Beyond The Pitch – The Future Of The Venture Capital Landscape With Samantha Lewis, Part 1

 

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Welcome to another episode of The 7 in 7 Show with Zack Ellison, which features full-length interviews with the world’s leading investors in innovation.

Episode 9 of Season 2 features Samantha Lewis, a Partner at Mercury Fund. Her specific focus is on Mercury’s Power theme, where she seeks to fund startups utilizing blockchain, data platforms, and fintech to rethink the way people access capital and opportunity, build wealth, spend money, and organize as communities.

Samantha currently serves on the boards of Mercury portfolio companies Apparatus (infrastructure), Arden (infrastructure), Civitech (data platform), Brassica (fintech infrastructure), and Cooklist (data intelligence). 

Samantha is an active Kauffman Fellow, the world’s premier venture capital fellowship. Prior to joining Mercury, Samantha was the Investment Director at Goose Capital, a Houston-based investment group of serial entrepreneurs and F500 CEOs, where she led deal sourcing, structuring, and portfolio management. During her time at Goose, she led investments in Syzygy Plasmonics, Rufus Labs, and Emerge. Samantha is a repeat entrepreneur with a background spanning agribusiness, logistics and supply chain, beauty, and deep tech.

Samantha received her MBA from Rice University and a B.A. in Political Science and History from Texas A&M University. Samantha remains deeply committed and involved in the efforts to build diverse, robust innovation ecosystems. Outside of Mercury, Samantha actively mentors founders, teaches a Venture Capital class at Rice University, and supports Ukraine through fundraising and medical supply deliveries.

In this episode, Zack Ellison and Samantha Lewis discuss:

1. Venture capital’s evolution: From pitch to sustainability
2. Diversity in venture capital: Identifying untapped markets and founders
3. Venture debt: Bridging startups to success
4. AI’s role in startups: Beyond hype to utility
5. The importance of geography in finding venture opportunities
6. How venture lenders catalyze startup growth and validation
7. Enhancing investor returns with DPI (Distributions to Paid-In capital)

Beyond The Pitch – The Future Of The Venture Capital Landscape With Samantha Lewis, Part 1

The Venture Capitalist Role

I have with me Samantha Lewis, a partner at Mercury Fund. Sam, thanks for joining. I’m very happy to have you here. Tell us how you got here. How did you become a VC?

Going back to the very beginning without boring everyone, I come from a family of entrepreneurs. Both my mom and my dad have started companies. All the companies they started were actual real businesses. You’ll get what I mean by real businesses later, but they cashflow and have positive EBITDA, etc. I grew up in a family just seeing that.

I went to college at Texas A&M University in Texas and then started a few companies. One of them was with my mom and it was in food logistics and supply chain. We grew that fairly quickly to about $3 million in revenue over a few years. I started another company modeled after the dry bar, which most guys don’t know what that is, but all the women do. It’s a place where you go and it’s very simple, where you get your hair blown out for events or for days. It’s a simple model.

We built something like that for lash extensions. I did that and then I sold that business then went back to business school. When I went to business school, I went to Rice University in Houston. I thought about how can I apply and what I’ve learned in my entrepreneurial journey to scalable tech startups. I got involved with everything, like all things tech entrepreneurship and VC to dig in and understand.

I met my now partners at Mercury Fund, Blair Garrou and Aziz Gilani, in one of their classes they teach at Rice. They teach a venture capital class. I met them then and then they mentored me throughout the years after Rice. I jumped over to investing straight after I graduated. I was doing early-stage investing in deep tech startups for about three and a half years and then jumped over to Mercury in 2020.

 

 

Mercury is an early-stage investment firm that’s focused on software and it’s outside of the coastal hub. We’ll get to this a lot more, Zack, as we’re thinking about how we think about the world of venture. It’s quite different from how my friends and my colleagues on the coast think about venture. There’s not necessarily one right or wrong, but both of them are important to drive returns. We believe we have a pretty good model for that in Texas.

You were an operator and business builder before you became a VC. How has that helped you as a VC?

I think on the qualitative front. I know I’ve already told you this before, Zack, but I try to think about my role as a VC. Not only from the quantitative metrics and the things we’ll talk about that can help me drive quantitative outcomes. Many people overlook the qualitative pieces of how hard it is to build a startup.

You’ll see throughout our conversations and throughout the episode that I try to think a lot about inserting qualitative pieces into it just because that matters a lot, especially in early-stage ventures. Sometimes, we’re investing in companies that are $1 million of ARR. They have so far to go before they can only be driven by quant metrics.

It’s the entrepreneurial journey. We think about this a lot at Mercury. When we’re thinking about hiring new people, elevating people to partner or bringing on LPs or who we’re investing in as startups or partners across the Mercury platform, we have identified what it means to have empathy for the entrepreneurial journey. That doesn’t mean that you have to be an operator before. You can have empathy for the entrepreneurial journey just by being in the trenches with entrepreneurs as they’ve been building.

That’s one of the most relevant things that I’ve gotten out of being an operator before. I understand how hard it is to make sure in the early days you’re meeting payroll every single pay period, and how hard it is to make sure you’re hiring the right people in the very early days. If you don’t hire the right people or you make the wrong decision about who you’re going to work with as vendors, that can have serious impacts on the bottom line. There are some of those decisions I’ve been there with on the day-to-day that helped me when my entrepreneurs call me to throw around some ideas on what they’re thinking about next.

I think you have a huge advantage as a former business builder and entrepreneur yourself. I find that for myself as well because I’ve built out ARI from nothing. It was just an idea from my mind. It differentiates me from other venture debt providers because I’m not just a banker, a lender or finance person. I’ve gone through years of building this from nothing and done the operations, the marketing, the team building, the HR, the risk management, and the legal. Everything.

I know how hard it is and it’s a painful journey building a company. As if you talk to successful founders who have had exits and monetized their businesses, even then they wonder if was it all worth it sometimes because it’s so mentally and physically taxing when everything is on you all the time.

It’s one of the highest-pressure jobs you can ever have. I read your episode with the Rarebreed rollup and Dan. You and Dan talked about that a lot. It’s the grit that gets you up every single day whenever things look tough and what you’re going to do with it. I think sometimes entrepreneurs, tech CEOs or tech cofounders forget that a lot of VCs are entrepreneurs too, or a lot of capital providers are entrepreneurs. I’m not the founder of Mercury, but my partner Blair Garrou is. He goes through that entrepreneurial journey still every single day when he’s thinking about how we build a firm. It’s the same with my other partners now here. That it gets overlooked a lot, but we get it. We know what it’s like to build firms.

I’ve talked about this in the past. There’s a book by Malcolm Gladwell. He was at an event with a bunch of traders and senior military generals essentially. He said it was like two peas in a pod because they’re used to making risk decisions all day long every day, and everything’s on their shoulders. I think I would add entrepreneurs and pro athletes. In my mind, those are four of the most stressful jobs. I was a bond trader on Wall Street at Deutsche Bank and helped manage a $25 billion portfolio at Sun Life, which is a trillion-dollar asset manager. Those are stressful jobs. I don’t even think it compares at all to the stress of being a founder.

I have a different background, but I agree with you. I think the stress of being a founder is probably one of the most stressful jobs out there, especially as you grow too, or even in the early days. Let’s say you’ve taken some friends and family capital. Your friends have trusted you with money. That is something that keeps people up at night. Early-stage venture, like a lot of companies, fail. That’s okay, but oftentimes, friends and family don’t know that.

Control your own destiny and try to do super capital efficient business models and get to break even if you can. Share on X

They’re like, “Sure, Zack. I’ll back you for your new tech idea.” They don’t understand that they need to build a portfolio of assets. If you’re going to do one early-stage investing, you need to do others. That keeps entrepreneurs up at night. The ones who get through that, and then you hire people and then people’s livelihoods depend on decisions you make every day. It’s a very intense job.

Current Market Conditions

This is a perfect segue because I want to talk about the funding markets for startups and the VC market. It’s a very tough environment. We’re still in the first quarter of ‘24 and it doesn’t seem like it’s going to get better anytime soon. What are your thoughts on the current market?

It is undeniably a very tough market. Zack, we’ve already talked about this. I think this is how we initially were bonding. This is the tightest capital market by far in venture since 2010. That is not easy. I live in two worlds because I’m an early-stage investor. That means I have some seed companies in my portfolio, and then I have some Series A that have hit scale and are growing into like the Series B growth rounds. I see just such a stark contrast between those two buckets of founders and what they’re going through.

Generally, seed-stage investing has largely evaporated, especially pre-seed, very early. Emerging managers went out in the last bull run, and were interested in investing in seed and pre-seed companies. A lot of the emerging managers were super early stage. They were also diverse, so 80% of diverse managers were emerging managers in a report I saw in 2021. That’s a whole different dynamic, which we can get into later if we have time. Those funds are getting wiped out. Why? It’s because LPs are deciding where to continue to deploy capital and they’re deploying capital into fund managers that are proven and they know.

It is a sad state of business for the venture industry. I think what it means for entrepreneurs is you have to know that there are a lot fewer dollars chasing a lot of deals still. If you’re thinking about starting a company, that’s one thing to consider. If you’re already in and you’ve raised the seed round or you’ve raised the Series A, it’s something super important to remember in such a capital-restricted environment. Everybody’s bar is a lot higher. You get the stack.

I know you get this, but all of our bars are significantly higher. For example, one of the key things that we’re focused on at Mercury in this capital environment, there are a lot of companies that went out and raised either a very large seed or a fairly moderate Series A in like, let’s say, 2020-2021. They got exuberant valuations and they’re trying so hard to catch up to those valuations because growth investors are like, “We’re not giving you that valuation.” They might still have amazing growth rates, amazing retention, or some amazing fundamentals for a Series A investor, but the growth investors don’t care about that anymore.

Maybe they were coming down and looking at Series A companies or later Series A to early Series B. They’re not doing that anymore. That’s created this huge gap in the market where there are all these successful companies that would’ve been defined as successful a few years ago that cannot get funding. Why can’t they get funding? It’s because the bar is so much higher between what the growth investors be and above is what I mean by growth, but what they’re looking for.

There’s this huge actual place in the market where Mercury supplying dollars and it’s right there. We’re finding what we call mature A’s and they’re great companies. They’re highly de-risked compared to some of our other seed-stage and VA companies. They have their go-to-market motion and rolling, but they’re not getting capital and especially not getting capital on any attractive terms for the board and the company.

We’re willing to jump in and say, “Let’s tweak a few of these things. We’re already growing. We already know we have product market fit. Let’s tweak a few of the other things we need to get our cohort data in line. Once the market starts to open up, we’re going to be super well positioned.” There are dollars still flowing but it’s just tough.

What we’re telling entrepreneurs is control your own destiny. Try to do super capital efficient business models and get to break even if you can. Also, you have to run incredibly lean. We don’t know when the markets are opening up. Economists all have their ideas but until then, make sure you control your own destiny. Get to capital break even and cashflow break even and go from there.

I’ve been saying that for quite some time. I think a lot of people weren’t really listening. They wanted to believe that the market was going to get better and it was going to be easy to get capital again. I said, “No, it’s not going to happen.” To your point, you have to control your own destiny because you do not know what’s going to happen in a macro sense. There could be many events outside of your control like the IPO market being shut.

The IPO volume’s down 92% from 2021 to ‘23. It’s literally like frozen. That’s not any company’s fault or decision to make. They have zero influence on that, but that basically means there’s no exit opportunity into the public markets for any of the so-called unicorns. You’ve got a big backlog of all these companies that are going to have to stay private for a lot longer. There’s less capital to fund them as private companies as well. This brings me to a question that we talked about a little bit offline, which is the state of dry powder in the industry. We hear a lot about how VCs have all this dry powder, and I think that might not be true in a sense. What’s your take on it?

 

Yes, it’s totally not true. We’ve been shouting this on the rooftops for a few years now. The way it cascades, and you know this, Zack, but I just want to make sure we’re level setting with everyone. IPO market’s closed and because IPO markets closed, then it starts to trickle down through later stage investing to early-stage investing when it comes to dollars flowed. Deal count is a little different, but as it starts to trickle down, so then much later stage and growth investors start to fill it first because then they don’t have liquidity opportunities. They start to push it down.

Series A investors start to fill it and they start to push it down. It goes down the line all the way to the pre-seed. What we’ve been saying, and I have to give all the credit to Aziz Gilani, one of our partners. He’s been saying from the beginning, “The dry powder is not a real thing that founders can be counting on.” Why is that? It’s for many reasons. Sometimes, just because LPs committed capital, it doesn’t necessarily mean they’re going to follow through on capital.

If also there are no companies that they are now deeming good as fund managers, people are okay just sitting on capital if their LPs are aligned with that or they’re okay just not even calling capital from their LPs. Only because the dry capital is there doesn’t mean it’s going to be deployed because they have to get to a point of liquidity. If IPO markets are closed, it’s like the end-all-be-all. It’s not flowing at all in the way that people do. I think I gave you a stat.

This is a Silicon Valley Bank report. All of our favorite bank, RIP. It gives you an amazing opportunity, Zack, but they put out this macro report every single year. The 2024 one has a headline that says, “Dry powder, it’s not as dry as you think.” There’s almost $300 billion of dry powder. The amount that’s being deployed is $100 billion, so there’s a $200 billion gap of dry powder.

The headlines read $300 billion of dry powder and people read that and think, “I should be able to get funding.” The reality is only a third of that’s being put to work and it’s not all that it seems. I’m seeing this a lot just talking to founders looking for debt financing. A lot of them don’t realize that the market is 180 degrees different than it was a few years ago.

Why do you think that?

I’ve always studied behavioral finance and behavioral science when I was a trader and a portfolio manager of fixed income. I think there’s a lot going into it that’s behavioral in the sense that people do anchor to the past. It’s hard to change someone’s perceptions. If they’ve been living in an environment that’s a certain way for a long time and things change, they might not recognize that change until much later.

It’s pretty clear in the financial markets that we’ve had a huge bull run 13-14 years at this point. Anybody who’s built a company in the last 5 or 10 years has just had phenomenal opportunities to fund themselves very cheaply. Money was almost free. You could borrow money from SVB as a startup, pre-revenue for 3%. It’s like laughable in hindsight. On the equity side, you could go out and raise money with nothing but a pitch deck and a half-brained idea because it had some magic word in it and everybody was trying to chase the hot, shiny object.

By the way, fundamentally, we are not investors like that, which we can get into in a little bit.

I know. That’s why I have you on. I don’t talk to investors like that because they’re jokers.

I will say in defense of some of my friends who are at funds that are more like that, it’s not at all how we invest. It’s not at all how our LPs want us to invest. It’s why we make partners with people like you, Zack. Historically, when that is what their funds have done to get returns, then that is what the fund managers are telling them to do.

It's about building a business that's sustainable through cycles. Share on X

For example, as you just said, if you’re an entrepreneur who has built a company in the past 13 to 15 years, you have a very different take on what it takes to get capital than entrepreneurs who built in the 2008 era. I think VC has a reckoning coming. A lot of that has to do with people have to understand that capital is getting tougher to find and you have to do real diligence. What does that mean? Back to the fundamentals.

You nailed it in. Not only do founders need to pivot in their expectations, but VCs do as well. The model that worked well when we were at a peak bull market with very cheap capital and abundant capital, doesn’t work anymore. Now you can’t go out and invest in these growth ideas that are going to hit maybe 1 out of every 10 or 20 shots. You need to invest in companies that can drive profitability quickly and have business models that work and can sustain themselves even if they don’t have access to external funding going forward.

It’s one of the interesting things that will come out of the next few years. It’s which of the very large big-name firms survive. A lot of them have never returned anything significant to LPs. They might be the hot and sexy thing to go work for, but never have returned that much capital to LPs. I don’t think that’s going to last forever. It’s about building a business as a VC manager. It’s about building a business that’s sustainable through cycles. Through cycles piece has gotten very lost over the past decade.

What we’re seeing now is LPs in funds are asking for different metrics. They basically are saying, “I don’t care about what this paper IRR is and are forward looking IRR in a sense. I want to see DPI, your distributions on my paid in capital, some cash, and results. It doesn’t need to be a 10X return, but I need to see something because I don’t believe there’s anything there.” That’s what they’re saying. “I don’t believe there’s anything there of value in many respects.” It’s interesting because we’ve seen a boom in secondary opportunities. Everybody’s piling in there, too. I’m curious if do you folks do anything in that space.

We don’t buy secondaries, but we sell secondaries. We have a pretty interesting model, which our institutional LPs especially really like. We drive for DPI. When we went out to raise fund five, we had upsized fund five to $165 million fund from fund four, which was $100 million. We’re investing out of fund five. Talking about upsizing a fund in this market is almost insanity. We did close early 2023, but with that being said, it’s because we had high DPI, higher than anyone else out there trying to raise. The reason that we have high DPI is because we’re okay if one of our companies gets bought by a massive company or a very Silicon Valley darling type of tech company.

We’re okay selling some of our stock, and getting like, let’s say, a 3X on it. Something good, but not exponential. Getting a 3X on it and then keeping the rest to let it ride. We will sell secondaries in some of these transactions to get to at least a 3X return on investment. We’ll get that cashflow, return it directly to LPs, and then we’ll wait the rest to let it ride so that we can get those outsized returns. That’s working really well for us. It speaks for itself in what we’re able to do for fund five.

You know what I call that? Sound portfolio management. It’s something that you’d see a lot in some of the bigger institutional investors. Not in the VC space, but in the bond markets where they know how to construct and manage a portfolio and what you folks are doing is similar in that sense. Also, keep some of that upside so you can ride the winners as well.

I will say it speaks for itself. I’m not trying to say this to pat our own backs, but it’s because we’ve been shouting this from the rooftops for a long time and it’s finally coming to fruition. It feels good to talk about, but our fund four is in the top decile of all funds of our vintage. It’s because we practice good portfolio management.

You should shout it out. I think it’s funny when people have been saying things for a long time and everybody doubts them and then they’re right. Everybody’s like, “Don’t tell us that you’re right. You’re a jerk if you do that.” I’m like, “I knew private credit and venture debt was coming.” Everything we’re seeing in the market like AI. Why do you think I need my fund applied in real intelligence like ARI? I’ve been on this for years and people talk crap about me. They doubted me for years.

Now they’re like, “You’re not allowed to tell everybody that you are right on all your calls.” When I was like, “Go along private credit in 2021,” and I sent that out to like all the major pensions and most of them never did anything with it. They’re like on their returns, “I would’ve made literally 40 points more in those two years if I had read that paper and done anything about it.” Public fixed income got smashed in 2022. It was down to like 20% to 25% depending on duration.

Meanwhile, private direct loans, the stuff that I’m doing and other direct lenders are doing was up like 15% to 20%. Imagine that difference where you’re clipping where 40 points in a year in fixed income. That’s a decade of returns, so I’m going to I tell everybody I was right and you should, too. You have a freaking good fund. You’re killing it, because you have better processes than your competitors.

Thanks. Here we go. I shouted it from the rooftops on the 7 in 7 Show.

 

Timeless Investment Principles

We were right. We would’ve made a lot of money if you’ve invested with us. I’m taking a half step back now that we’ve patted ourselves on the back and developed a couple of more haters out there. Let’s talk about timeless principles of investing and key investment principles that you live by. It could be principles or processes. I know that what you do, the stage that you invest in, is much earlier than most people reading will be investing. It’s much more qualitative and more geared towards the people. Explain what you do to identify the best opportunities and then also the processes that you implement along the way.

We have a pretty good process that I’m proud of because we’ve worked hard on getting here. Every year or every change of cycle, if it’s in the middle of the year, we all get together and we do a full offsite. We throw up on the board, what are the things that are the most important to us as senior partners of the firm and then we all force-rank them. We think about what are the most important things to be investing in that are relevant to this current macro environment and to when we think in this scenario, like when we think liquidity markets are going to open back up.

We call that our fundamentals. That’s what we drive into there, which is more the quantitative metrics. Those are growth rate, retention, and the high metrics we know that Series B investors and beyond all the way up to public markets usually care about that. Those are the capital efficiency of the business model all boil down into that managed with the growth rate. We have pretty strict metrics under there that we’re investing on in these A companies that we’re finding.

This happens especially when later-stage investors start coming a little earlier. What they miss is that there is undoubtedly a qualitative perspective here. You have to have one and you have to have high conviction and what your qualitative perspective is so that you’re attracting the right entrepreneurs. We take lead investment stakes. We’re investing the majority of the round and A’s and then we jump in on the board and as needed. We’re very hands-on with the company. Zack, that’s how I met you, through one of my companies.

We’re very hands-on with them. There’s this qualitative piece of one making sure the founder VC fit. A lot of people talk about that, but what does that mean? It means something very different for us than it sometimes means for others. That dynamic and understanding why that founder wakes up every single day to drive this because early-stage investing, especially Series C and A is tough. We’ve already covered that a lot here. It’s really hard.

You have to understand why this founder is so passionate about the problem they’re solving. Are they going to keep going? When they are staring at a wall, are they going to figure out how to get through the wall because there are going to be so many walls and hurdles that they’re going to have to jump over and you need to understand that. It’s like digging into the grit. I think you and Dan covered this too when you were talking about some of the military background. You have to understand their grit and how they scale that wall and get around the wall because plenty are going to be thrown up.

That one’s super important when it comes to founders. We also have to force rank some other qualities about the founders and that’s highly qualitative. You have the vision and scalability. Can they scale? Are they hiring the right type of people that know how to scale these types of businesses? I hate the word coachability, but to me it means something that I can easily define and it means something different to probably every single person. To me, it means collaborative problem solving.

Is this founder or the CEO open to collaborative problem solving? If they’re not, they’re not going to attract the right people and the right investors, and then they’re trying to do it alone. Finally, self-awareness of the founder. Where are your gaps? How do you hire around them? When are you no longer maybe the right person to be the CEO of the company? If we ever get to that point. Bringing those things up is a good sign that we look at when we’re looking at the qualitative measurement of a founder.

Key Qualitative Aspects

What would you say are the 3 to 5 most important qualitative aspects? How do you quantify something that inherently can’t be easily quantified? In other words, you’re looking at their footprint in life to see what they’ve done in the past. Are there other ways to determine what their core personality traits are?

People are trying. We’ve had very robust and fun discussions about this at Mercury because I will even say in full transparency, we’re not even aligned yet on being able to assign a quantitative value to the qualitative metrics we’re trying to diligence founders on. We are working with a behavioral psychologist, though, who understands venture to try to put some framework around it. The biggest part of that is not so that we get an outcomes report that decides whether we invest in the founder or not.

It’s not as much about that. It’s about from that outcomes report, then we all decide how do we work best with this founder. If there are red flags, there are red flags, but usually, we can get those from just conversations. It’s, “Do you have a lot of turnover in your executive team? Do you not recruit like top talent?” A lot of the things on how they work with people and then how they’re transparent and open in the diligence process.

I’ve got to mention something talking about transparency and diligence. We were talking before offline about how I’m writing an article now for founders about how to avoid the startup death spiral. In other words, if their valuation creators and they need to go raise capital to survive, how do they get to the front of the line? How do you stand out aside? Aside from their business fundamentals, are there other little things they can do that become big things in the process?

Coachability means collaborative problem solving. Share on X

You just hit on one, which is in the diligence process or in the conversations, they need to be transparent, truthful, and fair in their actions and demonstrating alignment with the VCs and with other stakeholders. I have a list that and I’m working on this article now. It should be out soon. I’m starting a new monthly column where I’m writing for the benefit of founders and entrepreneurs to help them get over a lot of these typical blockages and pain points that everybody experiences. One of them is how do you stand out in a competitive process? It’s not just about your company. For me, a big part it boils down to is, do I trust this person and this team? It’s funny to me how people expose themselves by being liars.

Trying to hide the ball. We have to figure out if they are lying on purpose or trying to hide the ball because they feel like they are so desperate to get this capital in. Either one is not a good thing, but it’s interesting because there are a lot of things that are very hard to uncover in diligence that shouldn’t be hard because the point is, we’re investing in people who we want to partner with, Zack. You’re going to partner with your entrepreneurs like I’m going to partner with my entrepreneurs. The only way we can solve problems is if we know what the problems are. One of the important things that often gets overlooked is that the narrative is very important.

For example, I talked to an entrepreneur. I’ve known her for over a year. She’s done a few different things. Sometimes, it was trying to raise on a higher valuation because they have a very deep tech platform that was getting valued probably in 2021 at something that she was trying to raise on in 2023. It didn’t work, so then she pivoted and then she buckled down and figured out, “How can I prove out some traction?” She then brought the valuation down and came back.

She is not trying to hide the fact that she did that. She was like, “No, it made sense. The market changed. I talked to all of these experts in the space and they helped me craft what is now the best thing for us to do as a company.” She wasn’t hiding the ball. She was just like, “We tried to raise on a higher valuation. It didn’t work. Here’s why it didn’t work. This is what we did to fix it since a year ago. Now this is what we’re doing.”

I just appreciated it so much. It was so refreshing. I was like, “Thank you for reminding me.” I didn’t have to go back to old emails, pull it up and look it up myself and then ask her about it. In 2020 or 2021, you could raise money on a deck. You can raise money at exuberant valuations on a deck if your idea was good enough and your team was good enough. That’s just not the case anymore. People need to remember that for sure as they’re building out their pitch decks.

To wrap up this point, in terms of things that founders can do, you put their best foot forward. I’ll name a couple and then I want to hear a couple from you. I would say be transparent, be fair, and be accessible. If your VC or potential funder is emailing you and takes you a week to get back to them. They’re not going to chase you. Again, this is not 2021. They’re not going to chase you.

They’re going to forget about you, and put you on the do-not-call list. Be responsive. Get back to people quickly. Being humble is very important. Every founder needs to be inherently a huge believer in themself and, by definition, be an overconfident individual. Otherwise, you would never start a firm because the numbers would tell you otherwise.

They’d say, “Don’t start a firm because most fail.” You have to be a little bit crazy and a lot overconfident to start a firm. I don’t mind that people have tremendous confidence. In fact, that’s something I look for like, “I’m sorry, I don’t want the person with my money not having confidence and thinking they can do what they said they’re going to do.”

Save humility for something else in many respects, but be humble in other ways. Know that you’re going to go and drive this business forward, but be humble in how you interact with people who are trying to partner with you. They can partner with anybody else, too. Those are some of mine. What are some of yours?

I could sum up that. I call that being unabashedly bold. You have to understand that piece because that is a special sauce for an entrepreneur. We force-ranked this in the top things we look for, and it is in the top five for Mercury going back to qualitative assessment on things, is a unique insight. What is your unique insight into this market or into how this tech applies to the market or into your customer’s mindset? Whatever it is. What is your unique insight that positions you and the company to win in this market?

Being able to fundamentally understand that and then be able to explain to people that in a very concise way is a superpower. Founders that have that are able to raise a lot of money at higher valuations, depending the rest of the business works. That is super important. I’m going to say unique insight, boldness, and vision but vision goes into that unique insight. I mentioned this but proven ability to scale. That doesn’t mean that you brought a company from $0 to $10 million IRR always.

It can mean you know how to put the right people around you that know how to scale if you don’t have that experience. Probably the most important thing out of all this, but it encompasses everything we’ve said is self-awareness. How are you self-aware as an entrepreneur and as a CEO? It’s a very lonely job to be a CEO as you know. How are you so self-aware that you’re going to continue to question yourself and what you’re good at, where your skill sets best are, and how you build a team around that?

 

Sourcing Investments

Those are very good. A question for you now about how you source investments. This is a question I get all the time from prospective investors and they say, “We love your process. You’ve got probably the best processes we’ve ever we’ve ever seen, quite frankly, because you’ve developed them at three different trillion-dollar shops and have twenty years of doing this.” Process doesn’t mean anything if you can’t source the investment. That’s the key point. What I will say for venture debt, and it’s probably even more true for venture equity, is the investment process is the easy part. It is.

People get it so wrong, but you’re right.

The hard part is how do you identify the right opportunities? Especially on the equity side, where it gets crowded and it’s hard to get into the opportunities that are perceived to be the best. How do you find those companies? Also, forget the super-hot companies. I always think those that wind up being a bad trade most of the time. How do you find the companies that are maybe not on other people’s radar but wind up being solid producers and sometimes big winners?

This is a very Mercury in our DNA thing and people look at us like we’re crazy. We’re not afraid to look in places no one else is looking. That’s one of our big differentiators. We have other things that other venture funds have. For example, we run one of the largest software conferences outside of the coasts in Texas. We do it every eighteen months. It’s called the CXO Summit.

We do that. That brings a lot of entrepreneurs and a lot of funders into a room together. We network with all the seed-stage VC firms. We network with growth investors so that they know what to send us. That’s just what everyone does and what you should be doing. One of the key things that we do, and it’s proven out to be very successful for us. We’ll go into markets where no one else is, especially if we have LPs there.

For example, we have a big LP in Tulsa, Oklahoma, and guess who the largest, biggest VC is in Oklahoma? It’s us by dollar. Why is that? It’s because we have an LP there, so then we started understanding the Oklahoma and the Tulsa landscape. We’ve invested in three companies out of Tulsa and all of them are some of our top performing companies across fund four and fund five.

What I think is interesting about that specific example is that when you go to Tulsa entrepreneurs are anywhere. Houston even. That doesn’t have like a huge ecosystem. When you go to these places that aren’t flush with capital and with ego, it’s a big part of it. You can find entrepreneurs who understand fundamentals of the business, how you drive cashflow, and how you make sure your business sustains through ups and downs of market cycles.

You find people who are a little bit more conscious of that because their peers around them are running those types of businesses. The flip side of that is then sometimes it’s hard to get them to go into full growth mode when it’s time. It’s like, “We know we have the capital and the metrics go into full growth mode.” They’re like, “Cashflow break even.”

It’s like, yes, that’s good, but now how do we balance that with growth? That’s a conversation now at a much later stage than we used to have in the earlier investment stages of the companies. I think that’s a good example. We’ll go where other people won’t go because you can find good startups anywhere. You really can.

I couldn’t have said it better. That’s exactly how I think about it and it’s true for any market. You have to go where others don’t go and you have to think differently. Otherwise, you’re going to get average returns at best because if you’re thinking like everybody else and chasing all the same deals they are, you’re going to be average. Average is okay when the markets are up 20% or 30%. It’s not okay when the market’s down.

To your point, too, I think a lot about where are there gaps. Where are there gaps within the gaps, so to speak? In venture debt, for instance, the market’s already underserved and there is a funding gap there. In other words, there’s a lot more demand for venture debt from founders and startups than there is available supply from banks and non-bank lenders. There’s already a big gap, which presents a huge opportunity if you’re a venture lender with dry powder and a clean balance sheet like us.

However, within that gap, there are even greater opportunities. The gaps within the gap. You already nailed one, which is geography. That’s, without a doubt, a great place to start because if you look outside of the Bay Area, New York, Boston, and LA, there’s not that much activity in all the other cities. People will say Austin and Seattle and a couple of others, but there’s still a fraction of what the big four are doing.

Being unabashedly bold is a special sauce for entrepreneurs. Share on X

You take it down one more notch to the Tulsa’s of the world, and no one in the world is calling on them. You have a 100% market share in the good startups in Tulsa because nobody else called on them. That’s low hanging fruit. That’s alpha generation opportunity. You can outperform simply by going to a market that nobody’s in. On top of that, I like looking at sectors and business models that are not hot. Everybody’s scared of consumer now. There are valid reasons for that.

Everybody goes through these cycles of emotions where something’s hot today and it’s not tomorrow. They love AI today. They’re not going to love it when they lose all their money in most of these investments in five years. That cycle presents opportunities because if you take the best performer in a segment that nobody else is calling on, that is so much more valuable than taking the number 100 SaaS company that everybody’s calling on.

It doesn’t have a differentiated model that’s not doing anything interesting. That’s commoditized in many respects. I think there’s that. I also think founder type matters in the sense that women, Blacks, Hispanics, veterans are completely underserved and don’t have the same access to the markets that their ideas and execution capabilities deserve or want. If you are somebody who calls on them and you want to partner with them and you make capital and ideas accessible to them. Now, all of a sudden, you’re touching 75% of the US that nobody else is even calling on.

Which has massive market opportunities because as I just told you, Zack, I’m five months postpartum. What I realized was this is an entirely underserved market from a tech perspective. I’m used to using tech for literally everything, checking my bank account all the way through how I decide what groceries I’m going to buy and put in my refrigerator.

There’s like very little out there for childbearing parents. That’s crazy to me. I’m like, “Why is it?” It makes a lot of sense because only 2% of women get funded. They’re the ones who have lived through this. They understand the customer journey more deeply than anyone else, and they’re not getting funding. Why are they going to start that company? That is just one example of many when we think about how we fund underrepresented entrepreneurs.

I will make a plug on Mercury, because when I joined Mercury in 2020, I looked up Blair, who’s the cofounder and a managing director at Mercury. We had real conversations about how we’re driving diversity in the pipeline. Not only in the pipeline, but then how that’s translating to diversity in our portfolio. He looked me in the eye before I was even fully onboarded here. He said, “If your worldview is woven through every single thing that we do when we think about our pipeline metrics and our diversity metrics across, then we know we’re successful.”

It’s not saying that my worldview is correct, but it’s inviting that type of conversation to be had at the highest levels is a way how we think about underrepresented entrepreneurs. Underrepresented entrepreneurs are in Tulsa. We’ve always been looking at underrepresented geos. It was a fairly natural opening for us to also be thinking about underrepresented entrepreneurs. That’s something that we track very diligently and we hold each other accountable on also.

What you hit on, and I want to amplify this, these groups are consumers, too. That’s what you nailed when you were talking about the product that you mentioned. A huge percentage of the US, roughly 75% are consumers. They have unique needs because different types of people have different needs. The needs of a middle-aged man are very different than the needs of a young mother, for instance.

It’s very different. If you look at every segment, they’re very different in what they need. A lot of times because to your point, there are not enough founders and VCs that come from those groups because there are not very many VCs either that are women or minorities or veterans. It’s a very small group.

There are not a lot of VCs and there are not a lot of founders, but yet it’s 75% of the population consuming every day. To understand what those groups need, though, you need to have people from those groups identifying those opportunities. That’s what I think people miss. This is not about like, “Let’s give money to somebody because of their race, gender, ethnicity, or sexual orientation.” It’s not about that. It’s about serving customers and making money. They’re not being served and therefore, there’s a lot of money not being made.

We also have an additional thought to that, Zack. It’s not just on the entrepreneurs you fund, but it’s about the LPs you bring into our fund. We’re hyper-focused on that. Heath Butler, who’s a partner at Mercury as well. He is my mentor through Kauffman Fellows, which is awesome. Heath is so great. Before he started at Mercury, he started something called the Urban Capital Network.

The entire idea was to lower the barrier of entry for alternative assets for underrepresented people to invest in alternative assets. Urban Capital Network has spoken to Biden. They’ve been at the White House. They are well-known now for doing this. Their entire idea is to match up with venture funds. They partner up with venture funds that are doing de-risked investing, so a little bit later so doing Series A, Series B and beyond, and then investing alongside them on their best deals.

The way that they all think about it is that by recycling capital back into these communities, then that’s going to foster innovation in and of itself and the first startup capital checks that people need to get their companies off the ground. It’s a whole ecosystem. Capital needs to flow into those communities. People need to have access to those capital and resources so that they can start the companies and as they grow their company from people like ARI or Mercury. They need access to the customers who are going to be buying, and recycle that capital back into the ecosystem. It’s a whole ecosystem that we think about here.

 

Important Links

• Zack Ellison on LinkedIn
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• 7 in 7 Show with Zack Ellison on Apple
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• Samantha Lewis on LinkedIn
• Mercury Fund
• Kauffman Fellows
• Urban Capital Network
• Blair Garrou on LinkedIn
• Aziz Gilani on LinkedIn
• Heath Butler on LinkedIn
• 8A: Transforming Animal Health: A Veteran’s Path from VC to Founder w/ Dan Espinal – Past Episode
• 7 in 7 Show Disclaimer

 

About Samantha Lewis

Samantha Lewis, a Partner at Mercury Fund. Her specific focus is on Mercury’s Power theme, where she seeks to fund startups utilizing blockchain, data platforms, and fintech to rethink the way people access capital and opportunity, build wealth, spend money, and organize as communities.

Samantha currently serves on the boards of Mercury portfolio companies Apparatus (infrastructure), Arden (infrastructure), Civitech (data platform), Brassica (fintech infrastructure), and Cooklist (data intelligence).

Samantha is an active Kauffman Fellow, the world’s premier venture capital fellowship. Prior to joining Mercury, Samantha was the Investment Director at Goose Capital, a Houston-based investment group of serial entrepreneurs and F500 CEOs, where she led deal sourcing, structuring, and portfolio management. During her time at Goose, she led investments in Syzygy Plasmonics, Rufus Labs, and Emerge. Samantha is a repeat entrepreneur with a background spanning agribusiness, logistics and supply chain, beauty, and deep tech.

Samantha received her MBA from Rice University and a B.A. in Political Science and History from Texas A&M University. Samantha remains deeply committed and involved in the efforts to build diverse, robust innovation ecosystems. Outside of Mercury, Samantha actively mentors founders, teaches a Venture Capital class at Rice University, and supports Ukraine through fundraising and medical supply deliveries.