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In the Valley like, the, the trend de rigueur right now is distributed teams. And it’s like, how do we, how do we leverage talent from everywhere. But the reality is if you look at the most successful companies outside the Valley that have been built, they’re distributed forever. That’s been something that they’ve had to do, because if you can’t hire someone locally that’s been the CMO of a startup that scaled it to IPO, you look elsewhere, and you look outside your market and you figure it out.
Jay Clouse 0:25
The startup investment landscape is changing, and world class companies are being built outside of Silicon Valley. We find them, talk with them, and discuss the upside of investing in them. Welcome to upside.
Jay Clouse 0:52
Hello, hello, hello, and welcome to the upside podcast, the first podcast finding upside outside of Silicon Valley. I’m Jay Clouse, and I’m a company by my co-host, Mr. Cancel All Your Travel himself, Eric Hornung.
Eric Hornung 1:04
Jay, I do it for the people. Also, I think it’s just the socially responsible thing to do. But in the matter of, I think, three days, South by Southwest canceled, and then the Founder Summit, which was going to be happening in Mexico City, canceled, and then Vail Resorts shut down, so I’m not going to Breckenridge with my siblings. And all of that, you know, sounds selfish in the scheme of things to be even pointing out, because we are sitting here on March 15, and this will be going out in a few weeks. And I’m sure that people will be suffering a lot more when this goes out than I am right now.
Jay Clouse 1:39
Yeah, totally. It’s, it’s a scary thing. Doing, doing our best over here as well to stay socially distanced and in the house. But you know, Eric, I’m hopeful that this type of moment in time and moment in history can provide some positive spark for people to better appreciate and understand one another and connect with one another and empathize with one another. Hopefully this is sort of a thing that brings us all together as a world and society.
Eric Hornung 2:11
I hope for that. And I also hope that you and I get to maintain this level of social distance. Recording remotely.
Jay Clouse 2:17
I was just going to ask if you felt closer to me through this whole thing?
Eric Hornung 2:21
Yeah, I feel, I feel, I feel remotely close to you.
Jay Clouse 2:25
You have our recording equipment since you intended to use it at Founder Summit. Now it’s in Cincinnati with you, and I feel, um…
Eric Hornung 2:31
Like you’re missing a child?
Jay Clouse 2:33
I feel like I’m missing a child. Yeah.
Eric Hornung 2:35
It’s like that comfortable thing…well, I guess children don’t just sit in the corner. But for you, it’s like a comfortable thing that sits in the corner, and you know it’s there. And now it’s just in my kitchen.
Jay Clouse 2:44
I ran a poll on Twitter a couple days ago asking my Ohio friends, because Ohio declared a state of emergency this past week, and schools were shut down for a couple of weeks, Ohio State stopped having in person classes. So I asked the Twitter world how their employers were handling this, if they were asked to forcibly work from home, if they’re allowed to work from home, or if they are expected in the office. And about 12% said that they are still expected in the office. The other two are evenly divided, about 40% each allowed to or mandatory work from home. I want to, I’ll be curious, I’m going to ask that poll again here in a couple days and see if that’s shifted at all.
Eric Hornung 3:24
By the time this episode airs, I would expect that only people who have to go to the office–because their job requires them to be at an office, not because their employers are just mandating it–will be the ones who say yes to that.
Jay Clouse 3:39
Well, speaking of working from home, that’s something that our area of the country outside of the valley has been doing for quite some time, according to today’s guest. Today we’re talking with Alexander Lazarow, a venture capitalist and the author of “Out-Innovate: How Global Entrepreneurs from Delhi to Detroit are Rewriting the Rules of Silicon Valley.” It’s a forthcoming book from the Harvard Business Review press. He currently works at Cathay Innovation in San Francisco. He’s an adjunct professor at the Middlebury Institute of International Studies and a Kauffman fellow at the Council on Foreign Relations.
Eric Hornung 4:13
It’s always fun when we find people who are running directly in parallel with us, Jay.
Jay Clouse 4:17
Alex was introduced to me through Amy Nelson of Venture for America. He’s doing a book tour a little bit here, but also–and something that I just found out this morning as we were going to record–he wrote an article in the Harvard Business Review called ‘Beyond Silicon Valley.’ And just a week ago, someone at Mallory’s workplace said, your boyfriend should read this, and dropped that exact article on her desk. And so it’s sitting next to me bookmarked. Funny that through a series of events, we’re now introduced in interviewing Alex.
Eric Hornung 4:49
Is that irony or coincidence, or none of the above?
Jay Clouse 4:52
I will say coincidence, I don’t think it’s irony. I think it’s coincidence and a happy coincidence. So we’d love to hear your thoughts on this interview with Alex as we go through. You can tweet at us @upsidefmor email us firstname.lastname@example.org, and we’ll get to that interview right after this.
Eric Hornung 5:08
Jay, would you say you’re more of a operator or an allocator?
Jay Clouse 5:12
Operator. For sure.
Eric Hornung 5:13
You’re definitely an operator? Well, if you were going to hire someone, to hire for you, would you want to hire an operator or an allocator?
Jay Clouse 5:23
Eric, I’ll be honest with you, I don’t know what the term allocator really means in this context.
Eric Hornung 5:27
All right, well, let’s pretend it means capital allocator.
Jay Clouse 5:29
Ah, I would want to hire an operator.
Eric Hornung 5:32
All right. Well, that’s great because our friends over at Integrity Power Search are a team comprised of ex-operators of successful high growth startups and tech companies, which allows them to be a true strategic partner. See, integrity power search is the number one, full stack, high growth, startup recruiting firm between the coasts. They partner with venture capitalists, private equity groups, and CEOs to build amazing teams for the world’s most disruptive companies, like upside, Jay. since 2012. They’ve successfully executed 600 plus searches and are on track for 200 more in 2019. Their clients have successfully raised over 2.5 billion in venture funding and that is still counting.
Jay Clouse 6:13
Sounds like they know how to operate a recruiting firm.
Eric Hornung 6:16
And they know how to identify great operators for your startup.
Jay Clouse 6:21
Smooth operators. So if you guys want to meet Integrity Power Search and learn what they can do for your high growth startup, go to upside.fm/integrity and get started. This episode of upside is sponsored by Tresta. Tresta is a mobile app that lets you do business calling and texting from anywhere. With Tresta, you can set up your business phone number, download the app, and start calling and texting unlimited right away. Tresta is the best business phone app on the market. Whether you’re a founder or freelancer just starting your business or you’re already established, growing your network and your business is all about communication. You’ve got to be available no matter where you are. Tresta offers the call management features that empower you to communicates smarter and more efficiently, like auto attendance, call recording, user groups, and more. And you don’t need any special equipment either, just a smartphone you’re already using. Tresta is easy to configure, so you can set everything up yourself all online. It’s just $15 per user per month with no contract. So start your free 30 day trial today at Tresta.com/upside. That’s www.Tresta.com/upside.
Jay Clouse 7:32
Alex, welcome to the show.
Alex Lazarow 7:33
Thank you so much for having me.
Eric Hornung 7:35
So Alex, we usually don’t have people on from the Bay Area. But you seem to have an interest about things going on outside of the Bay Area. How’d that all start?
Alex Lazarow 7:45
Yeah, absolutely. So professionally, I’m a venture capitalist. I invest with a fund called Cafe Innovation. We’re globally focused. A third of our work is in Asia, a third is North America, a third is Europe. We also have a pan Africa venture fund. So professionally, we’re investing all over the world. I was with Omidyar network before this, doing a similar type of thing. But the genesis of the book was elsewhere. I teach an MBA class at the Middlebury Institute for International Studies, which is the graduate program of Middlebury College on global entrepreneurship. And most of my students were going to move back home, a lot of them to the Midwest or internationally and build startups. And as part of that class, I kept assigning my students books on entrepreneurship. And I was getting really frustrated because I’d assigned them books that would talk about how to hire only A players or how to grow at any cost. But the context was so different, and they were operating in markets where there wasn’t the same level of capital, there wasn’t the same level of depth of trained startup human capital, or they were operating in markets that had really, really tough macroeconomic shocks that might happen to them. And whenever I signed them anything, I would have to send them a bunch of blogs and articles and other things to complement it and to contextualize it to the reality of building startups outside the valley. And a couple years after that, I said, well, I might as well just write the book, or at least try to contribute to this conversation. And so that was the genesis of the book, “Out- Innovate, How Global Entrepreneurs from Delhi to Detroit Are Rewriting the Rules of Silicon Valley.” And the thesis really is the best tech is global, it’s not just here in the valley. And yet everything we know about it is really centered in a time and a place, Silicon Valley, and today, and for very particular type of ask device, software based company that wants to grow extraordinarily fast. But I think that the best entrepreneurs operating in Columbus or an Amsterdam or in Bangalore or Nairobi have more in common with the best entrepreneurs in Sao Paulo than they do with those in San Francisco. And no one is telling their stories. And so I wanted to do that. And so I interviewed about 200 entrepreneurs from around the world, both in the US and Europe, but also in a variety of emerging markets that were leading some of the most successful startups to talk about what it takes to scale there outside the valley. I think they have a lot to learn from each other. But frankly, to your question of San Francisco, I’ve always had one foot in the valley and one foot abroad. And I think that the Valley has a lot to learn in this situation as well. And so that’s why I think it’s really interesting to be both here and often on a plane.
Jay Clouse 10:08
One of the benefits of the valley is that it’s such a geographically concentrated space. So when you started saying, I’m gonna look at companies outside of this geographic density, how did you think about boiling that ocean or beginning to do some of the interviews? Where did you look first?
Alex Lazarow 10:25
Absolutely. So I have the advantage as a venture capitalist to have met already a pretty wide variety of startups professionally over the last seven, eight years of working. So I started, one, with this little bit of contextual knowledge of having done that. Second, I did what, what I think I do professionally as well, as I tried to understand from my own network, what are the most interesting stories that people had heard of, and what are some of the most extreme situations that people had heard of, in every geography? And so I ended up getting a pretty wide sample size just through my direct network. But I wanted to make sure that I wasn’t biased. And so, and I think for me, there’s three types of biases. One is a geographic one, I’ve invested a lot more in places like Africa, like Southeast Asia, and a lot less than in the Middle East or, you know, in South Asia. And so I wanted to have a bunch of entrepreneurs there. Two is, you know, look, like I think, like the industry in general, I think, I think I wanted to make sure, I think it’s critical to have better gender diversity, so I wanted to put a focus on that. But also just kind of economic, social diversity, getting different types of businesses as well. And so after kind of getting the first waft, I tried to make a little bit of a top down analysis on what are some of the most interesting companies just from outside in research that I was missing, and then proactively reached out and interview some of them. So it was a little bit of a combination of those two.
Eric Hornung 11:48
What’s the one most harmful bias you feel San Francisco has or the Bay Area has about the rest of the world?
Alex Lazarow 11:56
It’s such an interesting question. I believe that–and this is part of the reason that I wrote the book–is that we’re at this moment where we think that we can export everything that has worked well in the Valley to around the world, and that’ll just replicate. This is isn’t, it isn’t the bias of saying, hey, look, we’re creating eBay, and now make the model eBay; it’s actually the way we will build a business. That philosophy and that ethos not approach works. It’s a little bit like America used to export the Washington Consensus, because we genuinely believed that this was the, the best thing we had to create prosperity, and that was the unique cocktail of liberal democracy and capitalism, and that would lead to outcomes. And the reality is that worked in some places. But you know, other markets have different approaches. And you could think of what’s worked in China with, with their model, what’s working in Northern Europe with capitalism to socialism. That has worked in different ways elsewhere. And I think the hubris of thinking that our approach to building startups is ‘the’ approach, I think is, is, is both dangerous and in some cases, very harmful to companies. And I think around the world it’s really important for entrepreneurs to understand tha, well, yeah, like in the Valley, it makes sense to blitzscale; in the Valley, it makes sense to do all these things. Nut it just doesn’t make sense necessarily in a particular context. And I think that’s the, that’s the bias, is, is the bias of not being flexible and adaptable to the reality elsewhere.
Jay Clouse 13:17
I think in this discussion, a lot of times, we make two groups. You have the group of the Valley, and then this group of everything else. In your research of looking at the everything else, how homogeneous is that group versus how much do you think there might be like, several dozen everything else is?
Alex Lazarow 13:38
Yeah, I think that’s a great point. And, and I think that is equally dangerous, to say, hey, look, there’s the valley and then everything else, because you’re right. They’re incredibly heterogeneous. I used one simplifying heuristic in the book that is a gross simplification, but just just to kind of wrap my head around it. And I think that there’s a couple axes where you might say, hey, look, things are different. The first is the macroeconomic context of the country. So some countries might be more developing, others might be developed. Some countries might have a less developed startup ecosystem. They’ve never had a unicorn, they don’t have any founders, or whatever. And some have very thriving ecosystems. And you could say there’s, there’s entrepreneurs that fall into each of those buckets. So, you know, on top right, say Silicon Valley is in a developed country and is an incredible startup ecosystem. You might say, Tel Aviv and a couple other cities like that operate there. You know, the bottom, you might say, hey, look like if someone’s operating in the most developing markets with no startup ecosystems, then that might be bottom left. But in the other two quadrants, there are other things, right? You’d say, look like Sao Paulo is starting to have a really interesting startup ecosystem, it’s developing market, right? Or you might say, hey, look like there’s some places in the Midwest, which are operating in, you know, one of the greatest countries in the world but are, you know, still building out their startup ecosystem, and they might, they might look a little bit different. And so I think within that there’s a little bit. When I think about the book, I think it’s really important, as I reflect on the lessons I’m talking about in the book, is that it’s not a recipe book. It isn’t, do A, B,C, and D, and you will get success. I think of it much more as a menu. Read the book, some of these things will resonate your situation, adapt, learn and apply. But some of them are just totally contextually irrelevant to you. And I think it’s also important to just completely disregard when, when it doesn’t make sense either.
Eric Hornung 15:24
You mentioned that some of these ecosystems don’t have a unicorn yet. Do ecosystems need to have a unicorn to be successful?
Alex Lazarow 15:32
I think it depends what you call success. I think unicorn has, in the Valley, come to represent two things. I think one is a numerical value of a business that’s worth more, a bit more than a billion dollars. And two is this kind of philosophical approach of chasing unicorns and growing really fast. I don’t think you need the latter. And I think for the former, it isn’t about getting to a billion dollars. I do believe that getting successful startups helps launch the self-fulfilling prophecy of, of this hamster wheel, of this perpetual motion machine. I did the numbers and I mapped, I used the unicorn number a little bit arbitrarily, it could have been 500 million, it could have been 2 billion, but just as a number of a big company. And if you map the acceleration of unicorns in ecosystems, you see a little bit of this exponential curve, right? Like, if you get one, you know, it doesn’t necessarily change the local dynamic. Once there’s two, like, you know, that might happen a couple years later. But there’s kind of this inflection point around five or seven, where all of a sudden after that, there’s a bunch more. And this is correlation, not causation. But I believe the reason that happens is, you know, once you get, one, there’s a founder, they might have got a little bit of exits, maybe some of the employees have it. But once you get a couple, you start getting critical mass, you start getting a little bit of this network between companies that people that are helping each other, perhaps a little bit of the, the mafia like effect, as well. And that starts snowballing. So there’s capital coming back. There’s trained folks that have worked in high growth startups already. So I don’t believe you need one unicorn. But I think that having a couple of companies that start breaking out starts creating this momentum that gets unlocked. And that’s really powerful. And actually, I often advise people that are thinking about building startup ecosystems. I think one of the, one of the things we often think about is, how do we get the pipeline of companies at the bottom end, just get as many early stage startups to scale? And I think that’s, that’s critical, right? You need that because that’s down the pipe. But I also think that one of the things we often miss is thinking about helping those unicorns, not unicorns, but the companies are starting to break away, and how do you make sure that those companies are success? And they continue accelerating through the curve, and ultimately are part of unlocking the ecosystem as well?
Eric Hornung 17:44
Can you have that be made up of bootstrap founders that are looking at this more like a 20 year timeframe than a five to seven?
Alex Lazarow 17:52
So I’ve absolutely. I think that the Valley has this approach of building companies really quick, and we have a set of tools and an ecosystem that work extraordinarily well for that. But that by no means is the best model for every startup. Obviously, I’m biased. I’m a venture capitalist. I, I think it’s an incredible tool for certain companies. But I think the case of Qualtrics in Salt Lake City is a great one, right? When I spoke to Ryan, who’s one of the cofounders and the CEO, he talked about this being a 20 year game. And that company never took venture capital in its first decade. They ended up taking to the VC later on being already a multi-billion dollar business. But he talks about his big breakthrough happening in year 12 or 13 when they switch the enterprise model. It just took them that long, it took them a really long timeline. And I think that that unlocks a ton of value as well in the ecosystem. It’s just a different style of business. He self funded it through operating profits, he built it step by step. And I think we see a lot of those kind of businesses being built outside the valley. And I think, you know, the returns on that for the ecosystem will take longer just because the timelines are longer, but that’s fine. I think, I think it’s, I think it’s, it’ll still reap some incredible rewards.
Jay Clouse 19:05
It’s interesting some of the stories that we’re seeing now, because I feel like the prevailing narrative was, you have a unicorn, and that spins off these angels that create a new ecosystem, because now they have cash. That was such a prevailing narrative, and it makes intuitive sense. But I don’t know that there is even a long enough time horizon to prove that that was true in practice, or that we saw those stories happening, because you look at an ecosystem like Utah where Qualtrics was or in Columbus here, we had a company that was a unicorn that had a very similar story to Qualtrics, and it didn’t spin off a bunch of angels, because the way it was started, they didn’t take a lot of money, they didn’t have to give out a lot of equity. There wasn’t a lot of new money in new hands. It was a huge outcome for the founders. But it wasn’t the money that is really starting to bear fruit. It’s actually the people. And I think that’s actually more of a common spin off from these unicorn companies as people because to, to your point, something that I saw in the book that you wrote was, in a study of 628 entrepreneurs in emerging markets, 75% of those identified lack of available talent as the biggest barrier to their to their business.
Alex Lazarow 20:18
I totally agree. Two observations before I talk about human capital. The first is one of the things that I think is really interesting is that entrepreneurs outside the valley are often not waiting to exit their business to then become angel investors or mentors. Often they’re doing it at the same time as they are building their business. They’re building their ecosystem at the same time as they’re building their business. And there’s actually a really interesting study by Endeavour around the New York ecosystem. And how that was one of the things that was really critical, was that a lot of the founders were actively angel investors there and that helped rise that, that ecosystem. I’m seeing that a lot. The second thing, and I mentioned Endeavour, I think is a really interesting phenomenon, is that we’re seeing people that are not entrepreneurs becoming a stepping into the shoes of these ecosystem builders elsewhere. And Endeavor has been, if you know the organization, is one of the biggest entrepreneurship nonprofits around the world, and they get some business leaders in a bunch of different ecosystems to support some of the earlier stage founders. And as the founders grow, they then also become the business leaders and the board of the local organization to give back. But they kickstart that by finding folks, they’re not necessarily the founders themselves. We’re seeing some of that, and I think that’s, I think that’s exciting. On the human capital standpoint, absolutely agree. Not only is human capital, I think, the equal, and in many cases, the biggest challenge for entrepreneurs, it’s the only one that gets more acute with time. Like paradoxically, as companies scale, they need more capital, but it’s easier to get as they become more successful and they’re become proven. But as they scale, they need more people, and they become harder to get because the dynamics of that are different. What I think is interesting–I have a chapter in the book around the unique strategies that entrepreneurs outside the Valley leverage to scale their businesses, and human capital, I think is really interesting. Philosophically, in the Valley, we think of hiring only the A players. It’s built into the business model that it’s okay to have high turnover, because there’s a really deep depth of talent locally, we could just find someone else to find, to fill the seat. I think outside the Valley, we think of them as much more of a precious resource. And so, there’s a little of this, this dual investment of finding, retaining, growing over a much longer period of time. And so one thing that, one example that I’ll give that I think is interesting is Shopify, which is a startup in Ottawa. Probably not a startup anymore, they’re there. They’ve grown quite a bit. But they realized that they were starting to tap out the local engineering pool and say, look, like, we could go move elsewhere. But instead, they said, look, we want to build our talent pool locally, hw can we do that? And so they partnered with Carleton University, a local university, to create something called the Dev Degree, where they essentially are paying people’s education over four years, engineering, over the summers, and during the year they do co-ops with them, so they get labor out of that. But at the end of the two years, four years, they have a quarter students have already worked in the company, already trained up, know the culture and could step right in, and they’ve solved the recruiting problems. So it’s kind of a win for the students, it’s a win for Shopify, obviously, because they built their talent pipeline. It’s a win for the ecosystem. They actually, their, their cohorts are 50% women. So they’re doing a dent on diversity, for instance, in a couple of these. So I think that’s, that’s kind of one really interesting example on this kind of approach on building pipeline as well.
Jay Clouse 23:36
I love what Shopify is doing there. There’s another interview that the founder, Toby, gave, I think it was on the Knowledge Project, the Farnam Street Podcast, where he talked about, you know, his perspective was, in the Valley, if you’re a unicorn company, there’s actually a handful of unicorn companies kind of becoming or minting at any given time in the Valley. But if you’re a unicorn company in a place like Ottawa, you become kind of the de facto place where, you know, your parents, your family, are saying, Oh, can you get a job at Shopify, that’s what it means to be successful. You know, in my community where I grew up, getting a job at some of the local manufacturing companies was what you wanted to do. That was the stable, comfortable mark of success in those communities. And that’s an awesome position to be in as a company, if you’re really worried about getting talent.
Alex Lazarow 24:22
What I think is really powerful for startups outside of the Valley is that you don’t need to be a unicorn to be able to be in that position. You can be a much smaller company and have this disproportionate hiring advantage because you are one of the biggest companies, but you might just be 100 million dollar company or whatever. And so that’s one of the beauties, I think, of recruiting as well outside the Valley. Tangentially, one of the things that I think is interesting around like hiring in the local pool, to your question, Jay, I think one of the things that I’ve noticed is that startups outside the Valley have been really building out an ability to tap talent pools elsewhere as well. So you know, in the Valley, like the, the trend de rigeur is distributed teams. And it’s like, how do we, how do we leverage talent from everywhere. But the reality is, if you look at the most successful companies outside the Valley that have been built, they’ve been distributed forever. That’s been something that they’ve had to do, because if you can’t hire someone locally that’s been the CMO of a startup and scaled it to IPO, you look elsewhere, and you look outside your market, you figure it out. And so startups outside the Valley I believe, have figured out how to build a product, a culture, an organization, a hiring strategy, that can work in this distributed context, and can actually leverage both their local ecosystem but also tap knowledge from elsewhere as well. And I think that’s really powerful.
Eric Hornung 25:37
So far, we’ve talked a lot about how this Valley model of building companies is different outside of Silicon Valley. And we understand there’s a lot of different ways that it’s being done. One thing that I’m curious to hear your perspective on is how companies are founded. So going back to whatever it was, 1960 or whatever, when Fairchild was first invested in, the venture capital space really has been merged with the Silicon Valley founder in the way that you found companies. How is venture capital changing or adapting or innovating to meet the demands of the non-Silicon Valley type founder?
Alex Lazarow 26:21
Absolutely. I have some thoughts on both how startups get founded and who the founders look like, and two how the venture capital model gets adopted. Let’s start with the second question around venture capital. The quick history on VC, which I think is really interesting, I asked my students, where do they think venture capital originated from, they say, hey, look, startup of Silicon Valley startups. The reality is, it’s actually much older. It was an innovation that existed, and it was really pioneered in New Bedford for a totally different industry, whaling. And we talked about carried interest. The reason it’s called carried interest is it was literally what people could carry off the boat in terms of whale meat. And that model was the one that was adapted to create the venture capital firm. And we’ve now created standards around VC that look a little bit different, like 2 and 20, the 2% management fee, and 20% carry, the 10 year fund, whatever. That model has worked extraordinarily well in the Valley of creating a specific type of company really quickly, etc. I obviously am a big believer in that model. But it doesn’t work for every company. It doesn’t work for every stage of company. And I don’t think it works necessarily everywhere around the world perfectly. And so this is an area where the innovations I think are much more nascent. But there are some interesting trends that I am looking at and I think might influence how the funds of the future get built. And so here are three. The first is we thought a lot about investing in equity in the Valley. So it’s like preferred shares or whatever it is. And that is this model of the whaling industry. Another industry model is mining, which also has very high risk perspective investing. And there it’s the royalty. And we’re seeing some experiments or something analogous called revenue shares, that, by the way, no surprise are all, many of the leaders are being built in the US and internationally outside of the Valley in some of the major contracts. And those are really great for businesses that might not have this exponential growth but might have a little bit more of a forecast of growth, and then you could take of it. The second is, this 10 year timeline is long term, but it’s not super long term. And there are some companies that take longer, and I, we talked about Qualtrics earlier, and there’s some companies that take shorter. There are some experiments around making longer term funds. One of the things I think is really interesting is the Evergreen structure of saying, look, we can hold something for much longer. Naspers, which is a, actually, originally a printing business is now a tech holding company and one of the bigger emerging market investors in the world. I did this with Tencent, and it is arguably one of the most successful investments in the world. I think their position is worth about 100, 100 billion dollars. And I think this this ability to look beyond the 10 year hold period on great companies I think is really powerful. And the third is computerized decision making. I think in the old days, this belief was we invest locally, you go to the board meeting, like the saying is go to the board meeting and come, come home for dinner at the end of the day. And that works well if all the startups are near you. But if you’re investing across a range of locations, you have to be on a plane, you have to travel. But also, I think one of the tools that’s really powerful is how do you actually use data to help inform your decision and be part of that. And there’s now a bunch of startups that are using machine learning enabled decision making around decisioning of startups. And social capital, for instance, had, had capitalist service. They’ve now pivoted their model, obviously. But they had a really interesting data point around within their portfolio of companies that they were doing capital service for, they had a much higher proportion of founders that were women, that were minorities, etc, that ultimately would have been biased out through the traditional model. And so I think that’s an interesting thing of letting the numbers speak for themselves. So all these obviously are super early stage. I don’t think they’re going to shake up the model tomorrow. I also don’t take the VC as an dividual will disappear. I think there’s still this human connection and company building and trust that is part of it. But I think some of this stuff is coming and will be part of the of the toolkit over the long term.
Eric Hornung 30:11
It feels like a lot of that happens around what we would traditionally consider the seed round now. Is there any innovation happening at the more Angel stage, the pre-revenue stage?
Alex Lazarow 30:22
You know, what’s interesting is that the names of rounds have changed so much these days, where, you know, when I invest, I invest principally series A through C professionally, but what a series A looks like today, it looks so different than it did before. But some of these that I think are really interesting at the earliest stages, what Angellist is doing, for instance, around letting anyone be a miny fund manager, right by putting it out to a lot of people on the network and some funds that can invest behind some of the, some of the best people. I think that’s one of the things that I think is exciting. We’re seeing something similar with scout programs among VC funds that are arming people in the ecosystem to lead deals and support, support their markets, I think that kind of thing is that’ll become more even more powerful in markets outside the Valley because people need these distributed networks to be able to succeed. So I think that, I think that will continue being important. So those are some of the things that I think are interesting there. I also think some of these trends that I mentioned will also matter, like being long term by thinking about different tools for supporting entrepreneurs, etc. I’ll pause there.
Eric Hornung 31:27
It’s interesting, because as an angel, you provide a lot of value from a strategic standpoint. But also, a lot of angels will say, yeah, we’ll connect you to the next round of founders, or the next round of funders, sorry. And here, it’s like, as an angel, now you need to understand this company is on this trajectory. And therefore, I need to have a full tool belt of future funders, not just that series A funder. Makes the angels job more professional.
Jay Clouse 31:57
I want to dig into something you talked about in this trends, which is the analogous model to mining being you know, instead of royalties, we’re seeing rev shares. We’ve talked to a couple investors on the show that have kind of a shared earnings agreement with their founders. But I think you’ve also found some research to see that even founders and companies themselves are doing revenue shares with their employees?
Alex Lazarow 32:21
So, Jay, I think you asked a really interesting question, which even just taking a step back is, in this other model of building startups, is the best way to compensate employees: stock options. We’ve used this as a tool, it works really well when the company grows really quickly, etc. There’s a lot of reasons why they’re problematic as well, which we can talk about. But one of the things that I think is exciting and interesting to me is, if you are thinking about hiring your employees for much longer term, if you are thinking about growing them into roles, how might you also rethink compensation? There’s a really big study by index ventures I believe on the European options market. And the reality is there, the use of options was much lower than in the valley. But one of things that surprised me about it was that employees requested them more often. And part of it is because they were less aware, but part of it is perhaps they we’re also preferring cash or different types of compensation. One of the case studies I explored was a company called Phoenix International, which does off grid energy in Africa. Imagine two solar panels, a battery in the home, a couple cell phone chargers, lights, etc. They can essentially replace someone that has no electricity at all and that burns kerosene lights and walks a mile to charge the phone, with a pretty modern light solution. This company, Phoenix, did something, instead of options, they gave a program called Phoenix Flames, which essentially was a RSU. They essentially were giving restricted stock to their employees. But they did it the whole way through from the rural solar installer that lived in a village in remote, rural Uganda all the way to the executives throughout the company. And they did it because they actually found that a lot of the employees wanted to invest in the company what meter savings they had. And they did it to be able to give them a little bit of upside, etc, but a long term one, but where they were owners right away, they were equity holders right away. And the company ended up selling to engie. And this was in some ways for many of the folks on, on the cap table that were, you know, the the most rural, it’s always a life changing amount of money for them, where they are now ultra loyal to the company that stayed through the acquisition, etc. These models are still really nascent, I think; but what I think is powerful is, as we rethink towards this more long term, long term growth story, and in a couple of the dynamics we’re talking about, I think we also need to revisit the equity compensation model a little bit too. And that doesn’t necessarily mean shift away from stock options. I think they can be an interesting option for certain businesses. But I think there’s a whole range of other things that we can think about too and, and I think this is one of the ones that, that I was pretty excited about.
Eric Hornung 35:00
So much of when you’re joining a company that seems like it’s poised for fast growth is you go back to your friends groups, and I’ve had friends who’ve joined early stage companies, and they say, Yeah, like, here’s the base, and here’s what my sock option package looks like. So when you go off of this traditional path, how do you communicate that as a CEO to a new set of employees to say, Oh, yeah, come ride this wave with me, don’t go over there and do what’s normal or standard?
Jay Clouse 35:30
I’d also like to add on to that, how do you communicate it to your investors, if you have them?
Alex Lazarow 35:34
It’s tough. It is so tough to be shaping, shaping and changing etc. I think in all the cases where we talked about, where I talked to entrepreneurs that are experimenting with this, this is something where, a, they they had conversations with their board and their investors early on the philosophy and the approach that they wanted to take and the experiments they would do. They made it time bound and tried it out first with a set of people and see what happens. And three, I think from the communication standpoint, I think that the communication channel challenge exists if you’re doing it with stock options or if you’re doing it with any of these other models as well. I think, I think that dynamic is the same either way. If anything, I think it is easier to communicate to someone and say, hey, look, you are a part owner of this company as long as you stay with this company for this amount of years, rather than saying, hey, you’ve got this instrument that is worth some money if the valuation goes up based on those dynamics that are a little bit harder to control. And so if anything, I think it’s easier to communicate with an RSU than a stock option on what the inherent value is for an employee at a particular point in time, particularly in markets where there’ve not yet been unicorns and where stock options have not yet paid out in meaningful ways so that people actually say, that’s, that might be worth it for me and really get it.
Eric Hornung 36:50
Do you see startups innovating on kind of all of these different metrics, which is like employee compensation, the way that they’re funded, and the type of product that they’re working on? I feel like a lot of the, I feel like you can’t have, you can’t innovate on all three of those aspects in a company. But maybe I’m wrong.
Alex Lazarow 37:08
I don’t think you’re wrong. I think building a startup is extraordinarily hard. Just figuring out product market fit, just figuring out who your customer is, how to scale all this stuff, right? Like that is incredibly challenging. And right now, on a lot of these things, there isn’t yet a benchmark or saying, hey, like, this is the best practice to do. And so entrepreneurs are also inventing some of these things as well on the side. And so I think you’re right, Jay, they are not doing this all at the same time. My hope is if we fast forward 10 years from now, we’ll have some really powerful benchmarks on how to do all these things, and it’ll be a lot easier to operationalize them into a company. But right now, I think you should try the ones that make sense. I mentioned this earlier. Like, I don’t think this is a recipe book, like do all these things, you’ll be successful. It’s more, hey, look, if this is the type of company you’re building, and this is the type of employees you’re hiring and this is the context that you have, if this resonates, why don’t you experiment on one or two of these? And if they work, double down on it. But but I agree, I think you can’t reinvent the whole wheel to build a startup or else, or else you have trouble building the actual business, which, which obviously, is the most crucial part.
Eric Hornung 38:17
Does that mean that outside of Silicon Valley where we have to be more innovative in the employee compensation and the way that we’re funded and the way we hire talent and all of this, that the products that come out are going to, on average, be less innovative?
Alex Lazarow 38:35
I don’t believe that. I think one of the things that is most exciting to me about entrepreneurs outside the Valley is what they are building and the nature of innovation that they’re having. The first chapter in the book is called ‘Creators.’ I call that because I think that what entrepreneurs are building is fundamentally different in some meaningful ways to the Valley. In the Valley, I think we’re obsessed with this notion of disruption, of disrupting incumbent industries and common players with a new attitude and new approach. And that works for the US, right, there are a bunch of industries to disrupt. But if you were operating in some of the toughest markets around the world where there isn’t a functional energy solution, where there isn’t functioning, functional bank, etc, entrepreneurs are more likely to be creators and creating industries rather than disrupting them. And there’s some really interesting data on comparing the proclivity of entrepreneurs to be much more likely to be doing things like agriculture, healthcare, education, etc. That, in a way, is so much more life changing than software-based innovation alone. And if anything, I would argue that the best entrepreneurs around the world are doing three things. One is they’re bringing a new business model or technological innovation for a market that was underserved or not served. And two, they are doing this not for just the top of the pyramid, but for the mass market. And three is often they’re creating a platform for others to build on top of that and they’re creating an ecosystem. And so in many ways, I would argue they’re more innovative. I asked my student, I was like, Who’s the most interesting entrepreneur that’s changing the world? And a lot of them would say in the Valley, I would ask them about that in the Valley, and they’d say, oh, like someone like Elon Musk. And I’d say maybe the next two or three. And a lot of times people struggle to find someone that hits that bar. I can name dozens of people that hit that bar for me in emerging markets, because they’re creating industries, because they’re fundamentally rethinking things. Anyways, I’m really excited about that.
Jay Clouse 40:22
Something we talked about earlier was the fact that outside of the Valley, there has been remote teams and almost, by necessity, being remote first for a lot of companies. We’re sitting here, March 15, which is a very unique moment in time where a lot of people are suddenly scrambling to figure out what is our business continuity plan, how can we operate remotely? And I would guess that in the Valley, VCs are doing more meetings, virtually on Zoom versus in person, is that true?
Alex Lazarow 40:51
I think it’s not just VCs that’re thinking about how to modify their businesses. It’s authors as well. My book is launching April 7, and I’m pivoting entirely from having launch events to South by Southwest for Collusion to a virtual, virtual launch entirely. So I, I feel that intimately. You know, I think what’s interesting is VCs that are investing outside the Valley have built in Zoom into the business model already, because you have to. I think now it’s becoming the go-to model for everywhere. If anything, I actually think that I’m more efficient by video conference, because in a Zoom meeting, you’re not traveling or asking the entrepreneur to come to u, so someone’s saving time. The meeting can be done more efficiently often; an hour meeting can be half an hour, you can kind of really focus. If it’s done with the right culture and operations, you send the deck ahead of time or, and the VCs read it, you can have a much more efficient, tactical meeting. So I’m seeing entrepreneurship to that. You know, obviously, our portfolio companies are thinking about this, too. I think that remote and distributed is a meaningful trend that is going to scale globally. I think if anything, the best entrepreneur swho’ve figured this out elsewhere are now in the valley, where we’re having to look and say, Hey, like, how’s Basecamp doing this? How is CPR doing this? How are a lot of these companies that are built outside the Valley doing it? And what are their best practices? How do we learn from them?
Jay Clouse 42:09
Well, the reason I asked was, you know, one of the constraints for companies outside of the Valley is capital. And some of the advice is like, well, you got to just go to San Francisco and post up for a month and set up a bunch of meetings and do that every time you go and fundraise. But we got, I got a text message from one of our listeners and a founder here in Columbus, Ohio, his name is Arnob. He said, No one’s writing about this, but right now, all the venture capitalists who are taking meetings via Zoom from the Valley, suddenly the the playing field is level now with companies all over the country. And I’m wondering if this could be the spark to taking down some of the barriers to capital outside of the Valley that people are forced to reckon with and try and, and figure out how remote meetings may be more efficient.
Alex Lazarow 42:55
I love that. It is in many ways a great leveler, and I think can help drive a lot more access. I think we need to do a lot more beyond just forcing things to be on Zoom. I think to be able to really level this, I think we need to make sure that networks of people are really connected, and the best entrepreneurs in Columbus get connected with the best VCs everywhere, and not just in the Valley, by the way. So I think there’s a lot of other stuff that needs to happen for that to be successful. But certainly, this is a great, a great way forward and to move forward on it. And so I love, I love that, the great leveler of Zoom, in some ways, I think is a great way to frame it.
Jay Clouse 43:33
What are some of the–just kind of like rapid fire here to close this out.When you did this research, what were some of your assumptions that proved to be true? And what were some of your assumptions that you were surprised to change your mind on?
Alex Lazarow 43:46
One of the ones that I was surprised about, first to start with is, you know, when I started this hypothesis research, I knew of all these businesses that had replicated Silicon Valley startups and had taken, you know, taken the Uber model, the Lyft model, they’re now kind of ride sharing models all around the world. And so I knew of that. I also knew of models that were being copied out of China or India or other emerging markets and ported to other emerging markets. So I knew of these kind of, this linear export, exportation and adaptation of business models into emerging markets and other things. The thing that surprised me the most was that it was actually, it wasn’t unidirectional. It was bidirectional. So to give you the example of Uber, right, the initial model was, let’s do ride sharing as a product. And then that got exported to places around the world like Indonesia, where GoJek, which does ride sharing primarily on motor taxis, on little motorcycles. The founder there Nadiem, when I talked to him, his vision from the beginning wasn’t to do ride sharing, it was actually to do a full ecosystem, and not borrow from the ideas of super-apps in China. But what GoJek did is it said, Look in the morning, we’re gonna drive people to work. At lunch, we’re going to get them food. At night we’re gonna drive them home. In the evening, we’ll get them food for dinner. And in between, we’ll deliver ecommerce packages, they have a financial services solution where they can do cash in, cash out with the drivers, because a lot of people are under, underbanked or unbanked in Indonesia. And so they thought about actually creating an ecosystem around ride sharing. Those ideas then influenced how ride sharing businesses elsewhere get involved. And it’s no surprise to me that Uber now has Uber Eats and has an Uber credit card and a bunch of these other things. And so it was this bidirectional in nature that I think it surprised me. And so, that’s my two in one answer of what I’d expected and what had surprised me.
Jay Clouse 45:36
All right, I lied. One more question. Crystal Ball time. Five years from now, ten years from now, how does the world look? Is there this great divide between inside Silicon Valley and beyond Silicon Valley?
Alex Lazarow 45:48
Let’s do 10 years or 15 years because I think predicting anything within a five year timeline is hard. But I think that we’re going to stop having the notion in the long term of Silicon Valley and not Silicon Valley. I believe Silicon Valley will continue to be a bastion of innovation and will be one of the best places in the world to build startups. But I think that equally, there will be startup ecosystems elsewhere, that will be incredible. And hopefully one day equal or greater. We’re already seeing this obviously, in China with, with the rise of the ecosystem there. I think we’re gonna see much more of that, and it’ll be become more regionalized. So Silicon Valley will be great at building certain types of companies. I think we’re already seeing new york being one of the best places to do D to C, I think we’ll see Toronto and Montreal and Canada being very, very strong for AI. And I think we’ll see places like in the Midwest being very, very strong as well, like Minneapolis, with a very strong healthcare system ecosystem locally could become one of the best places in the world to do that. And we’ll see the same thing happen in emerging markets too. And so, my hope is that we stop calling ecosystems ‘the Silicon Valley for x’ or Silicon Plains or Silicon Savannah or whatever. We just start calling them x-city, and that city is known for a very specific type of innovation to which they are the best place in the world to go to, and Silicon Valley will go there to learn from as well. And so I think we’ll see a lot more of this bidirectional sharing of knowledge and a much more distributed and, frankly, fair ecosystem for innovation.
Eric Hornung 47:16
In the past, you could build a billion dollar company in somewhere like Orrville, Ohio, do you think that this extends outside of cities and into what might traditionally be country or a non highly dense cluster of people?
Alex Lazarow 47:34
I think building an incredible startup requires a couple of different ingredients. I think one is obviously a great business model and idea, I think, second is access to capital and third access talent and a bunch of other things. But let’s start there, I think to build a business anywhere, including in a rural market, but also anywhere in the world. I think anyone can have a great idea and great business model. I think you Need to then solve for capital and teams. One of the things that I think is exciting is with these shifts, we might see more of that, right, like, as you would mentioned earlier, with zoom and things like that, perhaps that levels the playing field of capital more. I think VCs, as they see successes outside the valley will spend more and more time outside the valley. So that will help. And I think from the talent perspective, if you’re operating in a place where there’s just there are less people locally, you just need to think about being distributed much more early. And you can solve for that. So I think in many ways, some of these trends are going to allow for a decentralization of innovation in this movement in some powerful ways, is one of the reasons that I’m hopeful that will also lead to job creation in places that need it and will lead to new innovation, but also different types of business models that are more germane to the problems that exist in those ecosystems. So, you know, an entrepreneur that’s operating in more rural environment will, because of the very lived experience of that founder will be solving a different type of problem and so on. I hope that we’ll also see a little bit more of a horizontal ization of the ideas beyond just the types of problems are getting solved in the valley to to a wider range of that. And I think that ultimately will be good for entrepreneurs for regions and society as a whole.
Jay Clouse 49:14
All right, Alex, this has been awesome. Listener, if you’ve enjoyed this conversation, check Out-Innovate: How Global Entrepreneurs from Delhi to Detroit Are Rewriting the Rules of Silicon Valley. Alex, if people want to pick up that book or find out more about your work, where should they go?
Alex Lazarow 49:28
You can buy the book at any major bookstore or on Amazon. And you can also sign up for updates at AlexLazarow.com.
Jay Clouse 49:37
Hey, listener, have you ever wanted to get a message in front of the upside audience but weren’t sure how to sponsor this show or weren’t able to do a long term sponsorship? Well, now you can just go to upside.fm/classifieds and let our audience know anything that’s going on in your world, whether it’s an event, an application, a special coupon or deal, or just letting them know who you are, what your company does. All you have to do is go to upside.fm/classifieds, and you can place an ad on this show. That’s upside.fm/classifieds.
Eric Hornung 50:16
Alright, Jay, we just spoke with Alex. That was a fun conversation. Where you want to start?
Jay Clouse 50:21
We talked in the intro that this is a unique moment in time for remote work and working from home. And Alex brought up in that interview again, the idea that this is actually something that the rest of the country has been possibly leading on out of necessity. What do you think, Eric? We see a lot of buzz from big name followers on Twitter of people in the Valley talking about how remote work is the future. But do you think that the rest of the country has actually been leading on this already?
Eric Hornung 50:48
My take is that the outcome of this is that people will be more flexible about the ability to work remotely, but I think it’ll make geography an even more important thing in the next few years, because you’ll have your in person network and your remote network, where, you and I have that Jay, but the majority of Americans don’t. So I think it’ll be a different environment when we emerge from this pandemic and crisis. But I don’t think it’s going to look like the dystopian, all online, all remote, all work from home environment that a lot of the people you’re referring to are projecting out.
Jay Clouse 51:27
It’s interesting to think that there are two future realities for people who are experiencing this for the first time. Some of them are going to be like, Oh my gosh, why haven’t we been doing this forever, this is amazing, it’s going to be a really positive change. And there’s also probably going to be a class or a group of companies and individuals who are thinking, this is terrible because it didn’t adapt to their situation or they didn’t have good planning in place. And it becomes actually something that holds them back from adopting this in the future just because of the the way it was introduced as a need and potentially not having processes in place. So it will be interesting to see if this ultimately is a catalyzing event or something that further slows down adoption for a lot of companies.
Eric Hornung 52:09
Yeah. And from a personal level, I can just kind of relate my experience working from home for two years. My company was based out of New York. And we were doing this podcast, which was touching 65 different cities around the country. But I was living in Cincinnati. And there was this I, this feeling that I was everywhere and nowhere, because while you have your network in Columbus, your real in person network that you’ve met and known, my network in Cincinnati was getting, was pretty much non-existent. So there’s a reality of working from home ,if that does take off, that is probably somewhere in between those two extremes, where I think there will be this, you’ll have your remote life and you’ll have your local life. And right now a lot of people in the world are 95% local life.
Jay Clouse 52:57
Turning to the interview itself, where I should have gone in the first place anyway, but turning back to that, a couple things stuck out to me.
Eric Hornung 53:03
Jay, this is our show, you can talk about whatever you want.
Jay Clouse 53:06
That’s true. That’s true. That’s true. One being that a lot of the things that Alex noted to us specifically about domestically, the United States, stuff that we’ve been talking about on the show for a couple years now, really, really well aligned with what we’ve already seen to be true. What is totally foreign to me, pun intended, are a lot of the foreign countries that Alex studied for this book. You know, talking about Asia and Africa and Latin America, that is much less familiar to me. A lot of the examples in his hprp so we’re in the book, are in emerging markets. So that’s something that I am interested in digging into more. We’ve had a few international companies on the show here, but that was newer to me than, than some of the other aspects of the show, which was just good to get some validation that, based on our touch points, you know, with 150 or so individuals we’ve interviewed on the show, we, we’re seeing the same and coming to same conclusions.
Eric Hornung 54:01
And you and I have talked about doing kind of upside miniseries about specific countries and learning about their ecosystems and founders. We just haven’t had the bandwidth to do it. But I think maybe that’ll be something that creeps back up as we expand outside of the US.
Jay Clouse 54:17
We’d love to hear from you listeners on that point. Are you interested in hearing more from emerging markets? Which emerging markets? Are you interested in collaborating with us in emerging markets? Feel free to shoot us a note. We’re interested in collaborations? Email us email@example.com. Let us know what you’re thinking. As Eric noted, we have a limited amount of bandwidth and an unlimited amount of curiosity. And of course, you can tweet at us as always @upsidefm and let us know what you think on this show. Otherwise, we’ll talk to you next week.
Interview begins: 7:32
Debrief begins: 50:16
Alex Lazarow is the author or “Out-Innovate: How Global Entrepreneurs from Delhi to Detroit Are Rewriting the Rules of Silicon Valley.”
Alexandre (Alex) Lazarow has spent his career working at the intersection of investing, innovation, and economic development in the private, public, and social sectors. He is a venture capitalist with Cathay Innovation, a global firm that invests across Africa, Asia, Europe, and North America.
Alex is an adjunct professor specializing in impact investment and entrepreneurship at the Middlebury Institute of International Studies at Monterey. He is a Kauffman Fellow, CFA Charterholder, and a Stephen M. Kellen Term Member at the Council on Foreign Relations. He earned an MBA from Harvard Business School and a B.Comm from the University of Manitoba.
Alex is a regular columnist with Forbes, and his writing has been featured in the Financial Times, Harvard Business Review, McKinsey Quarterly, TechCrunch, VentureBeat, Business Insider, and Insurance CIO Outlook magazine, among others. He speaks regularly on global innovation trends and has presented at Collision, Endeavor, InsureTech Connect, Harvard Business School, the Social Innovation Summit, SOCAP, and the Corporate Venture Capital Summit.
In today’s episode, Alex shares his research into innovation outside of Silicon Valley, including successful attributes that are often overlooked when working outside the Valley, and the surprises he found in his research.
- Ad: Finding experienced employees for your new business with Integrity Power Search (5:08)
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- Entrepreneurial interest outside the Bay Area (7:35)
- Harmful biases from the valley (11:48)
- Questioning the necessity of unicorn companies (15:24)
- Adapting VC for non-Valley founders (25:37)
- Revenue shares with employees (31:57)
- Balancing innovation as a startup (36:50)
- The “new” trend in remote work (40:22)
- Bidirectional innovation from outside Silicon Valley
- Ten-year predictions for Valley vs. non-Valley startups
Check out Alex’s book: https://amzn.to/2JT0MMt
Follow Alex on Twitter: https://twitter.com/Alex_Lazarow
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This episode is sponsored by Integrity Power Search, the #1 full stack high growth startup recruiting firm between the coasts. They partner with venture capitalists, private equity groups and CEOs to build amazing teams for the world’s most disrupting companies.
Learn more about or get in touch with Integrity Power Search: https://upside.fm/integrity
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