VCs are Not Innovative feat. Paul Martino

The pioneer of the post-seed round, Paul Martino, joined me for a discussion on the lack of innovation in the VC asset class. His firm Bullpen Capital saw a distinct opportunity to fund healthy, growing companies that had graduated past seed but could not yet attract a Series A-- a stage where the bar for investment seems to go up by the day.

In the interview, we discussed:

• Why Paul passed on joining Mike Maples at Floodgate in order to start Bullpen
• The product/market fit algorithm he developed for Mike
• If the stages of funding are moving out or if there are just more of them
• How Bullpen is differentiated
• The metrics they require to engage with startups
• How his quant background has helped make this subjective discipline more objective
• The hardest part of developing new, young VCs
• Why there's a lack of innovation in the asset class
• Why herd mentality is pervasive
• Other contrarian principles he and Bullpen embrace
• If it's harder to get A or B round funding for the non-traditional founders or industries that he invests in
• How Privat Equity is impacting exits
• the differences in sourcing at post-seed
• and we wrap up w/ Paul's thoughts on how branding and investment focus helps drive opportunity for Bullpen

Below are the Key Takeaways:

1. A critical founder error is lack of focus on the target audience
2. It can very difficult to cross-over from an alternative, early adopter customer group to the mainstream.
3. The explosion in new startups occurred after 2010, but corresponding funding after the seed round didn't follow.
4. Series A funds all doubled in size, moving later in the funding cycle
5. The check size, milestones and required exit outcomes for the Series A firms has also increased significantly
6. The stages of fundraising don't really exist anymore. Seed is a process, not a stage.
7. Bullpen is looking for companies w/ product-market fit that the rest of the industry isn't paying attention to.
8. Target companies for Paul often include: a) geographies that investors don't like, b) a founder w/ a non-traditional background, or c) a category that's out of favor
9. To raise $20M at Series A, a company needs ~$5M annual run rate
10. Bullpen invests in companies that have raised no more than $5M, have $1M+ ARR, are growing 3-4x/year, and burning no more than $200k/month
11. Bullpen helped form dog walking startup WAG with the founders of a failed portfolio company. WAG is now valued at over $1B-- a company that was the butt of many jokes in Silicon Valley, only a few years ago.
12. During their diligence process, they don't discuss the grand vision, they have founders defend every assumption in the excel model.
13. When Paul sits in on an angel meeting, he often finds that companies pitching should not be and the one's that were screened out are the most interesting.
14. VCs are not like the entrepreneurs they are investing in. There's a million "me toos" and very few people building a differentiated firm.
15. Most VCs get into the business for the wrong reasons-- which is why their is a lack of creativity, contrarian principles and innovation in the asset class.
16. Most investors try to predict the future, while they should focus on the hand they're dealt and how best to play it.
17. If Bullpen doesn't do a deal, the company often goes out of business. There are few investors that do the deals that Paul is doing.
18. If a non-traditional company achieves attractive enough metrics, they will get funding from downstream investors.
19. Many of Paul's successful investments have three viable options-- a) profitability b) venture growth or c) exit to PE.
20. When you're one of the only people out there doing something, your sourcing strategy is just to get your message out.

You can listen to the full interview on iTunes or at the TFR Website.