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Kim-Mai Cutler: from Journalist to VC

Limited Partner Episode

August 4, 2021
August 4, 2021

We sit down with Initialized Capital's Kim-Mai Cutler to talk about her opposite journey from us at Acquired, going from journalist to VC. We riff on how the landscape has evolved from Kim-Mai's parents' "Hewlett Packard generation" in the Valley through the TechCrunch era that se was a big part of, to today and how the nature of reporting, investing and influence -- the intersection of the two -- has changed.

We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Marvel
Season 1, Episode 26
LP Show
1/5/2016
August 4, 2021

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
8/28/2019
August 4, 2021

8. ESPN

Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

ESPN
Season 4, Episode 1
LP Show
1/28/2019
August 4, 2021

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

PayPal
Season 1, Episode 11
LP Show
5/8/2016
August 4, 2021

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
6/25/2017
August 4, 2021

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

NeXT
Season 1, Episode 23
LP Show
10/23/2016
August 4, 2021

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Android
Season 1, Episode 20
LP Show
9/16/2016
August 4, 2021

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

YouTube
Season 1, Episode 7
LP Show
2/3/2016
August 4, 2021

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Instagram
Season 1, Episode 2
LP Show
10/31/2015
August 4, 2021

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!

Sponsor:

  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Hello Acquired LPs, and welcome to another great episode of the Acquired Limited Partner Show. We have a very special guest with us today, Kim-Mai Cutler. Kim-Mai is a partner with early stage venture capital firm, Initialized Capital, which many of you will recognize the name from twice now have we had Garry Tan on? Once (I think) on the show and then once when we released the audio from my conversation with Garry at the Collision Conf.

Many of you will know Kim-Mai's name as well from her previous work as a journalist with TechCrunch, among many other fine journalistic outlets. She has a long history in the Bay Area as a technology and financial journalist, and has been known for pieces at the intersection of the tech industry and public policy, often about housing in the Bay Area, cryptocurrency. Lots of fun topics. I'm sure we'll have a wide ranging conversation today. Kim-Mai, welcome to Acquired.

Kim-Mai: Thank you for having me.

Ben: It's great to have you here. I may as well start with the most interesting question for me, and I think for David, because it's the literal opposite of the direction that our careers have gone. You started as a journalist and now you are a VC. Before asking questions about that, can you describe mechanically what happened there?

Kim-Ma: I don't know if this is actually that unusual, but I grew up in the tech industry. My parents were engineers. My grandfather was a physicist who worked for Hewlett-Packard way back in the 50s. My family's been in the industry for 70 years in the Bay Area, in particular, and have worked for a lot of iconic companies in previous eras. Growing up in that, it was almost like so immersive that it felt almost forced-fed to me as a child.

I think in the 80s and early 90s the technology industry, in particular, goes through waves of consolidation and decentralization. The particular wave that I came of age in in the 80s and early 90s, was a period where there was a lot of consolidation. My exposure to the tech field when I was a child was like going to what Google is today, basically. You walk in and it's massive. They have cubicles now, but they were a sea of cubicles. Then my parents had seven bosses above them. It was very centered on big tech.

Ben: What type of companies were your parents or grandparents at?

Kim-Mai: My family collectively worked for Hewlett-Packard for more than 100 years. You have to recall that HP at the time from the 60s to the 80s was like working for—I don't know what the right company is now—somewhere between Facebook and Stripe.

David: By the time this comes out, we probably will have just released part one of our Andreessen Horowitz series. We talked about there, like when Marc Andreessen came out to the valley in the early 90s right at the time you're talking about. He was like, it's over, I missed it.

Kim-Mai: Then the web happened. You know when something is so rowdy that you want to do something totally different? I just said I don't want to do everything that everyone else is doing. I want to go and become a reporter. And that's what I did. I went out and worked abroad right out of college, I covered the financial crisis. I spent 10 years covering both finance and tech.

Ben: You were like the Wall Street Journal.

Kim-Mai: It's in Bloomberg, yeah. I went to Bloomberg for a couple years and then covered the financial crisis. Then I realized after being immersed in the finance industry, I came around to appreciate what's special about where I grew up, which is that people really genuinely love what they do here. If you don't love what you're doing, you should do something that you're really interested and passionate about doing. That was just not something that was necessarily really ever present in other industries that I became exposed to, which were more hierarchical, stagnant, rigid, and that kind of stuff.

I came back and started covering tech. After a couple waves of covering that over several years in the Bay Area, when you read about something enough for a while and you're like, I think this is how it should be versus how it is. You just get that niche enough that you start getting involved in things and the norms. The cultural norms around reporting are a little bit different now. Definitely, in previous eras, you're supposed to be really objective and you're not supposed to be involved. Then if you get involved and you're not impartial anymore, and you can't really be an objective impartial reporter, I obviously think that's shifted or changed now.

David: Boy, is it ever? It was years ago when we had Kara Swisher on the pod. She was saying that this was her big thing because he was a WSJ for so long. She was like, I got to have my own perspective on things. I can't just be totally objective, and that was out there back in the day.

Kim-Mai: Again, this coincides with different structural waves within the media industry or media in general that the birth of this country was very partisan. When the media industry consolidated into a handful of channels that consolidated effectively the advertising industry and added carriers, which only had like a select number of channels to choose from, in the mid 20th century, they became more of a normal "being objective," which of course, has fragmented apart in the last 10–20 years.

Even for her, she wanted to go from, I don't want to be this disembodied voice above high that has no feelings, to having feelings and opinions. I was more like I normally have feelings and opinions. I actually want to be in the weeds, like making stuff happen or change, which is even more a degree beyond her, although she probably claims that she doesn't like making [...] probably does. A conversation that we had, that's what I was interested in.

I was interested in getting involved with companies. We're actually solving the problems that I was writing about. Also from an advocacy perspective, also just getting involved with changing institutions, structures, and policies that are affecting the issues that I care about.

Ben: Super cool. I'm already going to deviate from what we had decided to talk about today because I think you raised this fascinating issue, where if I've got a Substack or a podcast, I can build an audience and have a relationship with that audience, and have never posted a code of ethics or certified that I don't own stock in the companies that I cover. Those things are not mandated in stone or in law, that in order to reach an audience, I must have declared this set of things.

In fact, David and I wave our arms around and we're like, we do lots of investing in public companies and private companies in our portfolio companies. Do you think for society, it is a net positive or net negative, that you have this proliferation of voices that don't have to adhere to the institutional journalistic standards that we've had to forever?

Kim-Mai: I would say for one, the standards were not legally enforced. It was more of a code of conduct, but also, I'm not sure we really have a choice. I don't know how you put the genie back in the bottle. It is what it is. There are benefits and disadvantages. Benefit on the one side is like, when you have someone who has skin in the game, or they're actually an operator, or a builder, or someone who's behind the scenes making stuff happen, there can be a much more in the weeds detailed description of what's happening on because they know how the sausage is being made.

I'm working with a Times reporter right now who may be writing a story about a whole area that one of our companies is in. He called me the other day and he's like, oh, how do I write a whole paragraph to describe how this whole space has exploded? What are all these companies? What's the size of the market? He's like, how many companies are there? What are their names?

I'm thinking behind my head like, oh, this company that you're referring to is a fraud. I mean, I am biased because I'm invested in a particular company, but the other one is like, I know you're not sure how they do their standard delivery. There are stuff that you know from having...

David: Or just like context too, I think, because it's fresh from my mind because we recorded yesterday part of the Andreessen Horowitz story that's been reported. The hard thing about hard things is, after the Opsware sale, Doug Leone calls up Ben Horowitz. He's like, I want to learn from you, how did you turn around this company, et cetera. I'm sure that happened. Obviously, he was trying to recruit him to Sequoia. That's what was going on. Somebody who's just a journalist isn't going to necessarily put that two and two together.

Kim-Mai: No, it's not the journalists or—the best ones are super sharp. There's a different perspective from making the sausage and then standing outside the window, watching the sausage maker make the sausage. Then on the flip side, of course, you don't know. Sometimes it takes a journalist to know. Sometimes I will see a newsletter writer write a clarification, or a correction, or something, and I'm like, I know corporate comms need to do that because they're going to withhold all access to all executives unless you did that. It's obvious that this is the case. I'm not sure everyone's perspective at reading that kind of stuff, because there's no reason that you would write a walk back of a story the next day that feels very marginal to the reader, but it's obviously significant to corporate comms. If there's stuff that you see like that, that you're just like...

Ben: What are some others?

Kim-Mai: There's access journalism going on. Some readers are sophisticated and some readers are not sophisticated about it. They might think like, oh, well, actually, this executive or this company didn't make this decision for this reason because this clarification clarified that, but there is probably an access trade going on in the background. It's not access journalism didn't happen with magazines, either.

Ben: From our readers’ perspective or somebody in the industry, the press don't really care. This is meaningless to be like, this politics, the story is the story.

Kim-Mai: Maybe. I think it happens a lot with books or books about companies. When a company becomes a high-profile subject of a lot of books, some books are written clearly with the consent and involvement of executives of the company, and some are not. That leads to a totally different set of content. You have to be aware that if the company is participating and obviously, there's probably some access trade happening where you get access to the executives who get you the inside perspective, but then there's probably some stuff that's a little washed over in exchange for that access.

Ben: Are there any other little things that as a reader, when you're reading a story, you don't realize that is implied by language that a journalist might be using, whereas when you're a journalist and you're reading another journalist story, you're like, oh, my gosh, I know exactly what this is saying here?

Kim-Mai: I guess this is probably obvious to readers, but sometimes, when somebody says something absurd, there are some journalists who are very good at letting someone speak ad nauseum to the point where they literally hang themselves in their own words, and some of them are exceptional at that. That is a lot of their body work, and you read it, and you're like, I can't believe that person actually said that thing out loud that we know that they probably all think that they did that they actually said it. Some reporters are really skilled at that. They're really skilled at just letting the person talk forever until they get what they want.

Ben: Wild. All right, I'm going to change us over to a question that has been burning on my mind ever since we thought it would be great to have Kim-Mai on the show. As you transitioned into being a professional investor from being a professional journalist, what are some things in the first 3, 6, 12 months that you realized, where you were like, oh, I never totally understood the nuance of that or the motivation behind that when I was writing?

Kim-Mai: There are things that you know conceptually that you've read about a gajillion times and you've read about them the whole time. You know that they exist, but then when you see them in practice, they're always interesting. The power, law, nature of the business, there are a lot of stuff that could be extensively profitable and growing, but just not venture returnable. I already knew that going into the field. It was just different to see it in practice, see the numbers, start to see and look at prime returns, see actual trends, and start to see how that plays out.

I do think that a lot of journalists, many would have a good sensibility for investing because you just see so much stuff. Then over time, having met so many founders over the course of 10 years, you gain a sensibility of what types of personalities or teams tend to break out versus not. There is this thing about this differentiation between, journalism in general probably leans heavily just more to consumer applications just because they get more readership, more virality, clicks, and all that other stuff.

Not that reporters are necessarily motivated specifically by that, but consumers just get disproportionate coverage relative to other areas. There are lots of companies out there that don't necessarily have the sexiest story or narrative to tell, but they're great businesses. Then conversely, there are companies that just have amazing stories that sell really well in the press, but then maybe they're not as amazing businesses.

Ben: It makes total sense. It's very similar to what's happening now in this direct listing market where—at least everyone thinks right now—consumer companies can do direct listings, of course, as long as they have enough cash in the bank and not raise money in their IPO. But it'll be hard for B2B companies to do these direct listings, where there's not retail interest because consumers don't really use the product. That's why you need the institutional banker coverage of these things. I think that's not playing out the way that we thought it would, given that Amplitude’s going to do a direct listing, and there are several others in the pipeline.

Kim-Mai: Yeah. There's also consumerization of SaaS, which confuses both.

Ben: Right, like Slack becoming a household brand, even though it's an enterprise chat tool.

David: Also, frankly, the Robin Hoodization of investing, where now, enterprise companies or whatever it is, retail is going to get excited because retailers are active investors now.

Kim-Mai: Right.

David: I'm so curious to get your take on everything that has been going on, especially in the last couple of years with this concept of owned media within venture firms, specifically. We've talked about companies, we've talked about venture firms, but obviously venture firms with you guys. Initialized has done a fantastic job with this and Garry's YouTube channel is amazing. Other firms have different approaches. What's your view on how VC has adopted media?

Kim-Mai: It's become a necessity with the proliferation of firms and funds over the last 10 years. There were probably fewer firms 10 years ago, I'm assuming. It's just because there were fewer dollars invested overall. I think it takes a lot more to stand out. Then we're also seeing many more specialized firms that have specialized areas or theses and it makes sense to bring content on that.

At the same time, the reporting field has changed. It went from a space 10 years ago, where I wouldn't say funding rounds were necessarily rare, but there were fewer of them, therefore it was easier for small companies to get coverage. There were more dedicated publications covering milestones for small companies. 

But when the industry started changing, the newsroom had big, big tech, that took a lot of the reportorial and journalistic talent, and absorbed it into covering not just even the big publicly-traded companies, but the big four or five companies that we all know and think about, so a lot of journalistic talent is focused on that. To that extent, there's just less reporter talent willing to spend the time on even growth stage companies. I don't even know when a $50 million or $100 million round [...].

David: I hadn't thought about that. If you're a tech reporter at Bloomberg, either really the price beat you on is the Amazon beat or the Apple beat versus the startup beat.

Kim-Mai: Bloomberg is the financial wire for lots of traders with access to huge amounts of capital. I don't know what their baseline number is now. Even a couple years ago, we were just very clear in conversations with them. They were like, we don't even get out of bed for anything, for any round that's less than $50 million. We're like, cool.

If you're a small company that is in the process of, you're just trying to launch or you want to acquire users, it is helpful to align yourself with a firm or set of investors that has its own channels. That's really important. The one distinction that I would make, though, is we're still super friendly with lots of journalists. I don't fully get the antagonistic take that some of the firm's taken.

I've seen some of the Andreessen partners be really dismissive to reporters, but then they'll turn around and then they did a New York Times interview about their new crypto fund last week. I'm like, you belittle them, but you also need them. I don't totally get that.

Ben: It's also a false dichotomy. It's not one or the other, it's both. There are some things that it makes sense for the business model of news outlets to cover your thing. Then there's the vast majority of things you do as an investment firm, where it doesn't. You need another channel to get that word out.

Kim-Mai: Yeah. Media usage, that means you have to be thoughtful, selective, and strategic about it. In the vast, vast majority of cases—like me is not a scale block position, customer acquisition strategy for companies—it is something that you can use to get your brand out there, and in particular for hiring. I think the probably most strategic use of it for early stage companies is probably for your employer brand, to be honest. Less than customer acquisition. I think that it's better to focus on other channels depending on what your model is, instead of relying on media heads.

Ben: Yeah, and I think that's only gotten more true over time.

David: We've certainly found that with our sponsors. At Acquired, we have great sponsors. I think we can and do deliver good value in terms of customers to them. The big reason I think you'd want to do it is your company brand, your employer brand, with the financial community, with employees, with sort of more writ large, I feel like the value in both startups and venture firms is completely ignored. There was this whole 10-year plus period or maybe you'd say it even goes back farther than that, where brand was just this dirty word, and people are rediscovering it now.

Kim-Mai: Founders contest and they have like a, I'm going to hire for this role right now, just stepping back and thinking about the whole structure and approach which is like, as company culture, what values you represent, what values do you not represent, and articulating what those are. Then working from that and down into what roles and job descriptions you're hiring for. Then working down into that into like, how are you going to have an employer and company brand that just automatically attracts talent versus just you having to source for specific roles so that you have a flow of talent coming to you, where you can both have a large top of funnel and then also have a high close rate at the bottom of the funnel for hires? I think when it comes to a lot of the standard news milestones, they're super important for attracting talent and recruiting talent.

Ben: Yeah. I'm sure we'll come back to media a little bit. Shifting away from it for the moment, are there any particular types of companies, be it sector or founders, where you feel like you're more interested in it than the venture industry at large right now? Are there particular Kim-Mai–type companies that you think are building the future in a way that people don't recognize?

Kim-Mai: I would say for one, overall, when you look at Initialized (the firm), we're more of a network-driven fund than an theses-driven fund. Partners naturally gravitate to certain areas. We have some partners who focus on dev tools, or SaaS, or crypto. I like these really messy, hairy, complicated problems that are the problems that just like everyone, like fundamental structural problems that I don't have an American economy. Obviously, I've been driven by housing most of the last decade.

I'm interested in jobs and socioeconomic mobility. Some of the deals that I've done are focused in that space. A company that just announced a [...] firm from [...] yesterday that I did this [...], I call [...], which is about prefabricated secondary dwelling units. I knew that it was more a question of timing and the right team. This is a space that we were going to head in over time culturally. Housing inventory is at the lowest it's ever been in the recorded data over the last four decades or so, just as Millennials are starting to do family formation and household formation. That's why housing prices nationally.

The median home price in California has risen from $500,000–$800,000 last year, and then that's including some of the hot metros in Texas or in other parts of the country that people leaving California are going to.

Ben: What's your sense of why? Why is there less supply on the market than there's been before?

Kim-Mai: Some of it is like a hangover from the 2008 financial crisis, where a lot of mid-skilled construction labor talent left the industry and just weren't effectively replaced. If you look into the data of construction productivity, it actually declined materially after that.That's probably a loss of really skilled, mid-managerial talent within the construction industry. At least, definitely on the west coast; I don't know about the rest of the country. Just the hangover from the 2008 recession meant that we never turned on construction or production to the level that it existed pre...

David: Listeners should know, you've spent a lot of time on this and you've been to city council meetings all around the Bay Area.

Kim-Mai: I haven't been to the city council. Not a city council meeting, but the work that I did ended up forming a bunch of state-level advocacy organizations that in turn, actually changed a lot in California and in other parts of the country. If you're playing on a project-by-project level, sure, but that's not the scale or state that I'm interested in changing things at, systemically.

We found over time, it was state level work that was going to have the most impact because cities were always going to drag their feet. Some of the stuff that happened in the last couple years was that states started engaging in creating more of what we think of as programmatic housing. Back in the day, when a lot of the land used in suburban areas of—the country were built out—a developer would go out and build a whole suburban neighborhood, which usually have four standardized units that a prospective buyer could buy from, it was scalable and that model was scalable.

As suburbs got filled out, there was this period where the United States banned racialized housing discrimination. Then mysteriously a couple years later, coincidentally, lots of cities started enacting zoning restrictions in the 1970s. You can infer what you want to infer from there. Zoning restrictions became really complicated and messy, and then housing became much more bespoke to create.

That's gone really far in one direction over the last generation. Now we're starting to see some pushback against that. How can we make more standardized products exist, particularly in full context? California did this thing over the last couple years where they made it really easy and ministerial to add a backyard unit, and the city has to respond in 60 days. It has to be a really fast, predictable process.

That created an environment where you could conceivably have a company create standardized units that can be deployed, like built in factories and deployed in a predictable fast [...]. That's why we did that deal, and they installed their first unit I want to say it's July, so a year and a couple of months ago. Now they're all over Seattle, the Bay Area and LA, San Diego, and more metros. They're doing it. They're building units. I'm getting one. Alexis is getting too.

David: That's awesome.

Kim-Mai: I need to put my mother-in-law in it. This is a product that in any economic environment has proven really popular. In the pandemic, it was popular because people wanted to take loved ones out of congregate settings, like their kids [...] from college and they needed to bring their grandmother home from the nursing home or whatever. Plus pandemic, or whatever, or liminal pandemic state that we're in right now, people are working from home now and they need more space.

Ben: Right, there's the office. There's also the cash flow yield benefit of it, where if you just run it as an Airbnb or whatever, then it can help with your housing costs.

Kim-Mai: Originally, we thought there was going to be more of a mix of people who wanted to rent it out. Actually, it turned out it's a lot of people who want to use it for them or their immediate family. I think that was a function of the pandemic. I think, initially, the market split, they thought it would be a little bit different but it's not. They posted something yesterday about a customer in South Bay. He's like, I want to use it as my yoga studio. Cool, okay.

David: What does the cost and process look like for this, and timeline?

Kim-Mai: It depends on the city. If they're in a city that they have a pre existing relationship, like a pre approved plan with, it can be really fast. They get the permit the same day or the same hour and then it's like two weeks in your backyard to do the foundation, and then they check in the unit. If something, it's off the shelf that they'll [...] with no customization. They already have units and storage that they can just install.

If you want more customs, you want doors or you want the nice shower fixtures, and you want a walk range or whatever, if you want some of the upsell stuff, and then it might take a little bit longer. It can be really fast in as little as 1–3 months.

David: Two doors down from us in San Francisco, there's a house that was to complete either tear down, rebuild. Now there was the pandemic, which caused delays. I think it all ended up being about a 3½-year project. It's just like a hole in the ground and a construction site for 3½ years, which is bad for so many reasons. Not to mention, there's that housing stock that's off the market for 3½ years.

Kim-Mai: Yeah. If you're doing a custom project, then you need custom approvals, custom parts, custom all of it, and all of it is just a lot more expensive. If you can do something that is more of a standardized product, it can happen a lot faster, more cheaply.

David: What is the cost for, let's say, just a standard unit?

Kim-Mai: Their unit started around $200,000, but if you need to take a home equity line of credit with it, the additional cost can be a little bit over $1000 a month on your existing mortgage.

David: That's a two-bed, three-bed?

Kim-Mai: It's a series. They do studios, one-bedroom and two-bedrooms. You can pick whichever one makes sense for your space. It's standard mid rise. If you're building an apartment building in the Bay Area, the standard unit costs would probably be somewhere between $500,000 and $750,000 just to build the thing. This is significant compared to mid-rise stick building or apartment building that's actually a lot cheaper in terms of production costs.

Ben: I mostly do investments in software companies, occasionally these software, real world crossovers. For something like this as a seed investor, how did that work? What milestones could you possibly achieve with a few million bucks? How does the company finance proving what it needs to prove in a seed round? How much money did you put in? What do they do with it, that sort of thing?

Kim-Mai: I'm not going to get the exact number right, but I think we invested around $3 billion. They actually had their unit design and pre approval done when we met them with one city. It was more a question of like, how many units can they get to you per month with how many pre approvals and how many cities across a whole jurisdiction? Then can they improve their margin per unit? Those are the questions that we had.

Even from the time that this new round closed to the time to like now, which isn't that long, they're ramped even in terms of monthly sales.

Ben: Sounds like it's working.

Kim-Mai: It's working, yeah.

Ben: This is investor-speak for it's going very well, and I don't know what numbers I can or should actually share publicly.

Kim-Mai: Yeah. They're a really exceptional team. The founder grew up in the construction industry. What's so special about him is he just has been immersed in it from his birth. There are a lot of stuff that he just already knew that a founder coming from software into doing something of which we met many teams like that. They would have spent two years teaching themselves, for many years teaching themselves all the basics. We help them find the right regulatory talent that can really scale the whole city by city and state process. It's great. They're doing this all over the state now.

Ben: That's cool. For other physical world products, as a seed investor, I imagine for a company like this, they needed to build a factory like the start.

Kim-Mai: No, they didn't.

Ben: Really?

Kim-Mai: Yeah. That's the other thing that's special. Other companies are spending all their time and a significant amount of capital building their own factories. There's already an existing large home industry that I think is out there, which the most successful large one is a company literally owned by Berkshire Hathaway.

David: Yeah, Clayton Homes.

Kim-Mai: It already exists out there. The question is, how do you design a product and then a customer experience that people love, but then you're not spinning your wheels making a factory? Instead working with lots of different producers is to fulfill that demand. They're not pursuing that model. Other companies are pursuing that model. We just thought the special sauce is more like, how do you create a great delivery, reliable, speedy delivery experience that customers rave about, love, sell to all their neighbors, and get referrals for?

Ben: I'm curious, as you think about other categories to invest in, I've heard it postulated that the first 25 years of the internet are behind us. All the easy things to do moving information around has been done. Now we're in these harder businesses where we need to do more work bringing software to things in the real world, and thus we're going to have to deal with slower growth, lower gross margins, and just higher fixed costs to operate real things in the real world. Does that appeal to you, or are you more like, no, it's both?

Kim-Mai: Maybe there are these more stodgy industries or whatever that are being revolutionized by software. But the reality is all the people working in those industries have been using the Internet for 20 years and understand what great consumer product experiences, or at least, they have some misconception of what great product or consumer experiences are, and they have those expectations that they're bringing into their stodgy industry. 

From that sense, it's like, okay, maybe the industry is old, but it should be theoretically easier to sell into them, than say, if you were trying to do it 20 years ago when they had no concept. Or maybe the workforce is 20 years older or back in time than it is now, like less familiar with what a great product experience should be.

There's also something to be said about, if it's a really hard problem that's difficult to solve, there might be less competition in it. I think that's because more are probably deterred by how difficult the issue might be. There are also things that I see that we don't have a choice, except to figure out how to find a solution for them. I'm thinking about climate, or emissions, or something like that. 

Whereas particularly in housing, it's like, do we have a choice about this? Someone has to figure out how to make this cheaper and more accessible. We also have done investments that don't involve any physical, real world stuff or Adams stuff.

Ben: Like one of the most unbelievable investment returns of all time on Coinbase a couple of months ago.

Kim-Mai: Yeah, Garry did that investment.

Ben: I actually have some reported numbers and I won't ask you to confirm them, but from some research that I was doing, it looked like a $300,000 initial investment that became worth $2.4 billion at the time of IPO. For listeners just to get a sense of some of the successful bits investments.

Kim-Mai: There's a YouTube video where Garry makes reference to some numbers that you can pull up. It's actually on YouTube. It's in the first shot, like how I turn [...].

David: The YouTube title cards. I love it.

Kim-Mai: Yeah.

David: Two things. One, we definitely want to talk about how Initialized is involved in your time there and especially with now everything from Coinbase. We have to ask about YouTube. As far as I know, really, no other VCs are quite as active on YouTube, but have figured out the power of that channel yet, except Garry and you guys. How did you all think about that and the decision to make it? Garry versus Initialized.

Kim-Mai: Garry really just loves making videos. Before he went into tech, he was like a high school… Did he talk about this in the previous show, like photography, shooting pictures of bands when he was in high school before college or something like that? He loves camera work. He just inherently loves doing it.

I saw the other week, because you said this is an insider show, that I saw that it was VCBrags nagging him by making this Maslow's hierarchy and putting it at the top...

David: Pseudo-philosophical YouTube channel.

Kim-Mai: Pseudo-philosophical YouTube channel, and he's like, VCBrags and I was like, this is awesome. They're like, it's great. This is great. They think it's a nag. I think it's positive. No one else has really figured out how to do it. He just loves making videos.

Ben: If they want to put Garry at the top of any hierarchy of needs, he should be very proud of that.

Kim-Mai: Exactly.

David: Any press is good press.

Ben: I'll continue to press on this. At some point, you can tell me, like stop. How do you think about that as a partnership in terms of getting the most leverage on senior partner time. Garry and I have this guilty pleasure too. I love fiddling with the dials, editing our audio, getting into the nitty gritty of production, and then realizing, shoot, is this actually the highest leverage thing that I could be doing right now? How do you balance that?

Kim-Mai: This is even more true now in a remote world than it is in a post-pandemic world, where talent is too geographically diversifying. The way that you connect and share ideas is through these mediums. What is Sandhill going to be?

David: A bunch of studios for internet recordings. That's what it's going to be.

Kim-Mai: I don't know. We're on this question with firms moving their offices up to the city over the last 10 years. Our office is in the city, but I'm like, are fetters really going to make a trip there and go to the five VC firms in a row? I don't know. I don't know.

David: I was talking with one of my angel investments last month, who's raised two rounds now, the companies in Seattle. Some of their investors are in Seattle, but most are either in the Bay Area or New York. It's great. We got to meet them. When we're raising rounds, we go pitch all of them and we do it from our WeWork in Seattle. Otherwise, we would never be able to meet so many folks because we'd be spending all our time on planes. It's just so much better for founders.

Kim-Mai: Yeah. In that context, is it important for him or for other folks in the firm to form effectively parasocial relationships with prospective future founders? Sure.

Ben: Yeah. Maybe you could say that this actually is the highest leverage use because there's the scale economies of create it once and then it can get watched tens of thousands of times on the internet.

Kim-Mai: Right. Or someone feels like, a lot of people come in, they'll say, oh, I really feel like I know Garry, if that makes people form a connection.

David: They do, yeah.

Ben: Fascinating. One of the last big topics, and we already mentioned it a little bit, is Coinbase. Classically, when a firm has just such an enormous, gigantic win, it changes the firm in some way. Some good, some bad, but the only thing that's very unlikely is that zero things change. It might have started changing before a liquidity event because people could see the win. How would you articulate the ways in which Coinbase, and hopefully Instacart in the future, and some of these other just enormous successes for Initialized changed it?

Kim-Mai: These were not overnight successes. As you know, these are like 10-year processes and journeys when the firm only just got started. I don't remember when the exact date will be, but the firm's almost 10 years old. We now have 14 unicorns and funding companies worth over $100 billion. Coinbase is one of them, but if you look at their portfolio, we also had the Opendoor IPO. Flock Safety raised a large background from Andreessen this week, and its value is also a unicorn.

We have companies like Truepill, Row in Bonny Port that are transforming digital health. There's also Instacart and Flexport in the hopper. There are a lot of other companies in the portfolio. I joined at fund three. Fund three is a very different beast than fund one. Fund one was like a $7-million-fund. You get questionnaires like, can you get in the cap table? Can you get in around? Then fund three was like a $125-million-fund. It's not just like, get on the cap table, but some small multi $100,000. It's more like, can you actually be the lead investor, investor of record?

Ben: Right. Can you get some meaningful ownership?

Kim-Mai: Right. I'm happy to see that there are a lot of incredible companies in fund three as well. That's a much harder fund to return because it's so much bigger.

Ben: Right. It's about being in those companies that have those just insane outcomes and having been a lead investor to own a meaningful percent of them by the time that they do.

Kim-Mai: Yeah. I also see in terms of talent for the fund, we're now in a place where we're doing an open search for partners and principals. We're getting an incredible amount of talent from that. The firm brand is standing on its own and we're able to recruit. This week, we just hired Pearl. She was previously at Founder Collective, and was involved in the PillPack deal, and is also like an engineer and founder, former founder herself.

We're getting other incredible investing talent to add to the team. The firm is growing and professionalizing a lot more. Garry, a lot of the stuff he's worked on for so long, it's coming to fruition now. I think in general, we all have a very team-oriented mindset. We're not a very individualistic culture. We all do a lot to support and collaborate with each other. We're happy to have the successes that we're having. Then we're also excited to grow the pie.

Ben: In many ways, it reminds me of a post product market fit startup, where now the job is really to figure out how the brand can stand on its own, how to accompany senior executives in a firm, and a broad base of great partners. At this point, you're like, the machine works and now it's time to scale the machine and make sure it endures.

Kim-Mai: Exactly.

David: I love that analogy. I hadn't quite thought about it with a venture firm, but the first real exit for all sorts of reasons, for brand with founders, for brand in the marketplace, brand with other venture investors, with LPs showing them, demonstrating, you can actually return hard capital to them. You're cranking that flywheel until you get that first. You wanted to do it manually and then it's about building the system.

Ben: Kim-Mai, as we wind down here, any parting words, and I definitely want to make sure you tell us who should reach out to you, how they can reach out to you, and where people can find you on the internet?

Kim-Mai: We're on the lookout for more talent both in terms of the portfolio and also in terms of the firm itself. You can email me at kim@initialized.com. I'm looking for founders who are taking on really hairy problems that affect everyday Americans with its housing, jobs, mobility, climate, and the firm overall. 

We also look at all kinds of deal flow. We're not [...] specific fund. If you're also doing stuff in marketplaces, SaaS, enterprise, we have other great partners who can look at that too. Again, we're also doing our open partner principal search. If you either have an investing track record or you're an amazing operator, a person who's built up a high-growth stage company with specific value add or skills to offer, you should definitely look at our jobs positions.

Ben: Great. Are you on Twitter?

Kim-Mai: Yes, you can find me on Twitter, @kimmaicutler.

Ben: Great and we'll link that in the show notes. Kim-Mai, thank you so much for your time.

Kim-Mai: No problem, thank you.

Ben: Acquired LPs, we'll see you next time.

Kim-Mai: See you.

David: We'll see you next time.


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