20VC Carta Founder Henry Ward on Why The Best Companies Are Not Product Led But Distribution Led, 3 Requirements Needed For A New MarketInvestment To Be Exciting and Why Small Markets Are So Attractive

In this episode of "20 minutes VC," host Harry Stebbings interviews Henry Ward, CEO and founder of Carta, a company revolutionizing how private and public companies, as well as investors, manage their cap tables and equity plans. Ward shares insights into Carta's journey, having raised over $147 million, and the unique approach to expanding into service markets by acquiring firms and turning them into software businesses. He discusses the importance of executive adaptability, the concept of "executive half-life," and the challenges of scaling a company to 500 employees. Additionally, Ward outlines Carta's strategy of entering "n of one" markets where they can dominate and the future potential of the company, which includes providing liquidity solutions and reducing income inequality. The episode also touches on the value of maintaining investor relations and the delicate balance between R&D and new business opportunities.

• Harry Stebbings welcomes listeners to the 20 minutes VC podcast.
• Harry introduces Henry Ward, founder and CEO of Carta.
• Carta helps manage cap tables, valuations, investments, and equity plans for companies and investors.
• Henry Ward previously founded Secondsight, a portfolio optimization platform.
• Acknowledgement of contributors to the episode's questions and suggestions.
• Promotion of Brex, the corporate card for startups, and Stripe, a resource for technology companies.
• Introduction of Terminal, a solution for building remote engineering teams.

What a show we have in store for you today.

Harry Stebbings expresses excitement about the episode.

To date, Henry's raised over 147,000,000 in funding from some of the very best in the business.

Harry highlights Henry Ward's successful fundraising for Carta.

And prior to founding Carta, Henry was founder of Secondsight, a portfolio optimization platform for retail investors.

Harry provides background information on Henry Ward's entrepreneurial journey.

• Henry Ward moved to Silicon Valley following his then-wife's career move.
• He decided to start his own company rather than look for a job.
• His first venture, Secondsight, did not take off.
• He was introduced to the problem of inefficient private investment processes by Manu.

Yeah, I followed my time wife here. She found a dream job here.

Henry Ward explains his initial reason for moving to Silicon Valley.

But through that process, I had met Manu, who introduced this problem set to me.

Henry discusses how he was introduced to the problem that led to founding Carta.

• Henry Ward's vision to rebuild financial infrastructure from the ground up.
• The goal is to support corporate governance and shareholder management throughout a company's lifecycle.
• There is an opportunity to bring liquidity to private and public companies in new ways.

This idea that we could rebuild the financial infrastructure that was built in the public world, but we can build it bottoms up from first principles.

Henry Ward outlines his vision for Carta's role in financial infrastructure.

• Henry Ward observed that executives may not stay long as the company scales rapidly.
• The concept of "executive half-life" refers to the duration an executive can effectively contribute to a growing company.
• The challenge is finding executives experienced in scaling a company at the same speed as Carta.

But very few executives have had the opportunity to work at a company that's scaling at the speed that we are.

Henry Ward discusses the challenges of executive turnover in a fast-scaling company.

• Discussions about executive limitations are tough.
• Executives rarely self-identify as having reached their ceiling.
• There is a contrast in how companies deal with founders' versus executives' weaknesses.

Very few executives will raise their hand and say they feel like they're tapping out.

Henry Ward speaks about the difficulty of executives recognizing their own limitations.

• Henry Ward shares his personal challenges and lessons as a first-time CEO.
• He learned the importance of being cautious with his words and decisions.
• The CEO's role evolves significantly from the early stages to managing a large company.

I think the two biggest things that I've at least taken away at this point, and I'm sure I will learn more, have more takeaways over time.

Henry Ward reflects on his personal growth and the evolution of his role as CEO.

• Leaders must be cautious with their comments as they can have unintended consequences.
• An example is Jeff Lawson's offhand remark about T-shirt colors leading to a costly and unnecessary reorder.
• Such incidents can create internal conflicts and disrupt team dynamics.

"And Jeff, to his view, benignly said, I'm not a fan of the color. And suddenly this person scrambled to reorder all new shirts, 10,000 shirts of different colors, because Jeff had said that, which was not as intense at all."

The quote illustrates how a simple comment can be misinterpreted, leading to overreaction and unintended outcomes, which emphasizes the need for leaders to communicate carefully.

• Henry Ward's job as a leader has become specialized, focusing on storytelling and executive management.
• Effectively communicating the vision and placing executives correctly are crucial for success.
• Narrowing focus to these areas can positively impact the company's trajectory.

"My job increasingly becomes very specialized, and it's really about two things. One is telling our story to candidates, employees, investors, press, and then two is recruiting executives and keeping the right executives in the right place."

This quote explains the two primary responsibilities that Henry Ward sees as essential for his role in leading the company, highlighting the importance of both internal and external communication and talent management.

• Decision-making evolves from being a sole activity to a collaborative process as a company grows.
• In later stages, the accuracy of decisions becomes more critical than speed.
• Involving the executive team in decision-making ensures better outcomes and understanding.

"At the later stages, there are fewer decisions to make on a day to day basis, but it's far more important that when we do make the decisions, we get them right."

Henry Ward discusses how the nature of decision-making changes as a company matures, emphasizing the need for careful deliberation and collaboration in the decision-making process at later stages.

• Leaders must accept that they will not always be right, but they should aim to be "REaLLy right" when they are.
• Trust and credibility can be maintained if leaders quickly recognize and correct their mistakes.
• The impact of being right needs to be significant to compensate for the times when wrong decisions are made.

"But when I am right, I'm REalLy right. And that gives me the credibility and the leeway for my Executive team to be wrong ofTen."

Henry Ward acknowledges that being wrong is inevitable, but emphasizes the importance of making significant positive impacts when decisions are correct, which helps maintain trust and credibility.

• Carter focuses on markets where there can be one dominant player (n of One) rather than multiple winners (One of n).
• The goal is to achieve a defensible position with no competition.
• Owning a market can increase margins, influence, and provide a platform for exploring adjacent markets.

"We won't enter a market that we think can be fractured where we would face competition."

Henry Ward highlights Carter's strategic approach to market entry, focusing on markets where they can achieve a monopoly, ensuring long-term defensibility and profitability.

• Carter has faced criticism for lack of focus but refutes this by emphasizing the importance of exploring new markets.
• The company is adept at identifying and correcting bad ideas or poor execution.
• The ability to operate in multiple markets simultaneously is seen as a strength, given the network effects of their business.

"We have to build an organization that's constantly looking for new markets to go after."

Henry Ward explains Carter's proactive stance on market exploration and the importance of building a company that can handle multiple initiatives, leveraging network effects to converge markets faster.

• Product and customer acquisition innovation are key to entering and establishing relationships in new markets.
• Owning distribution channels is more sustainable than relying solely on product development.
• Companies should focus on establishing strong distribution to leverage even mediocre products.

"But if you own the lines of distribution into these companies, you can not only build mediocre products, you can..."

Henry Ward advises that owning distribution channels is crucial for long-term growth, as it allows companies to succeed even with less than exceptional products, underlining the importance of market access over product innovation alone.

• Silicon Valley companies often start product-led but successful large companies tend to be distribution-led.
• Successful companies build a manufacturing line through internal R&D and M&A to drive products into companies.
• Key for early or growth-stage companies is to have a wedge into companies with a compelling value proposition and a roadmap for future products and services.

"And so there's this view in Silicon Valley that the best companies are product led. The best large companies are actually distribution led."

This quote emphasizes the shift from product-led strategies to distribution-led strategies as companies grow. The best large companies focus on creating robust distribution channels to deliver a variety of products.

• Henry Ward identifies tying different parts of the network together as a key issue.
• Carta has distribution across companies, venture products, and law firms but lacks products that connect these customer types.
• Nonlinear business models are the goal, which can be achieved by creating products that tie different nodes of the network together.

"But what we don't have is a good set of products that tie all of these customers together so that we can distribute products into each of these customer types linearly."

Henry Ward explains the challenge of lacking products that unify their diverse customer base, which is essential for moving from a linear to a nonlinear business model.

• Carta's M&A strategy focuses on entering services markets that are commodities differentiated only by brand.
• The strategy involves acquiring services businesses, automating them, and turning them into software businesses.
• This approach allows for significant arbitrage opportunities, buying businesses at a low multiple and transforming them for a higher valuation.

"And so when you have that playbook, suddenly services business acquisitions, which seem crazy for a software company to buy. Services firms become super attractive because you can go in and you can buy a four nine a services shop at one and a half x revenue, and then you turn it into a software business where we raise capital and we're valued at 20 x revenue."

Henry Ward describes Carta's strategy of acquiring service firms at a low cost and transforming them into highly valued software businesses, highlighting the arbitrage potential.

• Services businesses bring a customer-centric culture to Carta, which complements their software business.
• There is a focus on integrating acquired services firms to foster a customer-focused culture.
• Employees from services firms are offered the chance to work in a tech company and learn new skills.

"They bring in a very strong culture of customer focused culture, which is super additive to us."

Henry Ward discusses the positive impact that the customer-centric culture of services businesses has on Carta's overall culture.

• Carta decouples discussions of R&D and business, focusing R&D on creating value without immediately considering monetization.
• The company deliberately decides when and how much value to extract from the value created, leaving consumer surplus in the market.
• Decisions on value extraction can change over time, and the company can adjust its model to subsidize areas where they want to leave more consumer surplus.

"We look at it very differently, where the goal of r and d is to create value for the world. And so when we think about what to build, we don't think about the business case for it."

Henry Ward explains Carta's philosophy that R&D should focus on creating value rather than immediately looking at the potential for monetization.

• Henry Ward's favorite book is "The Essays of Warren Buffett" for its coverage of corporate governance, finance, and capital markets.
• He wishes to address the economic discrepancy in Silicon Valley and sees Carta's mission to create more owners as part of the solution.
• The goal is to shift people from payroll (debt product) to equity (capital product) to reduce income inequality.

"The essays of Warren Buffett, I think is one of the classics."

Henry Ward shares his admiration for Warren Buffett's essays and their comprehensive insights into important business and financial topics.

"I think the economic discrepancy is a huge problem... And our contribution to that problem is to try to get more people off the debt stack and into the equity stack to reduce that change."

Henry Ward expresses concern over the economic disparity in Silicon Valley and Carta's mission to combat this by promoting equity ownership.

• Discusses the importance of expanding ownership beyond Silicon Valley.
• Emphasizes providing liquidity to employees and stock option holders.
• Highlights the issue of being paper rich but cash poor due to lack of liquidity.

"Expanding ownership outside of Silicon Valley and then providing liquidity for employees and stock option holders so that they can realize the value rather than be locked up and be paper rich but cash poor."

This quote underlines the need for broader ownership distribution and the ability for stakeholders to actualize the value of their shares, addressing the common problem of limited financial liquidity for those holding stock options.

• Carter focuses on understanding and improving capital flows.
• Aims to reduce the cost of capital for entrepreneurs.
• Seeks to provide liquidity for all members on the cap table as part of their core mission.

"We look very much at how capital flows. We see all the capital flows, how to reduce the cost of capital for entrepreneurs, and how to provide more liquidity for everybody on the cap table."

Henry Ward explains Carter's mission to observe capital movements and create financial solutions that benefit entrepreneurs and all stakeholders involved in a company's capital structure.

• Keeping investors informed with regular updates is key.
• Monthly updates help investors stay connected and informed about the company's progress.
• Assigning board members and investors to work with company teams can be beneficial.
• Adopt a team programs allows investors to contribute their expertise.

"We love putting our board members and major investors to work. So we'll do adopt a team programs where a board member with a specific expertise, like a go to market strategy, or investors with a specific expertise like go to market, will pair with our vp of sales and vp of marketing."

Henry Ward advocates for actively engaging investors and board members in the company's operations by pairing them with executive teams to leverage their expertise, thereby fostering a stronger, more collaborative relationship.

• Fundraising should be a discrete activity separate from operating the business.
• Founders should focus on building the business between fundraising rounds.
• Creating an auction process by aggregating interest in a short timeframe is strategic.
• Avoiding constant communication with investors can be beneficial.

"Fundraising is a discrete activity in between operating. So when I'm operating for twelve to 18 months in between financing rounds, that's what I focus on 100%."

Henry Ward expresses the view that fundraising should be distinct from day-to-day operations and concentrated into specific periods to ensure the founder's focus remains on growing the business.

• Establishing relationships with target investors can be advantageous.
• Spending time with associates or providing frequent updates to investors may not be the best use of a founder's time.
• Founders should be selective and strategic about when and how they engage with potential investors.

"I tend not to subscribe for founders spending a lot of time updating investors."

Henry Ward suggests that constant updates to investors may not be necessary and could even be counterproductive, as it might lead to founders wasting valuable time that could be spent on other aspects of their business.

• Anxiety in leadership often revolves around execution and operational issues.
• Learning to accept that not all problems can be immediately fixed is crucial.
• The advice to let some fires burn can be liberating for leaders dealing with multiple challenges.

"Sometimes you just have to let things burn."

Henry Ward shares a piece of advice he received, which highlights the necessity of prioritizing issues and accepting that not every problem can or should be addressed immediately.

• Financial models predict significant growth in ARR.
• Introduction of new products could lead to exponential revenue increase.
• The range of potential outcomes is broad, with high variability depending on the success of new initiatives.

"We see ourselves anywhere between $2 billion to 10 billion in revenue, five to six years."

Henry Ward outlines the optimistic financial projections for Carter, acknowledging the high degree of uncertainty and potential for substantial revenue growth based on the company's strategic bets.

• Acknowledgment of personal support and kindness received throughout one's journey.
• Expressing gratitude for the relationships and assistance provided by individuals in the industry.

"He's been of such support and kindness to me across my journey."

Harry Stebbings expresses his appreciation for Henry Ward's support and kindness, emphasizing the importance of personal relationships and support networks in professional growth and success.