Welcome back to Inside the Mind of an NYC VC, a new series at AlleyWatch in which we speak withNew York City-based Venture Capitalists.In the hot seat this time is Sutian Dong, Partner at Female Founders Fund, a Seed stage female founder-focused venture firm. Sutian talked about transitioning from FirstMark Capital to F3, being a value-add investor, the five things she looks for in a founding team, and much, much more.
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Bart Clareman, AlleyWatch: Tell us about your journey into venture and how you came to be a partner at Female Founders Fund?
Sutian Dong, Female Founders Fund: Working backwards, I’ve been at Female Founders Fund over a year now. I joined F3 full time in January 2016; it’s been an exciting 16 months to date. I was previously at a shop in New York called FirstMark Capital, which is a Series A firm that was founded in 2008 and since has established itself as one of the preeminent institutional venture funds based and founded in New York City.
Like a lot of people who get into VC, it’s a largely opportunistic jump into venture. I had known one of the partners at FirstMark, Lawrence Lenihan. FirstMark at the time was also a nascent, growing brand and team, and it was an opportunity to be early at a fund and an important part in building out its team and culture. I was previously Director of Marketing for a fashion brand called Norisol Ferrari, and it was through that connection and a desire to think more meaningfully about consumer investing that I got into VC. It was not necessarily a goal of mine to grow up and become a venture capitalist, but certainly once I fell into I discovered I really, really liked it.
I spent six busy years there, learning from not just my team but also the entrepreneurs that we were lucky to work with, and I was lucky to be able to be a part of a great growth story of not just a firm, but also the general NYC ecosystem maturing as a hub for entrepreneurship.
Say more about the appeal working in venture capital has for you, where does that come from?
It’s a couple things – one is temperamentally I tend to want to be engaged in a lot of things at once. Venture fits that bill really well.
As a venture capitalist you’re one degree removed from the highest highs and the lowest lows of being an entrepreneur, which is also smoothed out by the fact that you have a portfolio of companies. I also really enjoy the day-to-day of venture – thinking of venture as a services industry and thinking about money as only part of what we do and how do we make the entrepreneur’s journey easier as she tries to build a really meaningful, large business – that’s the part that I really enjoy.
Regarding the transition from FirstMark, one of the preeminent VCs in the city as you say, to F3, which is a newer VC – what are the biggest differences between your work at F3 vs. FirstMark, and how do the challenges compare? What are the similarities, if any?
The differences were a few things. One, FirstMark has been around for 10 years, and we at F3 are newer than that. Two, FirstMark does mostly Series A deals while Female Founders Fund does Seed deals. Three, FirstMark is sector and industry agnostic, while Female Founders Fund is sector agnostic and also female founder-focused.
That being said, the path that FirstMark has paved and the path that I see Female Founders Fund going on is similar in ways as well. FirstMark was one of the first funds to put a stake in the ground in New York and say, “a robust tech ecosystem is being built here, and New York City is going to be the next big place for tech companies.” This was after the financial crisis at a time when the question was not even necessarily, “can New York do this” but rather it was, “will New York ever be bigger than Boston?” New York’s tech ecosystem was much smaller not that many years ago.
Through a combination of working hard, making good investments, supporting the portfolio in smart and meaningful ways, and giving back to the community in impactful ways, FirstMark was able to ride the tailwinds of New York City as an ecosystem really blossoming, and come into its own as a preeminent Series A fund in NYC.
I see F3 at this very interesting inflection point as well. We believe female founders are going to create venture-scale businesses. The next wave of entrepreneurs who do really big things are going to look different from how they have in the past.
We think we sit in a place where we can put a stake in the ground and own the ecosystem and be the most helpful and value-add investor for any female founder. Assuming we can do our job and be great, valuable partners to these entrepreneurs, we can ride this big trend in which the number, the quality and the types of companies that are being built by women are going to both broaden and deepen.
What does F3 do to position itself as that most helpful and value-add investor?
This goes back to one of our operating philosophies, which is that venture is a service industry and money is one of the most fungible things that a VC can bring to the table.
As such, we try to be helpful to our portfolio companies along five pillars. Those are: recruiting, customer development, corporate development, fundraising, and press.
To that end, we do several things. One, we run about 40 events per year for our portfolio companies. We run both internal, off the record events for our portfolio companies, and we have public-facing events that are more geared toward helping the community learn about the paths of other female founders and helping them get connected to each other in more meaningful ways.
Additionally, we test services to see what works and what doesn’t. We’ve institutionalized some things on the backend like discounting services, which are pretty easy and a lot of funds have them.
We’re also building out some recruiting tools, and last year we launched something called the F3 Network, which is almost 100 folks now split pretty evenly between CEOs who have started, scaled, and sold businesses as well as industry experts who have all raised their hands and said “I’m happy to be a resource to your portfolio companies.”
So if one of our companies has a question about, how should I scale an inside sales team or have should I have these conversations with people who are thinking of us as an acquisition target, someone in the F3 Network can help.
We’re never going to be an expert in all the very specific questions that our portfolio companies might have. Someone once said that advice, like fruit, is best when fresh, and so as a function of that, the value we can provide is connecting you with the best person we know who can give you the most relevant, informed advice.
How did you think about your career path and moving to a female-focused fund? Also, a question from Alicia Syrett: what made the opportunity at F3 so compelling for you personally and professionally that you decided to make the jump?
I should start by saying we are a financial investor, we’re not an impact fund. We exist to deliver top decile returns to our limited partners. The way I think about impact is: we’re not an impact investor, but I’m happy if I make an impact.
I think everyone at FirstMark is really fantastic. They’ve done super well in terms of picking the right founders to support through the cycle of fundraising from venture all the way to growth.
In terms of Female Founders Fund, we just bring a different perspective to the table, which allows us to be quicker in spotting investment opportunities that may be not obvious to other people.
FirstMark is a fantastic place, but the opportunity to be 1) in on the ground floor at what I thought was a real meaningful change in what entrepreneurship and founders would be, and 2) an opportunity to be a driving force in what was still a white space was so compelling for me.
On top of that, my partner Anu and I just work really well together, so the culture side was super important for me as well. When founders think about picking their investors, they’re often counseled “well, you have to think about this as a 7-10 year marriage.” When partners pick their partners it’s not just 7-10 years, it’s forever, so you better make sure you like that person, that you can work together, and that you have the same goals in terms of building the brand, building the culture, building the next series of funds and the team to support them.
According to Pitchbook, 359 female-founded companies received $1.46B in VC funding last year, versus 5,839 male-founded companies that received $58.2B in VC funding. On a percentage basis, the dollars to female-founded companies was worse than every year this past decade except 2008 and 2012.
Why does this funding gap continue to exist in your opinion, and how can we change it?
There is not one reason why this funding gap exists. It can be a pipeline problem, it’s also just unconscious bias, it’s some of the networks that entrepreneurs who don’t look a certain way are not part of, it’s some of the industries that people are creating companies in where the investor on the other side just can’t get passionate about what you’re doing. I think it’s a combination of all of these things.
About the data: as you said, there’s a stark difference between the number of female-founded companies and the number of male-founded companies that raise money at every stage of the capital stack.
When we think about this data, we publish an annual report on female founders raising institutional Series A’s – we track A’s because Seed data is a bit noisier.
We’ve seen that the percentage of Series A financings led by female founders have increased every year since we’ve been tracking that data, since 2013. That being said, it’s increasing but we have a long ways to go towards achieving parity at, not just gender, but at any dimension of diversity.
Going back to your question: I don’t have a cogent hypothesis for why this exists, or, “oh, these seven factors that all interlink with each other in this way has created this massive funding gap in the United States.” I don’t have that thesis built out. What I will say is that I think this conversation and this dialogue, at least anecdotally having sat in the industry for a while now, has changed. Previously, every couple of years someone would say, “hey, this funding gap is still here, why is it still here?” and there would be some discussion, but it would fall off.
Now I do think that there’s this real shift in people talking about it, which is the first step. They’re making sure these discrepancies are surfaced and being thought about critically.
Two, there is a real shift in more female-founded companies getting funded. Three, there’s also a focus on the side of VC funds to hire more female investment professionals at all stages, from senior partner down to junior analyst, and also in terms of thinking about their portfolio diversity and making sure they’re financing patterns are not handicapped by biases they may hold.
I do think that’s changing.
Female Funders Fund’s 2016 Year in Review noted that NYC remains more female-founder friendly than the Bay Area. What drives that disparity in your opinion?
Back to the point of industry being seated here, I think New York City is really great at supporting companies that are not creating horizontal platforms, but more focused on innovating within very large industries.
As a function of that, what you see in New York are founders who have a lot of domain expertise, and are taking that domain expertise to tackle a problem they have seen in their professional life. I do think you see more female professionals who have experienced certain problems and are now going to create solutions around them.
You’ve spent your entire career in VC in New York, and as you said earlier, you recall the days when New York wasn’t second fiddle to the Valley but third fiddle behind Boston as well.
Two questions: how has the ecosystem here changed in the intervening years, and did you ever feel compelled to go out West?
I’ll answer the second question first, which is easy: I’m very long New York.
The big difference between New York and any other ecosystem is New York has industry in it. Tech exists as an enablement platform for all these massive industries that have been headquartered in New York for way longer than tech was a thing here.
What I’ve seen change in New York: one, I think New York City has been really, really great on the municipal side in terms of creating programs for entrepreneurs.
Two, the types of companies that are being started in New York have changed as well. The criticism of New York has been that we’re sort of “tech light;” there was this idea that we don’t have a lot of tech talent here, so how can you build really meaningful businesses when you have to import all your engineers? I think that’s changed, you see these big campuses being built by Google and Facebook.
New York has a very interesting set of big data, machine learning, computer vision, frontier tech startups that are being headquartered here, and the universities have great programs that have produced talent.
It used to be that someone who had the idea of becoming an entrepreneur would say, “If I want to do this I’ll have to move out to San Jose and code out of my garage.” Now, finding and supporting a talented team has become a viable option in New York.
I think you’re seeing more of what creates an ecosystem, though I do think you need to close the loop.
Once upon a time the hope was that the DoubleClick acquisition would “close the loop” as you say. What’s different today that when the next big New York City exit comes it can create that flywheel cycle where Company A begets Company B?
The New York City ecosystem at that time had less of the other building blocks. Other than DoubleClick being acquired, there was not a structure in place for people to learn how to build businesses from the ground up.
As an entrepreneur, if you did the math at that point in time and you thought about where you wanted to start your business, sure you could take a flyer on New York, but Boston or San Francisco was probably the better option because they had more money, more talent, more of a community of entrepreneurs so you weren’t this really weird small industry that sat next to publishing and fashion and finance.
Now, the perception of tech in New York has changed. My alma mater, NYU, does this exit survey of the MBA class asking where do you want to work after graduation. Before it was predominantly people wanting to work at a hedge fund or on the buyout side, but now it’s tech. People are thinking of tech as a real industry, as a place you can build a career, and oftentimes a more fulfilling place to work because you can work on problems you’re personally passionate about as well.
What do you look for in a founding team?
As investors, we’re founder-driven. What that means is, making sure the founder and the founding team are the right people is really, really important to us.
We look for several things. One is the ability to sell, and clarity of thought. Can you clearly articulate your vision of how the world is going to change, and sell me on and get me excited about what you’re doing to address that change.
Two is, demonstration of grit, perseverance, tenacity – however you want to call it – how do you pick yourself back up when you’re getting knocked down, which, as an entrepreneur, happens many times a day every day. How do you overcome those obstacles and stretch past what you have? If you only have so much money, how do you perform as if you had twice that amount? How do you stretch past the commonly conceivable limitations of what you’re doing?
Three is, depth of thought. You don’t necessarily have to be an industry expert in what you’re doing when you start, but if you’re not, and you haven’t built a business in that industry before, then you learn as much as you can and try to know as much as you possibly can. You become that domain expert.
You’ve done your homework. When I say homework, I don’t mean the whiteboard process where you say “there’s a white space on the direct-to-consumer side in this industry: we should build a business here.” You have done your research to the point that when you’re talking to an investor, who knows a lot about a handful of industries and knows something about several more, they don’t know more than you.
Four would be, you can articulate why now is the right point in time to build this business, and as a corollary to that, why now is the right point in time for us to finance your business. What market conditions have led to this point being the right place in time, because timing is so important when you start a company. Why is Instacart still around while Webvan didn’t work? Why was Pets.com a bad outcome, but BarkBox is such a big business? Having an understanding of those dynamics is helpful as well.
Five, back to your initial question about team, who have you built around you? As a human, you’re probably good at three things, and if you work really hard you can be excellent at those three. But then you’re probably pretty mediocre at the long tail stuff. It is generally not advised to work really hard to go from mediocre to just okay at something; it’s just not an efficient use of time. Instead, how are you thinking about hiring and how are you thinking about building a team so that you have the right people, who are excellent, to help fill the operational gaps and execute your vision?
Those are some of the things we look for. There’s also a question of, is this someone we want to spend the next 7-10 years with supporting as they build a business? As a function of that, we have a no-asshole rule.
You mentioned how investors will be expert in a handful of areas, what are the areas you have particular expertise in and where does that expertise come from?
We’re pretty deep within direct to consumer commerce. That’s somewhat a function of my background in fashion, but it’s also a function of having seen so many companies in this space and having been fortunate enough to work with some companies that have done really well.
As investors we’ve developed pattern recognition, where we can help a company as they grow by saying “I’ve seen this happen before, if you do this something good will happen or something bad will happen.”
Now, we’re cognizant that all companies are different and that context is important. Our job is to explain why we don’t think a company should do one thing or why a company should do another. An investor is not an overlord to say “do this, don’t do this,” but if you can give context and reasoning and help a founder better structure their thinking around particular problems, that’s helpful.
What spaces or trends are you following closely in 2017?
We’re excited about two broad trends.
One is the extent to which science and biology problems are becoming computer science problems. What I mean by that is you’re seeing the rise of interesting applications and technologies being started in genomics, bio-informatics, in companies that are thinking about the microbiome – that is, all of the bacteria that exists on your body.
That area is exciting to us, one because it’s so big, two because it’s largely unexplored, and three, I think it rides a broader wave of consumers wanting to own more of their health and wellness. Not just in the context of personalized medicine, but “how do I think about my body and mental health in a broader context?”
To that end, last year we invested in a company called Thrive Global, which is Arianna Huffington’s new business. They’re a corporate platform designed to help large companies help their employees become more productive personally, understanding that personal gains almost directly correlate to professional productivity. That’s one area we’ve spent quite a bit of time in.
The second is, we like to think about the changing face of work a lot. Whether that is as early as, how do college graduates and college students think about jobs and displaying themselves professionally online? How should employers think about keeping women in the workforce by providing a better on-boarding and off-boarding path for maternity leave and care?
What are the tools that need to be built as more people move into the 1099 economy? What are ways that companies can find, hire, and retain a skilled workforce? One, on the company side, how do you keep all these employees? And two, one the 1099 worker side, how do they think about their role and what tools can be built to help people build an income stream that’s untraditional as compared to what you would have seen as recently as 10 years ago.
What should a founder reading this know about F3?
The big vision for us is we will be the first place a female founder goes to look for institutional capital. We are excited about working with founders who have a really big vision for how the world is going to change.
We’re sector agnostic, so for us it’s more, “who are you, what have you done, and how are you thinking about the ways in which your specific application of technology can change the face of an industry?”
We’re really hands on. What you get when you take money from F3 is not a wire transfer and a “hey, talk to you soon, come back with good news.” It’s hands on support through whatever you need most, whether it’s connecting you with the Head of People at a large company who can tell you how to think about the first 10-20 hires, or helping you fundraise for the series A, or providing broad support and services to help you as a founder brand yourself and your company better.
Also, what you get with us is access to a really high caliber community of female founders who are already in our portfolio, and you get access to the broader expert network of people who are able, willing, and excited to help.
What would one of your founders say about you?
One thing our founders almost always say about us is that “Female Founders Fund is the most helpful investor that we have on the cap table.”
Some of our founders even say that they’re surprised by how helpful we are, and that they’re really happy they took our money – as a newer fund, it’s important to demonstrate real value right out of the gate. When we talk to new companies and potential founders ask me this question, my answer is, “call any of our portfolio company founders and ask them – that’s the best answer of how helpful we are at what we do.” It varies by company of course; some want or need more support than others.
But I do think that even from the outset of the firm we’ve tried to be thoughtful about how we can create the next generation of venture capital. As what it looks like to be a founder changes, what it looks like to be a VC will hopefully change as well, and the level of support we provide is part of that.
