Jeff Schumacher: Gotta startup? Want to raise capital? Here’s your cheat sheet | Fin24
 
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Jeff Schumacher: Gotta startup? Want to raise capital? Here’s your cheat sheet

Jan 18 2017 19:09

Jeff Schumacher is one of the coolest dudes it has been my privilege to interview here in Davos. The CEO of 500-person multinational BCG Digital Ventures lives in California, but some distance away from Silicon Valley.

He prefers the attractions of Manhattan Beach which puts the surf on his doorstep and ski-able mountains a short drive away. He also shares some insights into two of his famous pals; South Africa’s most famous entrepreneurial export, Elon Musk, and the Pretoria-born genius’s former business partner, Donald Trump advisor Peter Thiel.

Schumacher is one of the most recognisable venture capital investors in a state where people like him are treated like rock stars. To shake up the energy, we went for my first ever “walking interview” around the Davos Congress Centre – and the result was fascinating. Have a read/listen. Especially if you have an idea for a killer business. – Alec Hogg

I’m with Jeff Schumacher who is the Chief Executive of BCG Digital Ventures, I mean my kinda guy. You invest in digital companies….

We do, we’re a unique venture capital firm in that we both invent and invest, we’re also unique in that everything we invent or invest in has a corporate partner and we’re unique in our size, with over 500 people now globally.

You bring start-ups together with big corporates. That’s kind of what I read from the resume.

We do, we create early stage growth platforms for corporates and typically portfolios behind those and if they exist in the market we bring those entrepreneurs and start-ups to the corporate and if they don’t we invent them ourselves. We’ve founded 20 companies this year.

Where do you get your ideas from?

We have an innovation method that we use, that basically extracts everything from the corporate platform. It goes to our parent and integrated with BCG, so we go to BCG, and we take everything from them.

Then we’ve acquired a number of startups, I’ve acquired six last year alone, so we look at our IP portfolio and then we formulate a team of about ten to 15 people and we take about 90 days to create a portfolio of growth against, say I want to grow in China or in millennials, or in health, we create a portfolio around that.

It’s all early stage stuff and if it exists we’ll invest in it and if it doesn’t we’ll invent it, so it’s quite a unique offering. We really don’t have a competitor. I guess if I had said maybe Rocket Internet, that’s kind of like what we do, but they’re a fast follower fund and we’re not that, but that’s probably the closest to what we are.

Any unicorns yet?

Well, we launched a couple of them this year. We launched a foetal monitoring business and we’re investing in it now. We own a good share of that company with Alliance, which is another investor on it and that’s launched in China.

If you think about foetal monitoring, it’s home foetal monitoring device, it’s extremely safe because it just listens and it creates a new marketplace for mums to connect with other mums and if you think about China, they passed the second baby law, so it’s a quite large market. The population is supposed to grow 33% over the next five years, so it’s going to be quite a big opportunity for us.

That’s exciting stuff. We’re actually having a little walk around the WEF Centre here because there’s always something new, it is the first day. How many times have you been to Davos?

This is my sixth or seventh time, I don’t remember but enough.

Have you ever had any of the tea tastings? I see the Chinese tea ladies are here once again offering the tea.

I have not done it because I am not a caffeine guy. If I take caffeine our walk will turn into a run, so I try to limit the amount of caffeine I take in, but it’s quite unique, yes.

You’re right at the cutting edge of technology investing and things. Are you finding that the opportunities are growing or getting worse?

I think we’re finding the opportunity to be quite substantial.

Our thesis is corporates are going to own the next stage of evolution in growth in the market and if you think about it, the conditions that we’re playing in are quite favourable to what corporates are doing and if you look at what they have, they have about $2.5tn parked on balance sheets and there are about 15-million start-ups in the world, so we’re a conduit to activate that and if we can activate that, that becomes quite a unique opportunity and really corporates have been spending so long playing what I call defence, cutting costs, getting themselves to participate in this new economy and this new imperative that we all see today, but what we do is we play offence, so in the idea there it’s a hell of a lot more fun to score goals than it is to defend them.

Now you mentioned the $2.5tn, Donald Trump has been making murmurings on many issues, and one of them is bringing back the cash that American multinationals have abroad, there’s a lot there.

Yes, and I don’t necessarily agree with many of the principals Donald Trump is out there communicating, but one of the things he can end up de facto being the entrepreneur’s entrepreneur by creating conditions to make new markets and if he reduces the corporate tax from 35 to 15 percent or whatever number that may fall –

That’s what he’s talking about, is he?

Yes, and if he gives tax holidays to repatriate some of that money, that could open up massive new markets and that plays right into what we do.

Which money is abroad, Apple has $200bn just for starters?

I don’t know the exact number, but I know there is over $1tn sitting outside.

That’s a lot of capital and there’s over $2.5tn parked on global balance sheets, so regardless of what Trump does, if we can create the conditions for early stage growth, those corporates will apply that capital and if you look at what we’re trying to do, we’re trying to create market value, like a new start-up right, but also in some ways drive strategic value, that corporate and that actually gives us a bit of an unfair advantage because we’ll create a startup that has both market value and strategic value, so if the market value goes down I still have strategic value, if market value goes up, I still have strategic value.

This allows me to insulate myself to market volatility and it also allows our hit rate to go up a lot higher than most VC’s would have.

How long, traditionally is your investment period of time?

About three years. A typical start-up, if you look at the market today, if you look at the conditions today, that usually comes from about five years ago.

A typical start-up takes about five years to get to where it can really make market impact and disruption and if you look at today there’s twice as many start-ups as there were five years ago and three times the funding, so whatever you’ve seen today, just if you extrapolate that out five years you’re going to see those conditions multiply, double and triple and so for us we’re also participating.

VC has many interesting things, it’s a complicated market, it’s not the greatest asset class because it has about a one in 20 hit rate. Our hit rate is far superior to that, we’re probably trending close to one in three historically, so we’re about six times better and I think the reason is we don’t overvalue our companies, we overcapitalise them.

So what typically takes five years for that startup (this is the long-winded answer to your question), our range is about three years to get to scale.

Just the start-ups that you find, where do you look, where do you do your trawling?

We locate our centres where talent is, so our larger centres are located in Los Angeles and in Manhattan Beach specifically, which is what they call Silicon Beach, you have Santa Monica, Venice, Manhattan, that’s like the hotbed there, that’s where Snapchat is, SpaceX, like a lot of these different companies.

Our centres are located where talent is, so if you think about Los Angeles, Los Angeles, graduates more engineers than anywhere else in North America, so it’s a great hotbed for us.

We’re also in New York in Hudson Yards, we’re also in London in Soho, we’re in Germany in Berlin, we’re in Shanghai, we’re in Tokyo and Sydney, all of those ten, and we have satellite operations in Palo Alto and Mountain View there as well as Seattle, Mexico City, Boston, Toronto, Stockholm, and Tel Aviv.

The right places, there’s no doubt, Tel Aviv?

Yes, Tel Aviv and Singapore.

What’s your best hub, who’s delivered the best company so far?

Manhattan Beach, the California Centre for us is the best.

Why would that be?

I think because it has the unique set of both engineers and design talent and business talent, so you have those three things that combine better in Los Angeles and if you think of Los Angeles, this year or last year, technology did media and if you think of LA you think of media and now technology is the biggest sector.

Are you finding then that the talented people in the technology field, in the innovation field, the smart brains around the world are migrating to these centres almost being drawn in by other smart people who are there?

Yes and that’s part of the thesis, so like DV doesn’t do, is it won’t build competitive ventures. So if I build one start-up I’m not going to build another one to compete with it. It allows me to share across my network of 500 people, so one of the things that we kind of help fix is the guys in a garage or three girls in a garage, that’s pretty lonely right, so when we create start-ups they’re connected to that 500 person network that we have.

Then that builds even further out and branches out, so one, we help entrepreneurs connect with others in a way where they get an ecosystem in a culture, in an environment that’ll help them grow so they can, even if they’re doing a startup that’s in industrial goods, you can talk to the ones that we have that are doing in healthcare and there’s still synergies to have that kind of conversation.

So for them I think you’re seeing the gravity get pulled into these centres, where like Los Angeles, they used to send all the people up north to Palo Alto, now they’re all staying. It shows you innovation is leading the value, Shanghai, more start-ups started there in the last 60 days than all of Palo Alto last year. Now many of those will fail quickly, but just the turn, it just shows you innovation is globalising, it’s not just Polo Alto or Silicon Valley anymore.

The whole idea of disruption, Clayton Christensen’s book that he wrote in 1997, ‘The Innovator’s Dilemma’ did get people thinking along these lines, but it’s really hitting its straps only now. Why do you think it’s taken so long?

Well, I think partly we’re here and it’s hard for, especially ‘The Innovator’s Dilemma’ and the idea that a corporation is at scale.

It’s going 30 000ft, 500 miles an hour and you’re asking them to see a quarter on that round, right, but at the same time all corporations and even governments for that matter were start-up at one time, so what we’re really just doing is bringing that entrepreneurial spirit back to corporates and not letting them wait for something to get to scale before they do it, so we’re actually teaching them to innovate at the cold face or at ground level.

Jeff, successful businesses need a higher purpose, I want to play around a bit with this starting with your company. What’s your higher purpose? Clearly you’d like to make money, but is there a higher purpose?

I think we attract people that really want to change the world. Now that’s a loaded statement right, but it’s hard to, I guess, do that in your day to day, but if you create a new start-up that’s really geared like the first and foremost thing of everything that we do, it’s what’s the purpose of the company, why do you exist and we, like that foetal monitoring business we talked about, Kaishi, it helps some mothers connect with their babies.

I mean what’s better than that right and if you look at it when the mum hears the heartbeat for the first time, that’s a life changing moment and no one’s ever heard the heartbeat in the womb, you haven’t, I haven’t, no one else.

This is why it’s so unique because what you’ve heard is an ultrasound and an ultrasound sends the signal into the womb and returns blood flow, so you hear whoosh, whoosh, whoosh and not the concussion, very similar to when you put your ear on your child’s heart, you can hear the heart, that’s the actual concussion.

Well, that’s what Kaishi does for the baby in the womb, so when the mom hears it 50% of them cry for the first time and their need state flips from, “I’m having a baby, to I have to protect my baby”, one of the reasons Alliance invested protection insurance there and so you’re helping even companies like Alliance that are at huge scales go back to the simplest thing to help a mum connect with their baby and so when we found companies or invest in them, the purpose statement is really important to us.

How long do you expect them to spend on that?

On companies?

No, on the purpose statement?

Usually my first question is, “Would you quit your job to run this company?” If they answer, “No”, then we probably don’t have a good company here.

So that’s what we look for, is that emotional connection to the role, so you talk about the purpose statement, then you get to what the friction in the market, you’re solving friction is my word, but you have to be solving friction, if you’re not, your solution in search of a problem, then we think through what the corporate alignment is to that investment or invention that we’re going to do.

Then we kind of ask the question, “Why now, is it too early, is it too late, what’s the solution, is it defendable, what’s the competition, is it ten times better? If it’s not ten times you shouldn’t do it, you know, what is the business model, how do you take it to market, what’s the ecosystem, what’s the team required to scale it, what’s financials?”

Right there, it’s an investment case, by the way I just walked you through one, so those are the things we look at, but I think it all predicates down to what the purpose is of what you’re doing and I think it also boils down to helping corporates go back to, if I use Peter Thiel’s ‘Zero to One’, right it’s mandated reading for us, and we’ve extended that thinking, but the idea of taking an idea, finding its purpose and thus you can make money. So you have back to friction, you have market friction, the addressable market you didn’t know was there, second baby law, 20-million more babies coming out I guess.

Then there’s expected friction, which is pain points and emotions that give you access to that market. That’s like mothers have to wait five hours to get an ultrasound for five minutes and then there is latent friction, designing an experience someone didn’t know they wanted it until they saw it. That allows you to make money in that market.

Perhaps one of the biggest areas of friction is banks and I see you’re involved here in something on blockchain.

Yes, probably our deepest area of expertise is the blockchain. I’ve been specifically working on it for about four years now. Really and you can’t really own the blockchain. You have to build and ecosystem in there and we’ve been lucky enough to really connect with the people that matter and there are probably 15 architects in the worlds that are capable of really thinking through the aspects of the blockchain, we know 50 percent of them. There’s probably 300 engineers in the world capable of working in it, we know 50 percent of them and the blockchain, if you think about it, if I simplify into, you’ve had the bitcoin and cryptocurrency, which everybody, I think is aware of now.

Then you have what they call a theorem which has come out and we’re working on what I would call blockchain 3 data, which we’re announcing here in Davos over the coming days. We’ve launched a platform called Devolution, ‘D-V-olution’ and that’s really starting to work in what I would call the third evolution, or if you think of bitcoin as Dos and a theorem as Windows, we’re working on the app store. This one I think will be the platform that will entice corporates to participate in it because it comes with many things that will make it conducive for them to do so and I think this will be the platform that will actually change humanity, in giving that access to many people.

What about someone who knows nothing about blockchain, they’ve heard bitcoin, where do they start learning about it?

Well, I think the blockchain is probably the most disruptive technology since electricity and just as companies don’t have the precedent of electricity anymore, you probably not going to see the precedent of digital much longer, so this is going to become a part of the way of life, I guess and where you’d start is probably Devolution and us, is a good place. We’re putting out a lot of information out there for people to get informed around the blockchain and the aspects of it.

Then I think as it becomes more and more ubiquitous in the market, you will find that some fisherman in Africa can put his three fish and somebody can write a smart contract that can buy those fish and allow it to Michrome payments that’ll disrupt. When you start removing the idea of ledgers and you start removing the idea of identity and if I can solve identity and if I can do certain things around that then I can open this market to just about anybody in the world.

Davos is very good at uncovering new ideas, blockchain has been tickled around with a bit here for a few years, but this year it’s on the agenda quite aggressively. There’s quite a lot of information. Don Tapscott was here a couple of years ago talking a little about the subject and is it one of those tipping point issues where in the broader consciousness of businesses around, they will start clicking to what is going to happen?

Yes, I think that where you see the blockchain today is where the internet was in 1996, but then let me ask you where was the intranet in 1999? A lot is going to come now and the conditions are now ripe for it. I think what we’re working on and some of the aspects around the blockchain that we’re solving for, is once we solve identity, identity is the fundamental, it’s the pass to enter right, so that will be the key one and I think we’ve largely solved that, we’re solving it and so that will be a big thing.

I’m doing a couple of sessions on the blockchain here in Davos, a couple of closed door sessions, in fact and then I have my colleague, Mike Schwarz, who leads it globally for us and Mike is probably the most plugged individual in the world on it right now, so both of those things I think right now, it’s where the internet was in 1996. I think the conditions are, you’re going to see, this year it’s definitely on the agenda, Davos, next year I think it will dominate the agenda of Davos, and Trump obviously is on that agenda too, so there are many discussions there.

It really is an exciting story and again, a good time to be alive and in a world that’s changing for the better, do you believe that?

Yes, I believe technology usually helps the world change for the better. The more connected we are, the more we understand each other and I think things like the blockchain will get us more connected or will give more people access and I think those are great. I think digitally we’re going to see a billion more people with a mobile or online. You used to say online, now I’m just saying you’re mobile connected; you’re digitally connected, so all of those things I think are conditions to help the world be a better place. Then I think it’s just predicated on our leaders being good people and hopefully, we learn to elect leaders that are good people.

Just to close off with, a PWC Chief Executive Survey that they have every year before Davos, yesterday from last year’s results show that the US is once again the best place for, or the most attractive place that CEO’s want to invest in, but this year it’s been three years in a row, this year it’s just screamed ahead, it has gotten even more popular. Do you think that comes back to what you were saying about Trump for all his faults, could be the entrepreneur’s entrepreneur?

I think so. Leaders sometimes worry about jobs and they talk about jobs and protecting jobs and in the US you hear us worry about jobs going to China, or jobs going to India, or jobs going to Mexico, or other places. If I was a leader I would not be worried about that. Technology will take more jobs from you than any country combined times ten. The point is, embrace technology, which is the entrepreneurs and you can also create substantial jobs at the same time.

I would worry and I think where Trump could de facto be the entrepreneur’s entrepreneur is, I think if some of his policies stimulate the new economy, versus trying to protect the old economy, he could create job creation like never seen before and I think this is where addressable markets, all startups are founded or the fundamental valuation play is, how big is the market, so if you start isolating your markets, e.g. Brexit, Brexit just by that alone, you’ve taken a startup that had access to 500-million, now it only has access to 50.

Well, the valuation goes down 10X, the capital that they have access goes down 10X, therefore, you can’t stimulate the growth that you want, or you can’t create the impact that you want.

I think the warning message to leaders is, “Don’t close off your market and open your market up” right. If you look at what is the greatest innovation platform in the United States, by far it’s the H-1B visa, bring in talent from around the world right, don’t close that off. That H1-B is probably responsible for most of all the innovation that’s happened in the US.

A million students, Peter Thiel, you mentioned him earlier; he’s playing a big role here in the transition team on Trump. Does that give you hope that he might have an influence there to do, or to get the new president to do what your dream would be?

Well, you know I know Peter, I bet I had the luxury of hosting a panel where he is on. He is a contrarian guy and he’s an extremely smart guy, so I think having him involved in that administration I think is a very good thing.

I think Peter can help and the one thing in the US, it’s the transition of power, you know peaceful transition of power, so not participating in the government just because you don’t like someone, I think is a mistake. I think you need to participate and you need to help people become better versus just close them off, so I think having Peter in that room is a very good thing.

His former partner, being a South African, I have to ask you about Elon Musk and his standing now in Silicon Valley.

I think Peter is still respected by who is. I think Elon even met with the President a few weeks back, and I know Elon a bit as well, so I think both of those guys create amazing things in the Valley, but there are also a heck of a lot of other innovative guys that are outside the Valley, me being one of them, but I think Peter’s standing is always going to be on what you do and he’s done some great things and I think he’s going to continue to do great things.

Elon has done amazing things and I think he’s going to continue to do great things and as long as we work with the new administration in the United States it can only lead to good things by doing so. By not doing so I think is where you challenge yourself.

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