1517 Fund founder Danielle Strachman on venture capital success metrics and startup fire-fighting

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Episode Outline

[04:39] Danielle’s background

[07:16] How the whole petition process of a charter school is funded with public money. So you have to petition the state to let you do what you want to do in the district.  

[10:13] Why starting a charter school in some ways is very much like starting a startup

[11:18] Understand that we're firefighters and we're all here to do whatever needs to get done because our building is constantly on fire especially in the first year of operations

[12:04] The most success metrics in venture are different than when you're trying to champion alternative education and giving

[14:34] Standard return metrics in venture and whether or not you're able to build something viable. The importance in keeping balance of those things

[16:35] Knowing that there's something really fascinating and kind of a Zen mindset about decision-making theory. You have to separate the outcome of your decision from the decision you make at the time

[19:22] Uncover why they're just not using the product that much, and what really want to see is that those pilot customers are insatiable

[20:19] What to do if something goes awry or they get fickle, when you're not sure who else to service in the market, it's hard to get that company to grow

[24:30] Getting the feedback loop between the founder, the engineering team, especially if they're using sort of like a dev group and the customers it's too disconnected


Danielle's Inspirations:

Shea Tate-Di Donna

Alex Iskold

Charles Hudson

Sydney Thomas


Connect with Danielle

LinkedIn

Twitter

Elias Rubel: (00:31)
Danielle Strachman to the show. She's a serial founder, educator, philanthropist, mentor, and venture capitalist. She's on the founding team at the teal foundation. And I'm super thrilled to have a conversation with her today about what she's up to with the 1517 fund Danielle. 8u Welcome to the show.

Danielle Strachman: (00:51)
Hey, thanks for having me on today.

Elias Rubel: (00:54)
Absolutely. So like, let's start at the beginning. How did you you're you're, you're super into alternative education. You're super into the venture world. These two things, if you, if you kind of hold your hand over the teal, uh, the seal foundation for a second and imagine it's not there, that's a really odd combination. So how did we, how did you land there?

Danielle Strachman: (01:18)
Well, um, yeah, maybe it feels like being shot from a cannon a bit because I would have never predicted it. Um, you know, I was a tutor and an educator and a past school principal and 10 years ago, had you asked me if I would be in VC, I would have said what's VC. I knew nothing about arena. So yeah, it does. It does seem, it does seem really odd, but what's interesting to me is that it's really only over time that I've kind of seen that my whole career in some ways has built up to what I'm doing now in maybe not a linear fashion, such that anyone could just put the dots together, but at least for me, I have a coherent narrative. And, um, one of those is that I have been assessing talent and people for a very long time. Um, this started out when I was a private tutor, working with students, you need to quickly be able to assess where somebody is at, what their abilities are, what their strengths are, how you garner their strengths to help them with learning where their weaknesses are, where they need support. Um, I also used to be a psychometrician, a psychometrician as somebody who does cognitive and intelligence testing in a neuro psych facility.

Danielle Strachman: (02:35)
And it was my first job at the college actually. Uh, I had, I had worked my way into my own internship there. I remember calling up the neurology department at the Beth Israel hospital. They did not have a internship posted or anything like that, but I always had a, like, you gotta go do it yourself, sort of mentality. So I called them and I said, Hey, I'm really interested in the work you're doing. Could I come shadow a and actually one of the things I tell people is don't ask someone for the big thing first, don't say like, I want an internship with you. Say like, Oh, Hey, I want to come shadow with you. I just want to come spend a few hours over there. And then you slowly boil the frog and then you say, Hey, can I come again next week? Hey, can we turn this into an internship?

Danielle Strachman: (03:14)
Hey, could I have a job here? And that's what happened for me in this neurology department. Uh, and when I was there, I was assessing the cognitive abilities of, um, of patients and also doing behavioral assessments on patients. And so sort of understanding how they work. And what's interesting is that I do a lot of this with founders now. Um, and I really didn't put these dots together even until about a year ago. And I've been in venture for five years now. Um, but these different skill sets have all sort of combined into the work I do now. Um, at one point I started a charter school. Um, that was my first, I guess it wasn't my first foray into founding something, but it was my first foray into founding an organization. Um, you know, we had to go through a whole petition process. Uh, charter school is funded with public money.

Danielle Strachman: (04:03)
So you have to petition the state to let you do what you want to do in the district. Um, we had to hire staff. I had never hired people before. Um, I had to fire people. I had never done that before. I had a student body of 160 students the first year, uh, which meant we had about, you know, combined parents, students, staff. We had a community of maybe 300 people. Uh, and so we were really leading this three ring circus, but, um, we had no business doing what we were doing, what my cofounder and I have the charter school used to say to each other was who allowed this, like, especially if we would pass each other in the hall and whisper who allow this, like who let us run this school, this is crazy. Like, this is absolutely insane. Um, just totally absurd.

Danielle Strachman: (04:54)
Um, and so we learned a lot of things going through that, and there's a parallel where starting a charter school in some ways is very much like starting a startup. Um, for us, we went through an accelerator program that helped, uh, charter schools to launch, uh, find customers, find funding, all of the things that you would also do if you were running a startup, you know, we had to do all the hiring ourselves. We had to find curriculum. We had to fire people on occasion. Um, we had to work with the general population, which is, is a trip, uh, and all of those skillsets have come in very handy when I work with founders because I've had that operator experience and can really empathize with them when they're going through the hard ups and downs. Cause I remember that even on our charter school stuff, we used to say that, you know, yeah, sure.

Danielle Strachman: (05:41)
I'm the director and you're a teacher and this other person has this other role. But the role we all really have is that we're firefighters and we're all here to do whatever needs to get done because our building is constantly on fire. Cause we're in the first year of operations, we don't know if we're going to make it past this because a lot of schools burn out within the first couple of years cause they can't can't financially float. So we had to learn a lot of different skills. And, um, it was, I always say that the charter school was both the most amazing and the most challenging thing I've ever done. Um, we faced all kinds of different things, but that led into me moving up to the Bay area, the charter schools in San Diego. And I started working with the tail foundation and the teal fellowship.

Justin Gray: (06:22)
Uh, and we just started working with a great young crowd of makers and entrepreneurs. We used to call it, uh, I used to call it like, you know, homeschooling for college students. Um, individually based that's another thread for me is that my sort of philosophical basis for what I do is run through everything. And so even with our founders, um, you know, we will lovingly say we homeschool CEOs. Um, and, uh, and yeah, so that's like a little bit of a brief story, but yeah, I w I would have never predicted that I would be in venture capital that I would be an investor. It even took me a few years to feel comfortable calling myself an investor the first year or two. I really didn't want to be associated as an investor just cause I tend to not like some of the personalities that I've met in that world, how people work is very different than I work. Um, but I've really embraced it and come, come into my own. Now after five years on it and been able to see how my whole career has very much supported, why I'm good at what I'm doing now.

Speaker 3: (07:24)
So it must be interesting cause I'd imagine the normal success metrics in venture are different than, you know, like when you're, when you're trying to champion alternative education and giving kids we'll call them, uh,

Justin Gray: (07:44)
The kids, I find a little bit derogatory, so let's go with children,

Speaker 3: (07:48)
Children, it's a deal. So I'm giving children a different path that they might not have expected. I mean, on one hand, just giving them that path forward is a success I'd imagine, right? Like that's, that's one success metric. And then the other is like the standard return metrics in venture and whether or not you're able to be.

Justin Gray: (08:11)
So how do you, how do you kind of balance those things? Yeah. You know, it's really interesting because one, one thing that's really hard about doing work as an investor is that you make a decision and then four to five years later, you have some idea. If you had made a good decision at the, or I guess I will say it this way, four or five years later, you will know what some of the outcome of that decision has been. And only until about seven years later, will you have a really good grasp on it? So the feedback cycle is really long. Um, one of the things that we talk about a lot at 1517 is decision-making theory. One of our investors has been an expert in decision making theory since the, and we actually took a course on it before we started the fund so that we knew that we had our head screwed on tight.

Justin Gray: (09:01)
And how you think about this. And there's something really fascinating and kind of a Zen mindset about decision making theory, which is that you have to separate the outcome of your decision from the decision you make at the time, because you can make a good decision with a bad outcome and you can make a bad decision with a good outcome and all the other variants there. Um, and so we separate that a lot of okay, at the time, here's what we knew about the founding team and about this particular market and about what was going on. Um, and we have to just think about, you know, are we making a good decision with the information we have at the time and the way that we think about the outcomes, or we baked that into our decision making theory later. So we might learn something about what makes for a good team or makes for putting out a product effectively and then bake that into our diligence process with future founders.

Justin Gray: (09:57)
But to go back to what you were talking about as far as sort of, I would almost call this assessment. This is where my teaching mindset keeps coming back in is, um, you know, we are, we are judged on a few different things. It's interesting because we have different stakeholders. We have our investors, the limited partners in our fund, but we also have our founders and we have potential founders that would come to work with us. And on the founders side, you want to be known for being accessible and helpful. Um, thorough, forthright with feedback. You kind of want to be known for like tough love, um, because you don't want your investor to just sit back and tell you that everything you're doing is great when it's not. And you also don't want to work with someone who's a jerk. Um, so there's that aspect of things.

Justin Gray: (10:41)
But on the, on the limited partner side, the investors in the fund, you want to show them that you can pick really good teams and over time you want to be able to show them returns. Um, so we actually just had something happen in the last week where we did our audit for 2019. You do a once a year audit typically comes out in March or April and for fund one, um, there's a particular metric called internal rate of return that every venture fund is sort of graded on. Um, and between 20 and 30% IRR is what puts you numerically as a known entity, top core tile fund. And just as of last week, our audit came back, we're at 20% IRR. And I was like, Oh, this is so great because for years, because we've been running 15, 17 fund one for five years, it's you have to be very patient.

Justin Gray: (11:38)
Um, because you, as the portfolio head can kind of see like what's tracking and what's going on. But what people want to see is the math model, your investors want to see the markups on the spreadsheet and how that adds to a great portfolio return. Um, but for someone like us, who's a pre-seed funder. So we often call ourselves the DNA check because we're getting people started very, very early. Um, it takes a long time to show those numbers. So I'm really proud to now be able to say that we are a top Cortel fund. Um, and we hope to keep doing that with every subsequent fund that we have going forward.

Speaker 3: (12:15)
That's amazing and super exciting.

Justin Gray: (12:17)
Yeah. I'm really excited about it. I'm like, Oh my gosh. Like, it feels good. Cause because part of it is that I know that we've been doing a great job at 1517. Our founders are doing wonderful work. Um, we back really wonderful people to work with and we keep getting inbound from founders were equally wonderful. So I've never had concern on that side, but it's always this. I can tell people night and day how well company X, Y, and Z are doing, but until I can show it on my Excel spreadsheet, it doesn't really matter. Like now I have, you know, and as a alternative educator, I hate grades. Um, you know, I like assessment, but I hate like arbitrary grades and things like that. And it's been, it's been hard to have to wait for our grade to be able to show to people and say, look, we're a major player we're competing in the big leagues now. And it's not just because I say so it's because I have the numbers to back it up.

Speaker 3: (13:16)
Yeah. Completely. That's amazing. I imagine that tees you up nicely for fund two.

Justin Gray: (13:21)
Very much so. Yeah. And we've been fundraising now for a little while and now that we have that 20% marker, I just emailed a bunch of potential investors this week and they all want phone calls next week. And I'm like, imagine that, imagine that, imagine they want to talk now. Okay, great. But the, I mean, the investors who I love the most are our true believers, the ones who believed in us before we had this metric and who just said, you know what? We see a fund that's kind of a diamond in the rough, and we're going to take a bet on this. And those, you know, those two GPS are going to take bets on founders who are diamonds in the rough, and now we've backed some great companies. A very well known company of ours is loom. They are an asynchronous video tool that originally, um, has been for engineering and design departments of companies to do asynchronous video between teams and be able to communicate more effectively, but given what's happening with COVID, um, you know, the founders said it really well.

Justin Gray: (14:21)
Uh, you know, one of the founders, Joe, the CEO said, we consider ourselves a public service now. So now they have Berkeley professors on it, teaching classes of 2,500 students for free, um, uh, family members, sending videos back and forth to say hi and keep in touch. And so they have, um, they have become something greater than even they thought that they were going to be, uh, and I just, I feel so, um, so blessed and humbled and excited to be part of that journey. What we always say about what we do is that, you know, we're not in the driver's seat of our companies and we're not in the passenger seat, we're in the back, we're here to like, you know, bring some Cheetos and pass them up to the front. And, uh, and, and it's just great when you, like, there's a moment that happens where, what we say is that, uh, you know, when we work with people originally, they are a team within name.

Justin Gray: (15:18)
So when Lim came to us, it was Joe Vinay and Shahid, and they called themselves. Actually, they called themselves open tests. They weren't even loom at the time. And so it was a team with a name and now they are a fully fledged company serving people, having, you know, teams. I think there, I think there are something like 60 ish people now employed. Uh, and there's this moment as the investor, when you walk into a startup office that is, that has made that transition into it, really becoming a company. And you know, when the founders leave the building, it's still operating, it's still going. It's not just this small scrappy team anymore. And that is just a really magical moment

Speaker 3: (16:00)
Who knew the superfood needed to facilitate that growth was cheetah.

Justin Gray: (16:05)
I know. Right. It's so good.

Speaker 3: (16:12)
I'm curious. What's the average age of, of the founders that you bet.

Justin Gray: (16:16)
So we don't ask them for their age. Um, you know, we actually don't even ask people about what schools they went to beforehand. We do to what the people we work with. It tends to be a particular narrative and that narrative tends to be around bucking a system. And that system has typically been higher education. So a lot of our founders are, are non degreed or have dropped out of university or never stepped foot in university. Um, which on average, I would guess most of our founders are in their early twenties when we start working with them. Um, but we've had a number of founders who have approached us who fit that narrative. Um, but they're my, what I like to call my OG dropouts. There are people who are in, went to school. One of our founders, his first company was a nightclub in New York.

Justin Gray: (17:02)
Um, he has all kinds of funny stories about starting a nightclub when he was young, he then started at T company. Uh, and now he has a startup that he's built in New York and yeah, he's in his thirties. And, and, and I love those people because they were bucking the system before it was cool. Um, so that's one thing we always have to keep our eyes on are like, are the founding, is this founding team doing this because it's really important for them to do it or because they think it's cool. And it's actually very easy to assess these things out for us. At this point, we've been doing this work for 10 years, between the till fellowship in 1517. Um, but that narrative is very important to us. We do sometimes break that narrative and we like to say, we'll break the narrative in the name of science fiction. Um, so sometimes we'll have a team. We actually have a team that is working on a satellite. Uh, we have another team in quantum computing. These teams are pH PhD up the wazoo, uh, and they came to us separately. They're separate teams and said, here's what I'm doing. And we said, gosh, these are just too interesting of ideas to just say, Oh, you're not a dropout. We're going to pass on it. So that's kind of our bar for if we're going to break our thesis, it has to be something really wild.

Speaker 3: (18:12)
Interesting. That's super cool. So

Justin Gray: (18:15)
I was going to say, actually, there's one other thing is our founders who were in their thirties, oftentimes it's their first sort of like startup startup, like something with scale that they're building. So our founders all do have a pretty green mentality, no matter their age. And we're looking for things like coachability, you know, whether they're 22 or 35 or older. Um, so those are a couple of things that come to mind.

Speaker 3: (18:38)
Got it. So I'd love to bring us back to something you mentioned earlier where you were talking about how, you know, over time you've begun to see these recognized patterns in what works and what doesn't, and then bake that back into your diligence process or screening process, if you will. I'm curious, like what, what are some of those patterns that you've seen that, that work and some of the ones that are signals that they aren't going to work?

Justin Gray: (19:06)
Yeah, absolutely. It's funny that you asked this question because, um, we have a potential investor we've been talking to, and he asked me this amazing question last week. He said, you know, I'd really love to learn what you've learned about the companies that haven't worked out. And so I wrote him up this like eight paragraph email, all about those things, and I thought this would be some great blog, post content. And then he wrote me back and he told me, he's like, no, this is your IP. You shouldn't share this with anybody. Um, I pulled up that email, I've got it right here. Um, so there's a few overarching learnings that we've had. Um, so I'm sort of just skimming this email right now. Cause I wasn't, yeah, we'll go where, you know, we're kind of on the fly right here, which is great. When did that decision making theory process that we talked about is that that has been really important for us and very useful.

Justin Gray: (19:58)
Um, another thing that we learned was that when we started our first fund, we were writing checks between generally 102 hundred 50 K with the aim to mostly do those two 50 K checks. And what we noticed was that in founders where we said, Hey, let's do a hundred K here. What that was starting to be a signal for us on was that we just didn't have enough conviction and that the team didn't have really the traction, they needed to really execute on a precede round to get to the seed. Um, so that was a huge learning for us. So now at this point, if we're wavering on, if we do two 50 K or not, that usually puts it in the not right now bucket and we will, and we say, not right now, not in like the traditional VC, like, Oh, put me on your newsletter or like, you know, keep them right now.

Justin Gray: (20:45)
Well, we move is actual feedback. And so I will write to a founder. I have a couple of founders I actually need to write to later today and say, Hey, I love your team. I love the dynamic, you have the skillset. But what I really need to see is a couple of your pilot customers who are a little more hungry than they are. Um, we always do customer diligence, whether we're leading around, which is most often, but even if we're following, we do our own diligence, we always talk to two pilot customers and it's really telling what happens there. Um, because you'll have a pilot customer who really likes the founding team, but they're just not using the product that much, for example. And so what we really want to see is that those pilot customers are like insatiable, that they are really into it, that they really, really need what the founders have to offer.

Justin Gray: (21:33)
Um, so sometimes that, you know, those founders maybe in the past would have been the people we would have said, Hey, we'll do a hundred canes of the two 50 K how's that sound. Um, but then what we found is that they're not able to do things on a fast enough cycle to get to that seed round. Then they typically will need to like, do something like a bridge round, uh, to get them there. And that's always a little bit risky. Um, we also have the issue of that as a pre-seed fund. Um, we come in really early on pretty early economics. And the worst thing that happens is that when six months later, someone else comes in and tries to get in on the same economics that you had, which means that I've, de-risked a deal for another fund that I don't work for. That is not cool. Um, so you, yeah, that, that one, I like the term for us, my cookies, like totally fresco.

Justin Gray: (22:22)
So I can forget about that for days, but I won't. But so at this point, what we've learned is that if we're not ready to do two 50 K, that means we need to send our like, Hey, you know, here's what we need to see. I even keep a list of founders to check in on of these are the ones we're checking in on next month to see where they're at, because maybe they've made the progress that we need. And we've had two of our very best teams. We said no to multiple times. We did the not right now with the feedback the teams came back multiple times. How do you like me now? How about now? Loom is one of these teams in fact, uh, which is doing amazing now. And, and on the third try, we said, you know what? You're at the point that we think makes sense, let's do this.

Justin Gray: (23:02)
So that's one, one major learning. Um, let's see. Um, one thing that we've seen is that companies that have one big customer, but not other customers, it's much harder for them. Um, I think this is also, this is like, this is a hard data point because we don't have that many of them. But what we've seen is that our companies that maybe they land a pilot with like an, a player, which is great. But the problem is is that if something goes awry with that a player or they get fickle, um, or you're not sure who else to service in the market, it's, it's hard to get that company to grow. Um, in addition, sometimes that a player pilot is really looking at the team as an acquisition, more than as a customer and a partner relationship. And so that's just kind of a learning, I think for founders of that, I think people think, Oh, I'm going to go after the biggest fish I can and get this huge contract.

Justin Gray: (24:03)
And like, that's awesome. And I'd say to balance that out with other contracts. Um, one, if you, don't another thing, if you don't mind, my French is star fuckery, um, STEM that we've invested in. And some that we haven't where, uh, you see, like, all it takes is looking at social profiles of founders and it's like, they're hanging out with the movie stars. They're always shaking hands with the big wigs at conferences. And they seem more concerned with like getting pictures with the right people, then building the company. Um, this doesn't work, uh, it looks really good and it's hard because it can send strong signals. We've had teams that have raised money from like big name such and such person. Um, but then it kinda turns out there wasn't as much substance there. There's a ton of flash. Like it's like, wow, man, that person knows is sharp.

Justin Gray: (25:00)
Like they're really, really sharp, but the substance is lacking. So that's another learning that we've had. Uh, and I think, uh, last main one is that for founders who are nontechnical, it's really hard for them to find product market fit fast. Um, they need to spend more money on engineering hires that they don't have. And the feedback loop between the founder, the engineering team, especially if they're using sort of like a dev group and the customers it's too disconnected. Um, and, uh, it just makes it really hard to make progress. So those are, those are some of the like, like, I don't know, watch out areas.

Speaker 3: (25:45)
Those are great. And I'm sure they're their hard earned to over.

Justin Gray: (25:50)
I guess one of the things I would say about these things, I mean, I'll have to send this podcast to my investors is like, don't share these things. Usually the thing is, is that I'll tell you also all the things I look for in founders, but it's not about words. It's about being able to recognize something. And I can tell you what a star fucker is, but I know like I have the visceral experience fucker is, and that's different than reading words on a page and thinking, you know, what it looks like. Um, so I'm always very candid with people because I know that I have the years of experience of working with these different types of people and being able to recognize, um, these really important patterns that are just hard to garner without that experience.

Speaker 3: (26:36)
That's a, I, it reminds me, I wrote a blog post a long time ago about grin fucking, which is like, when is that? When you like, when people aren't comfortable giving real feedback and you, so you show your product to someone or you tell someone about an idea and they're, they think they're being nice by giving you

Justin Gray: (26:55)
Kind of like the bullshit. Oh, like, that sounds really interesting. Like usually when someone says interesting, it's a lot, it's never a good thing.

Speaker 3: (27:04)
Yeah, exactly. So green fucking it's when you're, uh, doing something on the disservice. Yeah. Yeah.

Justin Gray: (27:10)
I'm going to use that because so many times people will tell me, especially really early stage teams that I wouldn't even say they have a startup, they have a project. They'll be like, I talked to my friends and they all love it. And I'm like, now I'm going to be like, they were all, we got to keep the grid every day.

Speaker 3: (27:29)
Well, Danielle, this has been really fantastic. I'd love to wrap up by asking you,

Justin Gray: (27:34)
Um, who, who in your professional life inspires you to? And my professional life inspires me, you know, I always, you know, there's definitely been mentors around us and there's been peer mentors around us too. And I think peer mentors are sort of an overlooked asset. Um, but, um, one person who admire, who I admire a lot is actually someone who is an advisor to our fund. Her name is Shea Tate, Donna. And she was over at true ventures and she helps build that firm. And she's a startup founder. Uh, and she now works at first Republic bank. And she has always been so helpful to us on both the advisory side, but also on the very practical side. And when we were first starting the fund for the very first two years, we would meet with her once a month. And she, we, she would meet with us for two hours and go over all the ins and outs.

Justin Gray: (28:29)
And I, at one point I nicknamed her the Oracle and I was like, Oh, good. The Oracle, because I can ask her my favorite question to ask her is what are the things we need to be thinking about that we're not thinking about right now? And it was just wonderful. So she is someone I very much admire and appreciate, um, other funds. I really love like, um, you know, I, I sort of harped on earlier about how investors, you know, maybe aren't my jam, but there are investors who are my jam and they tend to be pre-seed and seed investors who are also doing something because they have a mission and a vision they're very scrappy. They're very founder like, so I love working with 2048. Um, that's Alex's fund. He's a fantastic person. Um, I love working with precursor Charles and Sydney. They're fantastic.

Justin Gray: (29:21)
I love working with hustle fund, um, Elizabeth and Eric and the team over there. Uh, and I'm just getting to know them all better over time. And you know, when COVID hit, we started doing a once a month, like kind of shoot the shit, a zoom chat to just talk about what are you seeing in the market and what are we seeing in the market? And what's it like working your investors and what's it like working with our portfolio companies. And so I learned so much from my peers and I think it's really important to also build up peers that you respect and trust. Um, cause there's also a lot of people in the investor space who I don't trust and I don't respect. Um, and I wouldn't want to work with them just because other people think that, like, I dunno if they're cool or that they know what they're doing. Like, um, you know, brand is important and who you associate with is important. And, uh, and so yeah, I want to surround myself with good people. The folks with the Cheetos need to flock together. You know, I like it. If I can find people who will like, I dunno, pick their Cheetos and like a frappe or something, or like a Danielle, thank you so much for taking the time. This was really enjoyable. Hey, thanks for having me today.