William Leonard
Hey everyone, welcome back to the Atlanta Startup Podcast. My name is William Leonard, your host for today. I’m excited about the conversation that we’re about to have with Jason Caplain, who is a General Partner at Bull City Venture Partners. Jason, welcome to the podcast.
Jason Caplain
Hey, thank you so much. I’m excited to be here.
William Leonard
Jason, it was great seeing you I think four or five days ago at a Raleigh Durham Startup Week. You and I shared a stage on a dynamic panel where we talked about venture financing for the region, what we’re currently seeing in the early stage, financing markets, and raising capital in today’s market. We’ll talk a little bit more about that today but I want to start with you and Bull City. I think one of the things that stood out to me about Bull City is that you will have an emphasis on people. You’re not backing companies or ideas, you’re backing people. I think it’d be great to one, get the intro on Bull City Venture Partners, your broader thesis, and then learn a little bit more about the Jason story and how you made your way into the venture.
Jason Caplain
My partner, David Jones, and I run Bull City Venture Partners, which is based in downtown Durham, North Carolina, and for the last 23 years, we’ve been investing in mostly seed and early-stage, software companies. Most of those companies have been in the southeast and mid-Atlantic area. So about over 90% of those companies have been in throughout this region. What makes us a little bit unique is we have a very concentrated portfolio. Usually about 15 to 17 companies per fund and we also have, as you mentioned, a very strong bias towards investing in great people. So usually it takes the form of experienced entrepreneurs, or even like, repeat entrepreneurs. That’s what we’re investing out of our fourth fund right now, our $53 million fund. It’s just David and me. That’s the team.
William Leonard
I love it. How did you make your way into the venture? I know, everybody has a unique path. I know you started at Red Hat a while back, but tell us more about your path into venture as a general partner.
Jason Caplain
I grew up in Massachusetts. I come from a very, entrepreneurial family on both sides. Both grandparents started companies, not tech companies, but other companies. I guess, it’s my roots or whatever. Growing up seeing that, but moved to North Carolina back in ‘98 for Red Hat, as you mentioned. Red Hat took money from Greylock And Benchmark, but they never considered raising capital from local venture funds or regional venture funds. So the thesis in starting this, and I started this when I was 25 years old by the way, the thesis in starting was, let’s create a fund here in North Carolina that the future Red Hats will consider raising capital from. So with that as a mission, a bunch of the Red Hat execs invested in our first fund. That first fund was under $5 million and kind of a proof of concept fund if you will. That fund actually did invest all in North Carolina companies, invested at eight companies and three ended up going public.
William Leonard
Nice. That’s interesting, right? You talked about your first fund being mainly funded by Red Hat execs.
Jason Caplain
It was a mix. So Red Hat. I mean, that’s all I knew. I didn’t know anybody else here. I was heads down for two years at Red Hat, reporting to the CFO, and I didn’t have any friends here. So it was like, that’s the only group I knew here locally and then it was like, okay, who else could I meet? But I knew this region was an interesting place to invest. I didn’t have anybody else to talk to. I didn’t know all the other people here. Well, it was a slow build, by the way, like, hey, I went out and raised a million bucks. I had some help. I had a couple of other partners that were part-time, they had other full-time roles. And even with all that, it still took two years to raise our first fund. It was a down market. No one wants to invest even out in the public markets. Never mind, like a VC fund run by a 25-year-old running around without experience.
William Leonard
That’s interesting. I think there are a lot of similarities to you raising that first fund back then and a lot of emerging managers trying to raise a fund one or a fund two today as well.
Jason Caplain
Super humbling experience, by the way. When I think like that, it was a good catalyst for us to have a very disciplined approach and put that money to work. I think that can fit into our strategy of low volume, being patient, and moving slowly, rather than sprayed out there.
William Leonard
I want to talk a little bit more to that point there, right, just from the regional concentration, perspective. Valor, Bull City, and many others in North Carolina, Georgia, Florida, or wherever it may be have a unique focus on geographical or regional investing. I’m curious to hear some of your perspectives on the non-obvious advantages of geography-based Investing at the early stage.
Jason Caplain
The one obvious thing is like, that it helps when a founder reaches out and says, hey, can you meet later today at two o’clock or get on my calendar tomorrow, and we can meet face to face and have coffee? There’s something to that magic and being that accessible. We do that throughout the region, like with our Washington, DC company, North Virginia, and Maryland companies, we do the same thing. Not maybe available today, but we can certainly get up there very, very quickly. I think it’s also a region we know so well, where we can help recruit not only at the senior level but even way, way down, we have relationships with developers and salespeople. We can recruit through the whole stack of talent, which I think makes us unique. But the other thing too, I think, for this region in Atlanta, or the way we think about it is like, here in North Carolina, our regions are all very, very underserved. I think you would agree with that. I think it’s rising in popularity from others, but we’re certainly not the Bay Area or New York. It’s interesting to look at the development of some of these markets like North Carolina. I don’t think you’ve arrived until you have a $3-10 billion exit to your market to get there. So for North Carolina, we’ve had SaaS, Red Hat, and Epic Games, all valued at over $10 billion. We’re software guys. Having three companies in software that hit over $10 billion, what that means is that just generates a lot of talent. You’ve seen whole teams leave Red Hat in the past. Red Hat has birthed over 20 CEOs. And then you see teams leave Epic Games and start new companies. Andreessen came here locally. So you’re seeing a lot of that happen. That’s really how the flywheel starts going, having those big monster exits.
William Leonard
I think Atlanta has seen some of that as well, with the most recent one being MailChimp. I think, looking back, probably 10-15 years down the road, we’ll see the CEOs that come out of MailChimp and have started companies as well. So an interesting point there. Jason, I’m curious about this regional focus, you’re able to see deals quicker, and faster, make an assessment, and get to conviction or to conviction on passing, and curious to hear how you all build conviction early on, in some of the deals that you see, given your fund is so concentrated, and you’re doing 15 to 17 deals per fund.
Jason Caplain
This may sound a little silly, but to build that conviction, we look for founders where we get the feeling we want to quit our jobs and go work there. That’s the conviction we have to get. So it’s like, do we have conviction, this is one of the best founders we have ever met? Best people we’ve ever met in our lives? And then it’s why Bull City? What can we do to help accelerate the story, plugin, and be a really good partner, a trusted partner, and earn it, the founder is inviting us into the company that they created. We want to make sure we work hard so they have a great experience with us and they tell other founders about us, and then they want to work with us all over again. Why Bull City and that takes the form of, do we understand this well? Can we help with recruiting? Can we help out with introductions to customers? So we can think about the why us? Does that equation make sense?
William Leonard
I want to take that question a step further. Because you know, as a fund you have a thesis, you have a typical check size that you write, you have an amount that you want to invest into new companies, and the amount that you want to save for follow-on in your winners. But curious, how do you build conviction around deals that are maybe slightly off thesis for you? Where the team is just flat-out amazing, but you’re not sure is this a Bull City deal? Can we help? Do we know this market? Do we know this business model? How do you build conviction to do those deals, because I feel like every fund has one or two where they just meet the founding team and the team is just, they can sell anything, they can sell water to a fish.
Jason Caplain
I smile, because this just happened to us a couple of weeks ago. A North Carolina company— I wish I could name the name because I love the founder and love the team. David and I debated it a ton. We ended up passing. Bro, hey, it’s not aligned with our thesis. It’s just an unrelated space that is outside of software, but we love the team. It’s tech but we ended up passing and it’s really hard. I mean, we saw Peloton as an example in New York. We have known John Foley for a long time, David and I sat with him in New York at breakfast, and he was raising his first seed round, there’s nothing there. We ended up passing. We were like, oh, my gosh, it’s like an iPad on a bike. Right. It’s really hard. I think it’s a good question. We have done it a few times. If you look at something like Spiffy, so we invested in Scot Wingo. Scot sold his first company for $18 million here in North Carolina and did it again for 180, the third company we seeded ChannelAdvisor, went public on the New York Stock Exchange. So when Scot came back with Spiffy, the guys will tell you the story. Scott and his co-founder, Karl, we laughed about it initially. We’re like, oh my gosh, we’re gonna get in a carwash company. They have vans, soap, oil changes, and all that stuff. There’s no way we’re gonna do that. True to Scot Wingo, he executed very, very well, early Justice Capital. And then we’re like, okay, we gotta put some money in here. We’re gonna bet on Scot. So every once in a while, to your point, we’ll stretch it and do something like that for sure. That’s why I was smiling. We face this, like, all the time. It’s really hard. And by the way, I would say, we’re wrong a lot. That’s why I brought up the Peloton story where our evaluation of people isn’t perfect. We’ve got a whole long list of companies that we passed on, that went on and did great things. We’re not perfect in our evaluation.
William Leonard
We’re all human. I think that’s one of the things. You’re a VC, and you start building your anti-portfolio of what you passed on, and maybe what you missed, that you think you should have seen or could have seen early on.
Jason Caplain
Our anti-portfolio is multiples bigger than our winners.
William Leonard
That’s usually how it goes, man. But you touched on an interesting point about working with Scot across, I think it’s now what three or four companies?
Jason Caplain
Two companies. ChannelAdvisor and Spiffy.
William Leonard
Curious to hear, you’ve had the opportunity to work with him and I think some other founders as well. Let’s dig into your experience of working with founders multiple times, I think, maybe highlighting the importance of building trust. I think having a successful outcome is the ultimate sign of trust but early on in the first company, how do you build trust and rapport to say, hey you come back with another company, we’re gonna back you again, or we want to work together mutually.
Jason Caplain
For us, it’s not just about exits or, sorry, maybe phrase a different way. It’s not about the founder having a successful exit to work with him again, some of the companies that we lost all our money on, would still back that founder again. You lock onto it the right way. It’s that relationship with a founder that we put a lot of weight into and how they think of us the same way, like how do Jason and David act when things aren’t working out? I think about the same thing, how do they behave when things aren’t working? Do they give it their all and how to the very end, do they fight? We think all the same things. I think I’ve known Scot now for 20 years. We’ve been through a lot of battles together and a lot of problem-solving. I’ve seen him through some dark days at ChannelAdvisor, it wasn’t all perfect. It looks great because it went public and everything, but there were some dark moments in there. I’m sure there’ll be some for Spiffy, most companies have it. I like the person I see in Scot when it’s most challenging. During good times, everyone’s fine, but when things are rocky, how does that person perform? We backed Robin Smith twice. Troy McConnell twice. I hope there are others we’ll back. But that’s what we think about anyway when we get into a company. We kind of think about it as a forever relationship. Even when we read that first check, we’re thinking in our heads, hey, is this someone we want to work with for the rest of our lives kind of thing? We’re less transactional if you will, and more about the relationship, hopefully, that comes across.
William Leonard
No, it does. On that point, I think it’s so interesting that you talked about working with founders through the dark days of their startups, but ultimately getting to success. I’m curious to see or to hear, from your perspective, whether there are any inflection points of the business going through something incredibly challenging internally. And then there’s just like a switch that flips or a unique learning lesson from something that the founder and founding team and you all faced collectively and overcame, here’s to hearing about some of the inflection points, after some of these dark days that you all took on and use that as leverage and momentum to scale and ultimately get to a successful outcome.
Jason Caplain
Interesting. No one’s asked me that before. I think some of the ones we’ve had over the last two decades, it’s been adding a team member. That’s the case. A new salesperson that may take a different perspective, or a new head of sales, a new head of marketing, a new head of product, adding someone to the equation the current team was missing something, and the new person comes on board with a different perspective, or maybe different sales relationships, plugs into the existing company, and it just takes off. We had one company that was $5 million in revenue. They hired this rockstar head of sales, he brought it from $5-30 million just on his relationships. We ended up selling it, but it was kind of stagnant at five and actually kind of bumped around, I think it would come down a little bit, but bumped around five, and then we brought him on board and it took off. He made a lot of money in that. We did, too. I mentioned teams, but you know, credit ChannelAdvisor. Yes, it was Scot, but there’s also Michael Jones, there was David Spitz, and there’s a whole team there. Brad Schober. Lots of other guys there who helped make that a success.
William Leonard
Sounds like fresh perspectives and people coming on to increase the bandwidth of the executive founding team may be a unique catalyst for growth and spinning out of that. I’m curious because I just love this emphasis on people and not companies or ideas. You’ve been able to see the spectrum of characteristics of successful startup leaders, CEOs, and founding teams as well. What are two to three distinctive traits of, let’s say, successful founders that you’ve seen across Bull City and even before Bull City as well?
Jason Caplain
I think this even goes back to my days at Red Hat, too, across our portfolio, but the ability to sell is really important. That’s not just selling customers, although that’s good. Hey, you’re visionary, you can sell to customers and you can sell to potential partners. I think that’s important, but also to employees. You’re going to be good at recruiting and having people buy into your vision. You gotta be good at fundraising. It’s also selling, by the way. I think we’re all selling. Fundraising is important. That’s the blood that keeps you going. I think hustle is really big. I always think that the founder checks out at five o’clock, I haven’t seen that really work well. I think there was an extreme at Red Hat. Every weekend, late nights, I had some overnights there. Suggesting that, by the way, but I’m gonna say we were hustling, it was a mission there. The best founders have plan A, but they also have backup plans. They have Plan B and Plan C. They have all these contingency plans and that’s important. Don’t have one of those plans to be like, shut down the business. Plan A, Plan B, Plan C, how are you going to make this thing survive? And then the other thing is, it’s pretty interesting. I think our best founders are also good at underpromising, and over-deliver. I think what they do is they sandbag a little bit. And what that does is it buys credibility with other investors and it gives them a little more rope to try more things. The founders that underperform are given less rope to experiment and try new things. There’s one of our founders, Mike Doernberg. He’s very solid at that. He’s done that a long time. When he puts out a budget, I’m always like, oh, you got scared, and he laughs every time. But it’s true. He and Chris Smith, they build this budget, and you can tell that they have an internal plan and an external plan. We did the same thing at Red Hat.
William Leonard
I resonate with all of those characteristics. I think your point of being able to sell not just products, but also people in the vision of the company is so important. And then having the ability to see around corners, which I think ties into your plan A, plan B. And then you know, just having a bias to action. I think a lot of people say what they’re going to do, but now you kind of know you start working with somebody, so it makes sense.
Jason Caplain
They move fast, are good problem solvers, and are good at delegating. Look at Tim Chi, he runs The Knot now. He’s very good at getting back to email fast, making quick decisions, and delegating stuff out. It’s impressive.
William Leonard
I think on that tangent, I’ll move to the next point. But you have a consistent cadence of shipping products, especially at the early stage. Communicating with customers, man, it’s big, because they’re the ones that are going to inform your product vision. I think a lot of people underestimate that, especially at the pre-seed, seed stage, even at Series A when you’re still trying to get those sides of product market fit. So want to shift the conversation just a bit here, as we begin to wrap up. You mentioned early on that you have this concentrated portfolio of 15 to 17 companies per find. Curious for you to maybe just break down a little bit the fund construction dynamics for a lot of the founders who are listening to this podcast, and maybe talk about price dynamics at the early stage and how overpaying can impact returns for an early stage fund.
Jason Caplain
It’s like you bugged our office. This is a tough topic. Because we’ve evolved in our thinking a little bit. We used to believe that we should never overpay. We don’t want to overpay but we will stretch it for the right situation. And I will say, if the company is a home run, the price probably doesn’t matter as much. It’s these companies that are like singles and doubles that impact our returns. Realizing we’re not going to have all these home runs, so it does matter at the smaller exits. But for the right founder and the right team, something we have massive conviction in, we will pay up and pay above the average price out there for a seed or early-stage. We’ve done it multiple times. I think it’s something that we’ve learned from the past. There was a company called Flatiron Health, giving you an example, sold for three and a half billion. I think I brought it up on the panel the other day with you and that Zach came to town and they gave us crack to put in a quarter of a million bucks on a seed. The evaluation was probably 3x the average at the time, it wouldn’t have mattered, we would have had a massive homerun if we had done it. That was one of the things that could have prevented us from doing that deal. Great founders, this is a really interesting market, a massive market, but hey, the valuation is a little high. Well, we should’ve done it, taking a shot. It’s on a case-by-case basis. I mean, the interesting thing is, no two deals in the last 23 years have ever been identical for us. At the seed stage, they’ve always all been different valuations and it’s a negotiated process with the founder and what makes sense. The issue is a bit nuts, yes, that smaller return. But also, the second part is raising that next round of capital, being interesting, and setting it up for success in the future. That’s the key. How do we make sure like, hey, you end up at a 10 post here, but the next round is an up round and it’s not hard to attract that next investor to come on board? That’s that’s the really important thing, too.
William Leonard
I think that’s one of the issues that plagued the industry back in 2020/2021, when you’re raising incredible seed rounds at incredible valuations, and that next round, it’s hard to grow into that valuation to make it make sense for that next round. It’s a mental exercise that we have to go through often thinking about price and how to value a company appropriately. What is the value that we believe this company is worth today, it’s going to be different for fund by fund basis I’m pretty sure. So that’s interesting. As we wrap up, Jason, on our panel, our host Hunter, had us give a macro prediction for venture for maybe 2024/2025. I’m gonna do the same to you now. What is your macro prediction for the remainder of 2024 and looking into 2025, relative to the venture?
Jason Caplain
I think it’s more of the same. I still think there are a lot of companies out there kind of hanging on. There’s a lot of inventory out there. A lot of companies that have gotten funded probably will still, I believe go away or end up being acquired for a significant discount. Just find a home. Last year, everyone was like, oh, the first half of 2024 is gonna be great. Now people are saying like, hey, the back half of 2024 should be great. I still kind of look at 2025 and beyond. I think we have to get past election season. That’s my thing here. We need a couple of things to happen to be successful and get their venture flywheel going. We need the IPO market to come back. Not just like a company like Reddit but others to go public on the software side. We need those companies to go public so that LPs get more cash back so they get more distributions. Hopefully, will also help the crossover investors. And then once a crossover guys make money then that will help the PE and growth guys. It was kind of filtered down. It filters down to like that venture metro market. So once that whole thing unclogs, it just takes time. But it starts with the IPOs. In my opinion, once that happens, I think it’s going to filter right down to the VCs and then you’ll see that old market come back again. I still think there are too many companies out there and too many venture funds.
William Leonard
It’s unfortunate. I think it’s just part of the startup game that we play. I’ve seen a lot of company shutdowns recently, which is unfortunate. But I think founders are taking another crack at it with just different ideas, but also seeing some fund consolidation as well. I’ve seen maybe three announcements in the last quarter about fund consolidation. I think it’s interesting. We’ll see how this looks and we will revisit this prediction after election season and see how things unfold. But Jason, I think that’s a great place to wrap. Appreciate you joining me today.
Jason Caplain
Of course, happy to do it. This is great. Thank you very much.
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