20VC Why Valuation Is Of Critical Importance At Seed, How To Understand Innovation Cycles & Having 3 CEOs and Burning $10m a Month with Lee Hower, CoFounder @ NextView Ventures

In this episode of "20 minutes VC," host Harry Stebbings interviews Lee Hower, co-founder of Nextview Ventures, an East Coast early-stage fund with investments in companies like Taskrabbit and Grabcad. Lee shares his journey from being an early PayPal employee and LinkedIn co-founder to entering the venture capital world. He discusses the evolution of the seed stage investing landscape, the importance of valuation, and the potential of autonomous vehicles. Lee also emphasizes the value of early exits for seed-stage funds and the benefits of thematic versus opportunistic investing. With a passion for VC history, Lee believes understanding innovation waves helps VCs capture long-term value. He advises new VCs to develop a unique perspective and remain true to their roles, and he highlights his recent investment in Optimus Ride, an autonomous vehicle company with a promising team and market approach.

• Harry Stebings welcomes listeners to the show and invites them to follow him on Snapchat and to give feedback on his new blog.
• He introduces Lee Hower, co-founder of Nextview Ventures, and thanks Rob Go for the introduction.
• Harry highlights Nextview Ventures' successful investments and Lee's impressive background with PayPal and LinkedIn.

"Welcome back to the 20 minutes VC with our second VC episode of the Week with me, Harry Stebings, and I'd love to see you on Snapchat at htebbings with two B's. And it would really mean so much to me to hear your thoughts on the new blog mojitovc.com."

This quote sets the tone for the episode, inviting engagement and feedback on Harry's new blog.

"And you might remember we had Rob go, co-founder at Nextview Ventures on the show a couple of months ago... But I'm so delighted today to be joined by Rob's co-founder at Nextview, Lee Hower."

Harry introduces Lee Hower, emphasizing the significance of his appearance on the show and the connection to a previous episode.

• Lee Hower describes joining PayPal as one of the early employees straight out of undergrad.
• He details the history of PayPal, which originated from two separate companies: X.com and Confinity.
• Lee explains his personal connection with Elon Musk through a guest lecture at UPenn, which led to his job at PayPal.

"I was fortunate to join PayPal as one of the early employees. Literally my first job out of undergrad."

Lee reflects on his early career opportunity, emphasizing the significance of joining PayPal as his first job.

"There was one half started by Elon Musk, called X.com... The other half was called Confinity... The two companies ended up merging, 50 50 merger of equals in the spring of 2000."

Lee gives a brief history of PayPal's origins, highlighting the merger that created the company.

"Elon is a Penn alum a few years older than me... He kindly invited me to fly out to Palo Alto and interview with the team."

Lee recounts the personal encounter with Elon Musk that led to his job at PayPal, demonstrating the impact of networking and seizing opportunities.

• Lee Hower shares insights from working with the PayPal mafia, a group of former PayPal employees who went on to start successful companies.
• He learned about the passion and energy required for entrepreneurship, even as an early employee.
• Lee discusses the challenges startups face, including pivots and overcoming obstacles, using PayPal's history as an example.

"I learned the kind of passion and energy that goes into entrepreneurship... The second thing I learned is virtually no startup is a up into the right linear business that doesn't hit bumps along the road."

Lee reflects on the entrepreneurial spirit and the inevitable challenges faced by startups, drawing from his experience at PayPal.

"During my first year working there in 2000, we had essentially three different CEOs. Over the course of that year, at our worst point, we were burning more than $10 million a month."

Lee provides a candid look at the tumultuous early days of PayPal, illustrating the reality of startup struggles.

(Note: The transcript provided ends abruptly, so the notes are based on the content available up to that point.)## PayPal's Growth and Initial Public Offering (IPO)

• PayPal experienced rapid growth, going from inception to IPO in approximately three and a half to four years.
• The company was able to raise a substantial amount of capital before the Internet bubble burst, which sustained them through to their IPO in early 2002.
• The journey of PayPal is described as a "rocket ship," with moments of both upward and downward trajectories, but with consistent momentum.

"We went from being from inception to IPO in something like three and a half. The company went public in early 2002 in something like three and a half, four years." "Sometimes the rocket was pointed straight up at the sky, sometimes it was pointed straight back down at the ground, but the rocket motor was lit the entire time."

The quotes reflect on the rapid and tumultuous growth of PayPal, emphasizing the constant drive and progress of the company despite the challenges faced along the way.

• Lee Hower moved from California to Boston and entered the venture capital (VC) industry after his experiences at PayPal and LinkedIn.
• He worked at a Series A/B stage investor firm before founding NextView Ventures, which focuses on seed stage investing.
• Hower's preference for the early stages of a company's development influenced his decision to focus on seed investing.
• NextView Ventures invests primarily at the seed stage and continues to support companies through Series A, B, and C rounds.

"I feel I can hopefully be thoughtful at identifying good startup opportunities at that seed stage and also being helpful to the entrepreneurs as a hands on investor board member during that seed and early stage at Nexu here, as you know, we are a seed stage fund."

The quote explains Hower's affinity for the early stages of startups and his belief in his ability to identify promising opportunities and provide hands-on assistance to entrepreneurs during those stages.

• The seed stage landscape has seen a proliferation of investors, including dedicated funds, nontraditional institutions, and angel syndicates.
• NextView Ventures started in 2010, when the seed VC landscape was less crowded, especially in the Boston and New York areas.
• The size and nature of seed rounds have evolved, with a continuum now existing from pre-seed to post-seed stages.

"Fast forward to today, 2017. There's obviously been a proliferation of seed investors." "Today you see a continuum from what some people describe as pre seed through kind of institutional seed, and what some others describe as post seed."

These quotes highlight the growth and diversification of the seed investing landscape over time, with a wider range of investors and stages of seed funding now present.

• Identifying exceptional entrepreneurs and transformative ideas in large markets is the primary focus for NextView Ventures.
• Valuation is critical as it relates to making a good risk-adjusted return on capital, considering the high risk associated with early-stage investments.
• NextView Ventures considers the entire lifecycle of capital for a venture-backed startup to avoid valuation overhangs that could hinder future funding or exits.

"But we're not dogmatic about it. We target ownership and frankly, there's no subprime model to venture capital investing." "You can't invest in the mediocre companies at a cheap price and produce a good outcome because the distribution of outcomes is a power lot."

The quotes emphasize the importance of valuation in seed investing and the need to balance risk with potential returns, rejecting a one-size-fits-all approach to valuation.

• Seed funds like NextView Ventures and Founder Collective view exits in the range of $100 to $300 million as wins, especially when startups raise modest amounts of capital.
• For smaller seed funds, a $200 million exit can still return a significant portion of the fund, making such exits valuable and successful.

"If you own rough math, if you own 10% of a company that exits for $150,000,000,000 with a 40, 50, 60, $75 million fund, you can still return a meaningful portion of that fund with 200 million dollar exit."

This quote discusses the fund-returning economics of seed investments, illustrating how even exits that are not in the billion-dollar range can still be highly successful for seed-stage investors.## Impact of Exit Scale on Multistage vs. Seed Stage Investors

• Multistage investors with large capital pools may not find smaller exits impactful.
• For seed stage investors like Nextview, exits in the 100-200 million dollar range can be significant.
• Nextview aims to support entrepreneurs building transformative businesses, not just seeking exits.
• Seed stage investors, being earliest and typically at the lowest cost basis, can see exceptional returns, especially with unicorn or decacorn exits.

"I think though, that I wouldn't want to put words in Micah's mouth or founder collective's mouth. But certainly the way we think about it here at Nextview is an exit of the 100 200 million dollar scale can be impactful for our fund, but that doesn't mean that that's all that we look for."

This quote explains that while Nextview recognizes the impact of moderate-scale exits, their investment goals are not confined to achieving exits within a specific range but are focused on the broader objective of supporting substantial business growth.

"It means that the fund level returns for our fund as the earliest investor, typically at the lowest cost basis, are even more exceptional than a later stage investor."

Lee Hower highlights the advantage of seed stage investing, where early entry and low cost basis can lead to disproportionately high returns compared to later-stage investments, especially when companies reach high valuations.

• There's no one-size-fits-all approach to VC investing; success can be found in both thematic and opportunistic strategies.
• Thematic investing can be effective and provide positioning advantages in the ecosystem.
• Nextview views investing on a continuum from opportunistic to thematic.
• Being open to learning from entrepreneurs, who may have deeper insights into new markets, is valuable.

"You can point to vc investors who take a highly thematic approach, and it has been highly effective for them."

Lee Hower acknowledges that some VC firms have found great success with a thematic approach to their investments, suggesting that this strategy can be beneficial under the right circumstances.

"I think it's entirely possible for vcs to think and develop very thoughtful themes about investing."

This quote conveys that VCs can create well-considered investment themes based on their experience, indicating that a strategic approach to investing can exist without being strictly thematic.

• Appreciating the history of VC and innovation waves can provide a long-term perspective on technology adoption and market cycles.
• Understanding historical patterns helps investors recognize and endure through the initial hype and subsequent disillusionment phases.
• Drawing from personal experience, such as involvement with LinkedIn's early funding, illustrates the potential long-term value of investing during post-hype phases.

"Understanding not just the history of VC, but the history of innovation waves has enables me and others who think like this to take the long view of innovation."

Lee Hower expresses that a historical understanding of venture capital and innovation trends allows investors to adopt a long-term perspective, which can be advantageous in navigating market cycles and identifying enduring value.

• Some technologies may be overhyped in the short term but have underlying value that will endure.
• AI, computer vision, and autonomous vehicles are seen as transformative technologies with long-term potential.
• The future of impactful technologies often unfolds more slowly than anticipated.

"I think undue emphasis has probably been placed on it within the past year in terms of how many companies are going to be built solely based on an innovation that happens in chatbots or message AI."

Lee Hower suggests that while chatbots and messaging AI are important, the hype around them may be disproportionate to the number of sustainable companies that can be built around these technologies alone.

"I think we are in the very early days of the impact AI, computer vision, and a confluence of technologies are going to have in changing transportation and mobility."

This quote indicates Lee Hower's belief in the transformative and enduring potential of AI and related technologies in the transportation and mobility sectors, despite acknowledging that widespread adoption may take longer than some expect.## Favorite Book

• Lee Hower's current favorite book is "The Globalization Paradox" by Danny Roderick.
• Roderick's book discusses the economic trilemma of democracy, hyper-globalization, and national sovereignty.
• Lee is still evaluating whether he agrees with the trilemma proposed in the book.

"What I happen to be reading at this moment in time is a book called the Globalization Paradox. The author's I may be mispronouncing. This is Danny Roderick, who's professor at Harvard."

This quote introduces the book "The Globalization Paradox" and its author, Danny Roderick. It sets the stage for discussing the economic theories presented in the book.

• Lee Hower believes in work-life harmony rather than balance.
• He maintains a clear separation between his work and personal life.
• A practical tip Lee shares is to not carry his smartphone around the house to ensure quality time with family.

"I believe in harmony balance, and for me, what works, I'm not sure that this works for everybody. For me, what works is a fairly bright delineation of my work life and my personal life."

The quote explains Lee's philosophy on work-life harmony and his personal strategy for maintaining it, emphasizing the importance of separating work from personal life.

• Reed Hoffman has been the most influential mentor to Lee Hower.
• Lee worked with Reed at LinkedIn and continues to receive mentorship and guidance from him.

"Probably Reed Hoffman has been, I've been fortunate that I've had a couple different people who've been mentors for me over the arc of my career."

This quote acknowledges Reed Hoffman as a significant mentor in Lee's career, highlighting the value of having mentor figures.

• Lee Hower starts his day with the New York Times and the Wall Street Journal.
• He finds it useful to consume general and business news, even when focusing on technology startups.

"It's the usual. Like, I strive every day to look at both the New York Times and the Journal, you know, digital editions, but the metaphorical front page."

Lee's quote reveals his daily routine of reading the New York Times and the Wall Street Journal, indicating the importance he places on staying informed through these publications.

• Lee advises junior VCs to develop a unique point of view and become known for it.
• He emphasizes authenticity and advises against overstating one's role or capacity within a firm.

"Develop a point of view and a perspective that is unique, that might be around a particular sector or investment theme, it might be around a particular stage or geography."

This quote suggests that having a specialized perspective can make junior VCs more sought after by entrepreneurs and peers in the industry.

"Never express more than who you are."

This quote advises junior VCs to remain authentic and to accurately represent their position and capabilities within their firm.

• The most recent publicly announced investment by Lee Hower is in Optimus Ride, an autonomous vehicle company.
• The investment decision was based on the transformation happening in transportation and mobility, and the exceptional team behind Optimus Ride.

"The most recently publicly announced actually is the autonomous vehicle company I alluded to. It's a company in Boston called Optimus Ride."

Lee's quote announces his investment in Optimus Ride, highlighting the company's potential and the ongoing changes in the transportation sector.

• Lee Hower expresses his willingness to meet Harry Stebings in person.
• Harry Stebings thanks Lee for his participation and mentions the role of Rob Go in making the introduction.

"I'm very happy to do it. Harry, when you're here in New York or Boston, give me a shout and we'll grab a beer or coffee."

Lee's quote shows his appreciation for the conversation and extends an invitation for a future personal meeting with Harry.

"Well, Lee, thank you so much for coming on the show today."

Harry's quote is a formal expression of gratitude toward Lee Hower for joining the show and contributing to the discussion.