Boston VC Rich Levandov on Sidecar, AOL and How to Invest in Dysfunctional Businesses (Q&A)

How to support the next generation of founders by suspending disbelief

Galen Moore - Editor-In-Chief, Tech

We have an incredible line-up of speakers at the Boston State of Innovation event next Tuesday. Out of all of them, there is one I was most interested in speaking with ahead of the event.

Rich Levandov, a tech investor who works in Boston, Silicon Valley and Seattle, is a partner at Avalon Ventures, a San Diego-based firm better known for its life sciences investments. He was an AOL executive in the 1990s and has been making investments in tech going back to Art Technology Group, which is like somewhere between the Jurassic and Cretaceous periods in Boston innovation. That was while working with Fred Wilson and others at Softbank in the late 90s.

Since then, he’s acquired a reputation for backing founders and ideas he believes in despite data that would send other investors run screaming. Zynga and Sidecar were both his deals at Avalon. In a story that’s less well known than those companies’ ups and downs, he supported Backupify through a difficult round that came before the Boston data storage startup’s acquisition by Datto. Other investors were ready to cut their losses; Avalon said OK and they did the whole round.

At State of Innovation, Levandov is on a panel with Ellen Chisa, VP Product at Lola; Carol Fulp, President and CEO of The Partnership; Jodi Goldstein, Managing Director of the Harvard iLab; and Vinayak Ranade, CEO and founder of Drafted.. You can find out more about the event here.

I sat down with Levandov earlier this week to talk about how to support the next generation of great startups and founders. Here’s an edited transcript of our conversation.

GM: Should a VC be concerned about developing the next generation of founders? Or should a VC focus on, you know, generating venture returns for investors.

RL: We’re all in the same ecosystem, the investors, the entrepreneurs, the employees. We’re all excited personally about innovation and trying to bring new services tech and hardware to market and we all should be concerned about making sure the ecosystem is behaving itself. And of course the next generation of entrepreneurs is a part of it. We need entrepreneurs–not what’s the buzzword, wantrepreneurs.

I’M GOING TO SUSPEND MY DISBELIEF AND ENJOY THE MOMENT. 

It’s almost like when you go see a science fiction movie in a theater, the little game you play with yourself: I’m going to suspend my disbelief and enjoy the moment. 95 percent of businesses unfortunately fail and deliver marginal if any return. You have to suspend your disbelief and look for the reasons why a business is going to be successful. Look for the positive: Why will this work and what is it about the market and the barriers to entry and the ability to be number one in the space? Will this team at this point in time be able to pull this off?

Supporting an entrepreneur when things don’t look as rosy–when plan A doesn’t work; when plan B doesn’t work–is that it, game over, cut, go home? Or do you keep looking for what will work? I think I’ve done 250 early stage investments in my career now and the track record is phenomenally good. Plan A never worked; Plan B never worked; Smart people didn’t lose their composure around the table and we made it work. If you’re paying attention, you see ways to be successful. To me, the fun starts when Plan A doesn’t work. But I think a lot of VCs flip out.

Early stage is about dysfunctional businesses. If there’s no profit, no product, no revenue, it is dysfunctional. You’re dealing with other issues than pure results or how the quarter came in.

GM: Do Boston investors have a problem with that? People say, you know, Boston investors want to see the numbers; West Coast they want to see the product or have dinner with the founders.

RL: It’s a generalization of course you know that. But I would say it’s probably true. The West Coast is a target rich environment and it’s a hunter rich environment. There’s more money and there’s more startups by far. But I think a lot of the West Coast mentality is failure is more tolerated there. There’s just more of a willingness to back an idea without the data. It used to be you’ve got an idea and you’ve got a great founding team and that’s it. That to me has been replaced by teams that have already built the product and they’re in the market and they’re raising their first round of money. And that’s a reflection of it’s so much easier to build the product.

GM: You’ve talked in the past about your disdain for due diligence. Do you still feel that way?

RL: Supreme due diligence just uncovers all the risks. Very often none of these investments make any sense because the risks are so high. I’m more of an intuitive pattern recognition kind of investor versus a hard core fundamental analysis kind of investor.

EARLY STAGE IS ABOUT DYSFUNCTIONAL BUSINESSES.  

You used to ask what are the barriers to entry. Software now there is no defense. You just have to execute quickly and do really well. And that makes up for some of the things you might find in due diligence. I don’t want to sound careless. It’s important to do your homework. But I think one of the things that frustrates entrepreneurs in Boston is the (investors) who ultimately make a decision on an investment vs. the people who do the work. I might be assigned to an associate who will just grind and grind for months and then it gets kicked up to the VC and it doesn’t get done. And, at some of the larger VC firms where there’s a dozen partners you get into the politics of getting to yes.

GM: In the current environment is there more latitude for an investor who drags feet? A little less pressure to get deals done quickly?

RL: It’s never pressure to make deals quickly it’s pressure to let people know where you stand, quickly. One hour into a meeting I’ll say, love you, love what you’re doing, but it’s just not a fit for us. But I do think some of the best investments I’ve ever made turned out to be lots of people looking at them. If I like it quickly I’ll trust my instincts.

GM: You invested in Sidecar. What about supporting founders when it isn’t working out?

RL: Going in we thought ride sharing is going to be big. Of course you know it sold to GM. We’re still left with a lot of valuable patents and IP in the company which we’re assessing what to do with that. We experienced a massive amount of money raised by some of the competitors in that space, I mean billions of dollars to our $10 (million) or $15 million. We were the first ones to do destination. We were the first ones to do ridesharing. We were the first ones to do a marketplace, where drivers could bid and offer things like I’ll donate 10% of the fare to charity. We had fun with that.

We kept supporting the company, we kept trying new things, we kept pivoting. It was a real interesting experience to be on the underfunded side of something that was so aggressively funded. Ultimately it worked out well. Everyone did OK with the transaction. But it didn’t become Uber.

We’re in a new era where there are so many models for money now: crowdfunded campaigns, AngelList campaigns. Someone told me in 2014 there were 200 new micro-funds raised in Silicon Valley alone. With so much money around and so much excitement, the investor who’s successful for the long term is one who develops their own brand: Is it a trustworthy investor? Is it a fair one? Is it a sane one?

WHAT YOU BECAME FAMOUS FOR IS NOT WHAT YOU STARTED OUT DOING.  

People matter. There’s lots of hedge funds, there’s lots of VC funds. The ones who do well it’s not always the same funds, it’s the same people. So people matter. Part of my practice is I’m sure there are people who’ve had less than ideal experiences with me. But I think the majority have had great experiences. That’s important because they want to work with you again.

GM: You invested in Art Technology Group back in 1996 or something. So I guess you’ve had that experience a few times.

RL: Art Technology Group was a bunch of engineers out of MIT and a bunch of designers and they were going to be a Web services firm and they didn’t turn out to be that. That was an era you could get $1 (million) or $2 million to build a website for somebody. Along the way they built this engine that was called Dynamo. That became the product and that’s what took off.

GM: So, some businesses the pivot or the tack isn’t adversity, it’s opportunity.

RL: That’s a good point: All businesses are like that. You take almost any business, what you became famous for is not what you started out doing. You’re in the game. Opportunities come your way because you’re watching your competitors and your’e talking to customers in this data rich environment.

GM: People talk about process oriented vs. results oriented. Do you think you’re a process-oriented person?

RL: I’m more product and market oriented. To me I just think about constantly: What are the big markets and how do you build a jewel in that marketplace? Is it a growing market? Can you make a differentiated product that is beautiful, cheerful to use, obvious to sell, easy to discover? That to me trumps all the other stuff. The essence is the idea, the market and the team. A rising market lifts all boats. You can make lots and lots of mistakes if you’re in a growth market. But you’ve got to be early. You want to be first, second or third. You don’t want to be fourth, fifth or sixth, covering something because it’s fashionable.

GM: So, product-market fit kind of takes care of the process and the results.

RL: Yes. The beauty of the venture model is if you bat .300 you’re a superstar, just like baseball.

GM: On that note here’s something out of left field: How many startup disks do you think AOL mailed out?

RL: (Laughs) In the 1990s if you stuck your hand out in the street anywhere in the US you were likely to have an AOL startup disk put into it. But I got into AOL because I was at Phoenix and made a deal to put AOL on our PCs.

What was exciting about the Internet in 1995 was it was totally decentralized. There were no big consolidated plays. Now you look at it and you’ve got Google, Facebook, Amazon, Apple and these are very aggressive companies, very powerful. Is that good for the Net long term? It’s hard for entrepreneurs to live in the shadow of these really super aggressive companies. In Google’s case, they can engineer 100 products and give them all away for free, just as a branding exercise so people go to them for search, which is where they make the real money.

So if you’re an entrepreneur and you’re trying to come up with value add, I’m thinking how do we level this playing field. It’s not something everyone can do, but it’s happened before and it will happen again.

GM: Do you think that’s true? Is the tech oligopoly as fragile as all that?

RL: There’s a lot of branding force that’s built up. The barriers to entry are real. But yet there are things that show up out of nowhere and become big companies as well. I don’t think anyone should fear these companies. The question is, how do you work with them, how do you leverage and how do you learn to build businesses that can get big in their own right? How would you build a company that is going to get to 100B in market cap.?

GM: Rich, thanks for taking the time to speak with us.
RL: Thank you.