wrote, it was a reaction to a conference that I attended just as an audience member where there was a 50-something-year-old female VC who said, “Of course female entrepreneurs are doing startups in e-commerce and media and fashion.” And that made my blood boil, because the women that I studied with at Waterloo, the women that I worked with at Microsoft and aQuantive, they could be the founders of a company that displaces MongoDB or the next AI company. And so, I put in a good amount of research, where I looked up who are the most highly successful entrepreneurs, who are highly technical women, who are co-founders of highly technical companies?
Scott:	Were they all in New York?
Lylan:	No, most of them are Bay Area, because to have reached that level of success, it generally means to be an older company, and therefore…
Scott:	Yeah, I was going to say, those women fought through a lot of… I mean, there’s still difficulties, but… And Vanessa, our founder, is a woman, too. But to be super-senior nowadays, you either had to have been on a rocket ship or have been have working on it for 25 years, 20 years, something like that.
Lylan:	And already, there’s such a small percentage of computer science and computer engineering grads who are women. And so that was my focus, was highly technical women. And so, the most famous is Diane Greene, who has legit tech chops.
Scott:	VMWare, and then Google [crosstalk].
Lylan:	Yeah. Google, she’s very, very senior, but my focus was on founders and co-founders of companies, and she was a co-founder of VMWare.
Scott:	Yeah. Not too shabby.
Lylan:	No, but we need more.
Scott:	Yeah. Well, I have a daughter, so first of all, we’re raising her to be a leader, which is really fun, but her mom’s a leader, and mom started a company. So, I think the next generation’s… Not even the next generation. We’re seeing it at Kruze. We have tons… Like the delta… I don’t know if you know this, we put out a salary report for startup CEOs, and actually, the delta had closed at every step of the way. Women and men CEOs are getting paid exactly the same, except I think it was Series C, still, where there’s still a bias. And our thesis was there just hasn’t been as many women founded companies getting to Series C, only just because of natural attrition rates and when people are starting companies in this movement of women entrepreneurs. But looking at seed, Series A, Series B, having the pay rates exactly the same was super encouraging to us. It doesn’t mean it’s getting easier. It’s still hard, and women have to overcome a lot of challenges, and I see it on a daily basis with Vanessa. But the trend’s going the right way. It’s pretty exciting.
Lylan:	I was sent the other day a report on salaries in venture capital, and I would say that the report was not statistically significant. It’s hard to do anything in [crosstalk]. The report showed that for equal job titles, and you can always discuss, are people being promoted at the same pace, and so on. It’s hard to quantify that in a simple report, but if you assume that people at the same job level are of equal skill and experience and so on, women’s salaries were higher than men’s, in this one report. I’m not saying it’s accurate.
Scott:	I love it. Well, hey, let’s end on a super positive note like that. Maybe you can tell everyone where they can find you, find you on LinkedIn, or how they can reach out if they have a company that want to get funded.
Lylan:	Yeah, so my personal website is www.lylan.com. L-Y-L-A-N. To reach me personally, you can email podcast@lylan.com, and that way the email will get automatically categorized, so I know how you reached me. You could also do kruzeconsulting@lylan.com, if you want, then that way, it’ll be automatically-
Scott:	Right. Any name works, as long as it’s in front of @lylan?
Lylan:	Yep.
Scott:	That’s amazing.
Lylan:	And so that automatic categorization really makes my life easier in terms of, first thing in the morning, which emails do I check? Also makes searching very, very easy, also.
Scott:	Yeah. I love it.
Lylan:	So, if I’m like, “Who is that person, again, who had emailed me about the podcast?” I can search for it that quickly, right? “TO:podcast@lylan.com.”
Scott:	I’ve started getting more sophisticated on filtering, and it does make a huge savings. It’s awesome. All right, buddy, thank you so much for coming by. I really appreciate it, and it’s great to reconnect, and I’m excited for what you’re going to do in the future.
Lylan:	Thanks, Scott.
Scott:	All right, man.
Singer:	(singing) It’s Kruze Consulting. Founders and Friends with your host, Scotty Orn.

Getting into venture capital with Lylan Masterman

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