How The Rockefellers’ VC Firm Picks Tech Startups by [email protected]

Venrock partner David Pakman talks about the VC firm’s investing strategy.

Veteran venture capital firm Venrock, an investing arm of the Rockefeller family, has backed several successful tech companies since its inception in 1969: Intel, Apple, DoubleClick, to name a few. A recent win is the sale of Dollar Shave Club to Unilever for $1 billion; it also was one of the backers of Nest Labs, which was bought by Google for $3.2 billion in 2014. Venrock partner David Pakman said his firm looks for digital business models that can disrupt slower-moving incumbents. He noted that traditional firms are losing to tech startups because they don’t know how to talk to the digital customer. In contrast, digital-first firms tend to be ‘conversational’ brands skilled in engaging the always connected customer. Pakman discussed Venrock’s strategy on Wharton Business Radio’s [email protected] show, which airs on SiriusXM Channel 111.

Dollar Shave Club

Dollar Shave Club

[drizzle]An edited transcript of the conversation appears below.

[email protected]: Venrock was an investor in Dollar Shave Club, which was recently sold to Unilever for $1 billion. In some respects, that sale had to make you feel good about the faith you had in the idea originally.

David Pakman: It’s always nice to see an entrepreneur get their dream to come true. This was an incredible team. And it’s true, not a lot of investors believed in them early. It was a company that was hard to raise money for in the early days. But I saw a lot of interesting numbers and trends, and I believed in the team. It had a lot of conviction. So we led the Series A and the Series B rounds, and it worked out great for everyone.

[email protected]: Dollar Shave Club has started an amazing trend in retail. Even a company like Gillette has added an online component.

Pakman: Every brand today has to become a direct-to-consumer brand. So much of our attention has been splintered away from legacy broadcast media to mobile phones and social networks. The only way to reach consumers now, since so few of us actually watch television commercials and watch legacy TV, is online and through mobile devices. The way to be authentic there is direct to consumer. We expect every brand will have to become a direct-to-consumer brand, and many of the largest categories of products in the world are still dominated by companies that are not direct-to-consumer brands. They don’t know their customers. They don’t sell on the internet. That’s an investment thesis of ours.

[email protected]: You mentioned Apple. Music is a love of yours. Not only playing and writing it, but part of your work at Apple was involved with music. … Is it amazing to you to see just how much digital music platforms have grown and how much more it can grow in the years to come?

Every brand today has to become a direct-to-consumer brand.

Pakman: The internet itself has been just incredible to me. To understand that there are 3 billion people connected to it now, receiving information communication digitally, is far beyond what I ever expected to happen. But it is that now. And the real question we ask ourselves, and I think a lot of entrepreneurs ask themselves, is how do you capitalize on those macro trends of everyone being connected in real time, all the time, with a device that can record and play back any media type, any time? The world’s your oyster, and massive new businesses have been built because of it.

[email protected]What are the things you look for when you’re looking to help an entrepreneur with an idea?

Pakman: We think of different categories first. I’ve spent a lot of time in consumer services, in consumer media and in consumer products. We also look at enterprise infrastructure and enterprise applications. Each one has some different characteristics about what makes a disruptable idea promising, but it really starts with the fact that Silicon Valley best practices of creating companies and technologies move at an unbelievably rapid pace, compared to many large incumbent organizations in existing markets. Being able to move more quickly, to test, to reach customers directly, to iterate very quickly on products to help them reach perfection, is anathema to the way large companies work. At the core, no matter what segment we’re in, we’re just working with very fast-moving entrepreneurs that are willing to break glass and experiment and find new products that will work. …

[email protected]: Your company also invested in Nest. The connected home is something that is talked about more and more these days, and the ability to control your home thermostat via an app is something more people will do over the years. When you started to look at Nest, what intrigued you?

Pakman: A lot of it was the team. This is an extraordinary team, led by Tony Fadell and Matt Rogers out of Apple, who oversaw the creation of a huge number of iPods, iPhones and iPads. They believed that with the Silicon Valley best practices model of applying this supreme element of design and functionality into these unloved product categories of home thermostats, you could create not just a desirable product, but a premium product.

There really wasn’t a $250 thermostat. You couldn’t spend that much money if you wanted to. Yet you spent $30 or $50 for a really disappointing product. So, they created a premium product experience. We fell in love with that idea and moved much more quickly and brought a much higher level of customer knowledge than the incumbents they were fighting against — Honeywell in their case. We love that story. It’s very consistent with our view that you can disrupt many incumbents in very large markets by bringing this customer-centric, design-first software combined with machine learning and data to produce products that are smart and get better over time.

[email protected]: Is it easier for companies like Nest to see a level of success now, compared with 30 years ago?

Pakman: Foot traffic to physical retail stores is down, so being really good at dominating store shelves is no longer a core requirement for success because it’s not where people are going as much anymore. You can sell direct and reach consumers. Also, people are watching much less TV and don’t see TV ads. So, being good at television commercials is not as important. You can reach consumers on the internet, on Facebook. With distribution and marketing effectively democratized, the advantages of the incumbents in so many product categories are sort of neutralized. Now you stand on your own based on product quality features, benefits, price. I think those facts are what have laid the groundwork for so many new products in hardware categories to come to market.

[email protected]: How much do you think something like Nest is going to grow as more connected homes are built?

Pakman: The expectation is that I can talk and interact with most of the devices in my house that use electricity. That means they all have to become connected, so I think that they all will become connected. Washing machines are connected now, refrigerators are connected. I’m not so

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