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.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Dollar Shave Club
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 sure they’re doing useful things with that connection just yet, but some of them are. They’ll certainly turn your lights on and off or identify when there’s someone suspicious walking around my house or open my garage door when I approach in my car. Those are all useful features that connected devices can do, so I fully believe that they either already are connected or will be. The home itself is an entire connected appliance.
“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.”
[email protected]: More than 3 million consumers are using Dollar Shave Club, and Unilever is now part of the formula. When that deal was announced, you talked about how beneficial it could be for the Dollar Shave Club to have the backing of Unilever and leverage the reach that it has globally.
Pakman: Dollar Shave Club has had extraordinary success. … They’re at more than 16% U.S. market share of the men’s cartridge market in just four years, and they’re growing incredibly quickly. But to reach their dream of being a globally dominant men’s grooming brand, they need help internationally. Unilever is an incredible company that has a massive global footprint and can really speed their deployment to a number of countries and help them launch there. With the resources and the knowledge of the company, I think it really accelerates co-founder Michael Dubin’s ambition to be a dominant global brand.
[email protected]: How much does the timing work for him? Because Dollar Shave Club had the razors, but they were starting to get more into gels and other grooming products for men.
Pakman: Yes, they have 27 other products today, from soaps and hair products to shaving cream, and are launching many more. It’s definitely part of the brand. Michael always said, “Anyone can sell razors on the internet.” The goal was to create a globally dominant men’s lifestyle brand, a men’s grooming brand. That is very complementary with Unilever’s skill set and is definitely part of the playbook.
[email protected]: There are successful legacy companies that are still not monopolizing the internet the way they should. Those companies may have been so big over the years that it may not knock them off the books, but it certainly does affect their bottom line. They’re missing even further opportunities for growth.
“We can bring to market competitors that are nimbler and use distribution and marketing methods that are just more suited to the modern times.”
Pakman: Our bet is there are tens of thousands of companies that meet that description. We’re betting against that category, that we can bring to market competitors that are nimbler and use distribution and marketing methods that are just more suited to the modern times.
[email protected]: Gillette start its own online club. How much market share are they retaining since they began losing ground to Dollar Shave Club?
Pakman: I read the transcript of their earnings call and their press release, and their sales are still down in the United States. It’s the only market we compete in, and they expressly named U.S. online competition as the culprit. From that, I can only tell you it doesn’t look like it has been very successful.
I think consumers are voting with their attention and their dollars, and we’ve seen a lot of market share lost from the incumbents to the online competitors. The question is, what can they do about it? The hardest part for them is trying to figure out how to talk with and listen to their customers.
I think the biggest difference for brands that sell on the internet is, they tend to be conversational brands. Brands that talk with their customers, rather than shout at them. Broadcast television is really a platform for shouting at your customers and hoping they hear what you say. But online, you can’t get away with that. If you look at Gillette’s Facebook page, when they post videos that mock the online competitors, they get thousands of comments saying, “What are you talking about? Your prices are way too high! We like these other guys!” My guess is they’re pretty surprised by that.
[email protected]: Is timing a factor? We were in a recession several years ago and people didn’t have as much money to spend, even on the smallest things like razors. Having this option at a lower price point just made it easier to go that way, and the product being good made it easier for them to stay.
Pakman: It’s just a smart decision to pay less for something that’s just as good. And guys are smart. It’s not much more complex than that. I think the economic model that Gillette lived under was that they spend hundreds of millions of dollars a year on television advertising, paying Roger Federer to endorse the product. You’ve got to keep prices high to pay for all that. If you can make a direct-to-consumer model, have higher product margins for yourself and much lower marketing costs, you can lower the price. That’s what Dollar Shave did, and that’s a really powerful method of innovation.
[email protected]: Are there other areas within the retail sector that you watch for growth?
Pakman: Cars. Think about the companies that make cars, particularly U.S. operators. They do not sell direct to consumer. They don’t even know their customers. The customers are dealers. The dealers, I would argue, are neutral at best to the car-buying experience but are probably net negative? Haggling, no transparency, misleading advertising. The [CBS] news show 60 Minutes runs some investigation where they’re telling you they’re changing the oil and not doing it, right? No trust, no transparency. Value destruction in the entire experience of buying a car.
“The biggest difference for brands that sell on the internet is, they tend to be conversational brands — brands that talk with their customers, rather than shout at them.”
Now, you take Tesla, which is a direct-to-consumer car company. No dealers. No-haggle pricing. You can buy a Tesla on your phone by looking at a web page. They tell you when it’s delivered. There’s no commissions paid to salespeople. It’s completely rethinking the model, sort of the Apple model if you brought it to cars. The only problem with Tesla has been it’s expensive. You get companies like that to solve that problem and it can fundamentally change the entire expectations of what a car company is. I think that’s a massive disruption point for the automobile industry.
[email protected]: Is the medical industry in that realm as well? Even though we’re seeing more telehealth in that venue, the experience for a lot of people still is not great when they have to go see the doctor.
Pakman: Totally. Just as one example, we have a company called Doctor On Demand. You download the app for your phone, you pay $40 and you get an appointment on demand with a licensed, certified physician who does video chat with you and can prescribe medication right there and then. If it wasn’t a good experience, you don’t pay the $40. That’s obviously not perfect for every medical condition, but it is for a whole bunch of stuff. It’s one example of service-level innovation to make healthcare easier, better and nicer.
[email protected]: What are some of the other companies that you are involved with that are doing the same type of work to make things easier for the consumer?
Pakman: We’ll stick with cars for a minute. I’ll give you an example. There’s no question that, within some number of years, there are going to be many self-driving cars on the road. There’s no question that the future of all automobiles will be self-driving. It’ll be massively safer and reduce the 39,000 traffic deaths in the U.S. per year. We have 1.2 million a year, globally. The question is, how do you bring that technology to market? Left to its own devices, what will happen is all that tech will appear in brand new cars at the high end. And what a shame, if the only way to get a self-driving car is to buy the top of the line and to buy a new car.
One company we invested in is called Pearl. They make safety and autonomous products that you can buy off the shelf and put on your car and start to get some of the benefit off all this stuff. Their first product is the most amazing rear-vision backup camera system. Self-installed, solar charged, totally wireless, streams to your phone. It’s very similar to the Nest play of creating a premium product in a category but that’s super smart, intelligent, and you can buy it and install it yourself in your existing car. I think we’ll see a lot of interesting stuff coming from a company like that.