The Midwest Startup Boom w/ Nick Moran of New Stack of Ventures

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May 12, 2021

On today’s episode I catch up with Nick Moran of New Stack Ventures. New Stack is a VC firm based out of Chicago, IL that focuses on early seed stage investing. With a strong focus on investing in their own backyard, Nick and New Stack are on pace to build a brand name VC between the coasts that represents the Midwest on the national stage. It was great to hear about how things are going and what they have planned for the future.

Along with being a big time VC, Nick is also a veteran podcaster. He hosts a podcast called The Full Ratchet where he interviews fellow venture capitalists and investor experts. It’s a great pod and I highly recommend checking it out. He was kind enough to have me on the show back in 2015. If you’d like to listen to those episodes, I’ve included links in the show notes below.

During today’s chat you’ll hear some pretty honest, real talk about the world of venture capital and how it functions, what’s broken, and where it’s going.

Enjoy.

Show Links‍

Transcript

MPD: Welcome Nick. Thanks for being here.

Nick Moran: [00:02:59] Mark. Thanks for having me always a pleasure.

MPD: [00:03:03] So, I don't know if everyone knows who you are, but you have an impressive background and great story. I'd love to start by just focusing on what you're currently doing. Um, so people have some context. Would you give us an overview of new stack ventures? So people know what you do? Day-to-day

Nick Moran: [00:03:18] you got it.

So we're a venture firm we're based in Chicago. We invest at the very earliest stages pre-seed and seed. So that could be at company formation. It could be at early MVP or early commercialization. Um, but we really focus on outsiders. We focus on the folks that can't command early stage capital in the Valley.

We're in New York city. Um, these are founders that may be located off the radar. Right in places like Toronto or Atlanta or Omaha, Nebraska. Um, it could be founders with an atypical profile. So people that didn't go to Stanford or Columbia or Duke like yourself, Mark, um, or maybe they, maybe they didn't work for a big tech company.

Right. So they, they grew up in industry and they're, they're super ambitious, hungry, tenacious. Brilliant founders, but they don't have that standard Silicon Valley profile. And, um, we partner with them really early. We take ownership. We lead deals. Our average check size is about a million bucks at entry.

Um, we can go up to two or as low as 200 K. Um, but we really look to partner with sort of the next generation of true leaders in the tech space, but folks that are new to the tech space.

MPD: [00:04:28] So investing at pre-seed in particular is a bit of an art. You have to identify which companies are going to make it go the distance before they've even built a product in many cases, how are you evaluating that?

What makes something a fit for you outside of the fact that it's not New York, not Silicon Valley, um, and the general stage, what are you looking

Nick Moran: [00:04:49] for? Well, I mean, your point's well taken. I, I, uh, host a podcast myself. I have for eight years on venture capital and interviewed Neil Sakara from defy, uh, yesterday.

Um, of course, very practice investor. That's been doing this for over 20 years and he made the same point that it's really an artisan business. Um, it's not just based on formulas and metrics. That's kind of table stakes to understand what you're dealing with. Um, but there's an art to it. And. I think time will tell on if you know, we're a true artisan and if we have sort of the right rubric here, um, but for us, it's all about mindset.

You know, we view metrics and we view traction as lagging indicators. Um, which is why we don't look for those, right? Your typical SAS series AVC is going to write a numerous blog posts about what winning with ARR and net revenue retention and, uh, and quick ratios look like, right. That's not what we do.

We're trying to meet the best of the best people that have mission driven objectives. Have a clear picture of what near-term success with an MVP looks like as well as, uh, an idea of a long-term vision. For creating a billion dollar plus tech company. Um, so we're evaluating a range of different mindset factors with the founders and we're helping guide and make sure that they're operating in a market space and building an opportunity that can be venture venture scale.

Right. We don't. Yeah, go ahead. This is,

MPD: [00:06:21] uh, you're a team investor, right? That's right. I'm sure. I'm sure you want to see market and barriers if they're possible. But you're betting on teams. And you mentioned psychological profiling and we were chatting a bit before both our wives have psych backgrounds.

That's all right. Uh, are you using any of that when you're evaluating founders?

Nick Moran: [00:06:43] Well, I joke with my wife because she's my chief, uh, counsel on all things business. And she should probably be on, you know, on the marquee at new stack because. Uh, in my world, she's a general partner as well. And I couldn't do this job without her.

I mean, every night, whether I'm having conversations about the team, my team, or the founders we're meeting with, um, she always has the answers, which is kind of funny, but, um, the short answer, yes. I mean, we have something we call a founder matrix. It's got. Seven different dimensions that we evaluate on a 50th percentile all the way to a hundred hundredth percentile scale or 99th.

Right. So we're, and we get very specific about how we rank founders on, on these different paradigms. Um, so things like tenacity and speed, things like storytelling ability, things like. How mission driven and customer obsessed. The founder is, um, we're, we're evaluating these things because these are the things that we truly value.

And we found that when we partner with founders that embody these psychological and ideological principles, it's just a great fit. It's a great cultural fit. We're the right venture investor for them. And, um, we can find a home for them at series a with a tier one investor. Did you

MPD: [00:08:05] create this framework or is it something you borrowed from existing psychology and hiring practices?

Nick Moran: [00:08:12] Well, it's funny because a lot of folks claim that ventures are apprenticeship business. I did not grow up in venture. I wasn't a tech person. I didn't work for, um, uh, primary ventures like yourself, right. Or other places. Um, I had to learn on my own. I was an operator that worked in big industry that founded a progress, a product that had extraordinary success, which allowed me to retire at 32, but I had to learn from the ground up angel investing and in, so doing, I also had an apprenticeship.

So I launched this podcast nearly eight years ago, where I, I got to inter interview folks like yourself, the best of the best venture capitalists in the country. I got an audience with them where I could ask the questions that I wanted to ask, get the answers that helped illuminate what makes for these super special people, because the big secret in the industry is the unicorns are really the people, the businesses are just kind of the lagging indicator of the people behind them.

And, um, you know, after learning from all these great investors, I don't know, 300, 400 plus episodes over eight years. Um, that was my apprenticeship and taking all those collective sort of insights and distilling them down is what created this, uh, this founder matrix as we call it.

MPD: [00:09:35] Okay. So you took that information from the conversations and probably your own experience.

Also, I think you're giving everyone else too much credit, uh, and you distill this into your own framework.

Nick Moran: [00:09:45] Is that right? Got it. That's right.

MPD: [00:09:47] A hundred percent right on. Have you, uh, gone as far? I mean, I'm fascinated by the framework, by the way. That's why I'm digging in. Have you gone as far, uh, to test their frameworks results against the results from your fund and your investments?

Have you started to see a correlation that Hey, it's right.

Nick Moran: [00:10:05] A hundred percent. I mean, I hate to talk about it, but we, we do postmortems and we do reviews of the portfolio. We look at both broadly speaking, we split everything into opportunity side, which is a combination of market product technology, and then the founder side.

Right. And we evaluate those two things at a very high level on a regular basis, uh, on a yearly basis. And, uh, the folks that make 99th percentile in our must have category are always the best fit in a working partnership with us. And those results end up. To be super positive. I mean, we've had some breakout successes.

Um, we have, you know, some really strong lead horses and those founders embody the traits that we found, um, our best in our partnership. And so that's why we, we screen for those traits. Now we can't over optimize and we can't. You know, it's still an art, so you have to be able to apply critical thinking skills.

It's not just a plug and play formula. Um, but it's important for us to assess the characteristics that have led our founders to, to the greatest success. When you talk

MPD: [00:11:18] about the partnership with you guys. So let's say someone checks all the boxes, businesses. Awesome. Uh, the person gets profiled in a certain way.

And the machine says, yes, you gotta do. You gotta work with this person feels like the right thing. You write the check. What does a partnership look like for folks listening when they take new Stack's money? What, uh, what do you guys do beyond the money, which is obviously an important part of the game at this point?

Sure. How do you think about that?

Nick Moran: [00:11:43] Yeah, that's a good question. I, I think we always start with the end in mind. In the end for us, or at least the interim goal, not a huge IPO that's too far in the future. Um, so the thing that we're optimizing around is what does series a winning look like for this company?

How do we get a tier one investor to lead your series a round? So that's the end that we start with the goal. And from there we work our way back. Um, so let's say you're operating an enterprise SAS company, right? There's an established set of metrics out there and milestones, that one must reach. If they want to achieve a tier one series, a, uh, investment from a great firm, right.

The metrics are kind of the easy part. Um, but there's also some finer things around it. Like what does your team structure look like? Right. What is the scale on the vision opportunity look like? So once you. You capture the beachhead, once you rinse and repeat around a really focused offering and a focus market, you know, how do you expand either horizontally or vertically with your product and your opportunity from there so that you can paint a really compelling picture to a series AVC and why you not only can become a $1 billion company, but maybe a 10.

Um, so we always start with that goal of what a series, a winning look like. We have a process, we call it the next round plan. Um, and we just really dig in and make sure that we can help, um, set the strategic agenda. Make sure we're aligned on North star with the founders. That's the key because it's really, it's really easy in this business to get distracted by bright, shiny objects because they're everywhere and when you're building something great, there's a lot of people out there that want to partner with you that want to work with you that want to use your product that want to license it.

And, um, it's really hard. It takes a lot of discipline to stay on North star. Um, I like to say Jon Briones was on my show. He's famous investor for Lightspeed that now runs a firm called unusual and he said startups are not rocket science, art they're dieting heart. Um, the focus piece is the hardest part about it.

Um, having that North star and staying on it and staying true to it. And, uh, maintaining focus without having blinders on. So that's kind of the biggest piece. And we plug in our network, um, Mark, you know, we could talk about this, but we're based in the Midwest. So we work with a lot of founders that don't have the advantages of the Valley.

And so we try and bring some of those advantages to the founders.

MPD: [00:14:06] I actually think that's a super important role in the ecosystem. I want to talk about that for a minute. The focus, as you said, is on companies, not in the existing hubs. Now there's more hubs now. So, uh, if the trends continue, hopefully you'll have fewer places to hunt.

Um, for non hub founders, but, uh, for people not currently in the tech hubs who are building companies, uh, you work, you focus on them and the goal is to help them raise an awesome series. A so how do you help bridge that given that, um, wherever they're located may not have as much, uh, follow on capital waiting for them.

There may not be the series of investors. So how do you help them get to the Valley? Get to New York, uh, where they need to get to, to get the deals done.

Nick Moran: [00:14:50] Right. Um, well I think that the best place to start is to say, what are the biggest advantages of being in the Bay area? Right. Um, and, and I think the biggest single advantage of the Bay area is network density.

Uh, there is a critical mass of folks working in tech, talking about tech. Ideating on tech, investing in tech, um, and that has advantages and disadvantages, right? If you spend too much time in the Valley, you can get caught up in the echo chamber and you don't see a lot of opportunity outside of it, but the advantages are well-documented.

Um, talent is readily available. Uh, talent has experience in the tech sphere. So folks know what it means to go from MVP to proof of concept, to scale. Um, or sorry, MVP product market fit to scale. And, um, outside of the Valley, we don't have all those advantages, right. We invested in this fantastic founder, um, native American and Puerto Rican founder in Omaha, Nebraska.

And it's funny when we visit Omaha, this guy is the man in Omaha. Like he's a celebrity, but he's one guy that's at the seed stage of a startup. And while he has access to great talent in Omaha, He's going, he's going to need access to better talent, or maybe not better talent, but talent that has different experience in different areas.

Um, technical experience and startup experience. As he grows, he's also gonna need access to capital networks and we help kind of bridge that gap. Um, so if we put the right talent on the team and he drives the right sort of progress that the business requires to get to series a. Uh, we can provide those warm on-ramps and warm introductions to the right investors at the right time.

Um, you know, we like to say in the Midwest, we have the broadest and deepest network of any investor. Um, due to sort of the eyes and ears in every major and minor city that we've created with this podcast that we, um, that we manage. But, um, those are kind of the main ways we help. We really plug them into networks.

Um, we set up advisory relationships for our new founders, with our most successful founders. So they have a one-to-one advisory relationship that they don't have to pay for. We pay for it. Um, and we try and bring a lot of this network density to our founders that don't have the advantages of being in a geo with a lot of people like them.

MPD: [00:17:18] So, how do you do the one thing that, that all makes sense to me? The one thing I don't have my head around is how you do talent. So if someone's in Omaha, Nebraska, and they need to hire someone with a particular set of expertise, um, and there maybe isn't as much industry there to have trained people up for them.

Are you guys actively doing the recruiting? How do you get people there? Is it intros? What's the, what's the mechanism for you?

Nick Moran: [00:17:42] To be honest, the most important value add that we have there is, is on the strategic direction. So, um, you know, what are the needs of the business? And then, uh, from a perception standpoint, and from a leadership standpoint, what does the business need to look like?

At series a, so maybe we need, you know, a CRO in place that has experienced sailing to, um, SMBs in a certain market. Right. We can help identify that or maybe, uh, an elite product person is required for your type of startup, a product person that has experience. Building product, um, expanding feature sets and, and going horizontal across a space.

Um, so for us, it's more about, you know, helping identify what are the right strategic leadership roles that are required for this business in order to have the opportunity to scale, and then actually plugging the specific talent into that. You know, we leverage, um, other service providers. We don't have an in-house recruiting team or HR team.

Um, but we do have preferred service providers that can help with that. And that's probably the most important thing that a startup, you know, often overlooks is the importance of A-plus talent. Um, so we make sure that they have the money so they can pay for it because the difference between a plus and a minus is substantial.

Hmm. Okay.

MPD: [00:19:13] Now, one of the things I'd like to think about, obviously, because I'm in the business with you is, you know, we're talking a lot about entrepreneurs, but you're an entrepreneur, right? You're running your venture firm and you're thinking about how to build your business. What is, what is the state of new stack now and what is the roadmap?

What are you planning to do with the organization?

Nick Moran: [00:19:33] Honestly, I think we're, we're. Into new SAC. We're seven years in seven, eight years in, and we're still at seed stage. So the funny thing is, you know, it's, we've been like the ramen profitable startup for a long time. Right? I'm still the fast venture. Still take some still the least paid person in my organization.

And, um, uh, you know, we, we have seven folks now. But, um, it's a lot longer, I think when you're building a venture firm, if you're a spin-out right. If you come from a very notable firm and you spin out and you have attribution to successful startups, it looks really different. It's like a year of suffering and then you kinda, you know, you get your fun under you and you go, um, if you're building from ground up, which we did in this case, um, it took a really long time.

Uh, we, we probably have 25 million ish under management at this point. Um, you know, we will raise another large fund in the future. And, uh, we'll break out of the seed stage and become more of like, you know, series a and a financial deal, a little more operational. But, um, I think as far as the future, what's the vision here.

The vision is to stay true to what we're good at, which is early stage investing. So for the foreseeable future, I don't think we'll do more than a a hundred million dollar fund. I don't think that's in our best interest or in the best interest of our LPs. Um, but if we stay true to what we're good at.

And we continue to be ranked in the top decile of funds. Uh, we have an opportunity to build a brand between the coast that has not been built. Um, there are notable firms in New York city you've worked with and you've built some, and there are very notable firms in the Valley, um, that are household names.

There is nothing between the coast, really that that's a household name. There's an opportunity to build that. Um, founder first. Uh, while also delivering, uh, top returns. And so our goal very much is to, um, you know, is to build a, a category defining venture firm. Uh, that's not located in the major tech hubs.

MPD: [00:21:35] I think you're going to pull it off by the way. So I think it's one of those things that people don't understand. What you're talking about is very real. Um, someone jumps out, they were a principal at a big name firm. They attract capital very quickly. From LPs, but if you didn't do that, people are waiting to see your traction.

And it's a long development cycle and venture, it can be years and years and years. So the idea that you're seven years in, and you're just kind of, it sounds like you're. You're across the line. You're at the inflection point where it's, it's going to get bigger very quickly, but it takes a while and then you become a monster.

So I didn't realize that your plan was to build, uh, to go, uh, up a stage and build a bigger institution in that geography. That's fantastic. And do you, do you plan on continuing to focus on folks in. Non hubbed geographies, or do you think it'll shift increasingly towards a Chicago centered or a Midwest or something around your hub?

Because

Nick Moran: [00:22:37] Chicago is growing. Chicago is growing and we're in, you know, maybe the third or fourth, uh, generation of the tech ecosystem, but even so Mark, if I'm being honest, I don't think a top decile firm can be built just. Investing in Chicago quite yet. Um, it's just not that mature. And, um, we don't have a critical mass of, um, tech folks starting companies yet.

Now that's growing every day, which is great. Um, but for now our focus remains, you know, finding founders with atypical profiles that are in tech hubs or founders that are outside of tech hubs, um, that have all the right mindset, characteristics to build a great company. Um, they just didn't grow up, you know, in Silicon Valley in, in some of these, you know, tech centric areas.

So yeah, we're going to stay there and we'll see how it evolves over time. I mean, if, if Chicago was exporting enough companies that the steeds seed stage, uh, Maybe we would do another fund to focus on some other areas, you know, one for emerging locales and one for, um, you know, semi-mature markets like Seattle, Chicago, maybe Austin.

Um, but that's all TBD for now. They're still for us to find the types of founders that are the best fit for our firm. We have to be very aggressive and have hunting playbooks and have boots on the ground, really in Atlanta, Philadelphia, Baltimore, Indianapolis St. Louis Ann Arbor. And, uh, we do, we actually manage a fellowship program where we have folks that are focused in region in all these areas and helping us, you know, find these transformational leaders.

MPD: [00:24:24] So, you know, I do want to give Chicago a little bit of a shout, right? There is more going on than maybe I don't think you're meaning to allude. Right. We're we're in one deal together to Vala. Um, and that's an excellent company based out there. Um, uh, and I, I know you've made a lot of investments in your backyard and I hate what I've seen in New York because when I started in VC in New York, it was 2006.

I think there was some parallels to what you're describing. I was nowhere near the first-generation of New York VCA. Maybe it was third or fourth. Um, it had been around for 20 years plus, but it was just starting to really hockey stick as a community is what it felt like was getting critical mass. Uh, and when you had these companies pop up and they exited, they shut out, I don't know, 10, 15, 20 people who became founders.

Right. And that grows pretty exponentially pretty quickly. It doesn't take many cycles of that to build a full, robust ecosystem. So hopefully that's what happens in your backyard. Now, let me ask you a question. You're talking about this, this scout program, the fellowship. What is that? Is that these are college students or what do you have, how do you operate the fellowship program?

What cities do you focus on? How does it work?

Nick Moran: [00:25:36] Yeah.

MPD: [00:25:36] The fellowship, the seven people you mentioned on those are people on your team, your seven are full-time folks. That's right. Fellowship

Nick Moran: [00:25:42] is in addition to that. That's right. Just to clarify. Okay. And there's a 20, approximately 20 fellows in the program.

It's a, I mean, we looked around the ecosystem and we saw these training programs. Right. I won't specifically name them by name, but there are venture capital training programs, right. It's very competitive to get into them. Um, they're buildup as you know, you go through this training program and we'll get you a job at, at a good venture firm, but the really expensive, you know, many of them are 15, 20 K.

Um, and that's not accessible. For a lot of young folks that have all the talent in the world, but they don't have the resources to pay for them. So we said, how do we create a training program where we open source our entire playbook, right? Here's how you source deals. Uh, here's how you select deals.

Here's the process for selecting and here's how you win deals. Here's how you go out and amplify the portfolio, help out founders. And that allows you to then win competitive deals against other firms. Um, so we've opened sources, entire playbook. We went through a big recruiting process and we said, this is free.

This is not going to cost you a dime, but it's required you actually deliver results. So that's the trade off. Um, this isn't something where you go to a bunch of lectures and you hear a bunch of hand waving about VC. This is where we're going to give you the playbooks, but you got to put them into practice.

Um, so. You know, here's how you go on hunt deals in your region. Here's how you find them online. Here's how you find them offline. Here's how you build network works with all the incubator managers, the angel investors, the accelerators, the lawyers, the service providers, right? Here's how you build a core critical mass network in your region.

Here's how you become a player in your region, in the venture community. And here's how you find really special founders that are building great businesses in your region and connect to them. Um, so we've outsourced, yeah. This entire training program, we got 20 folks going through it. It's a year long process.

Um, so it's a real commitment, but just like everything, we measure everything, we're kind of very rigorous about, uh, metrics and measurement and monitoring and, uh, yeah, everyone's on the scorecard. It's all gamified, you know, you get your points for the week and, uh, you know, everyone's trying to get on that leader leaderboard and get to the top of it.

So it's, it's a fun time we've had. What's that. Sorry. It's full-time it's full-time for folks. Now this is a three to five hours a week. So while undergrads are going through their college education, um, we, we ask them to try and carve out three to five hours a week, uh, to contribute to this program. So we try not to make it a super heavy lift.

Right. Whereas we'll run internships. We've got a couple of interns from a Northwestern Kellogg, um, business school right now. And they're more on a 20 hour, 20 to 30 hour a week internship program.

MPD: [00:28:22] Interesting now, you know, when you're playing at the early stage you're, you're in pre-seed and seed at the moment.

Uh, there's a lot of evolution happening in this market. You've got platforms coming out. Angel list is playing a major role. How do you think about how the fundraising game is evolving? Are you feeling any pressures or shifts happening, uh, on your feet as you're in this business? Or does it feel like it's status quo for you.

Nick Moran: [00:28:50] There's a lot of shifts going on. Um, the market's dynamic and like you said, there's a lot of new entrance and that's all a good thing. I would, I would like your opinion on it as well, Mark, on, you know, whether this is positive or negative, but we see it as really positive all these increased, uh, capital providers at the early stages.

Um, I guess some of the big observations though, are that. A lot of the syndicates out there, which is where we started. We started with an angel list syndicate before we had a fund. Um, a lot of the rolling funds, a lot of the angel investors that have become empowered to invest in startups, largely speaking.

Those are smaller checks, right? Less than a half, a million bucks. And so most of those investors are going to be relatively passive. They're trying to build big portfolios because they're investing very early. So, you know, there's a failure rate and you've got to manage that with diversification and, um, you know, they're not going to be your number one lead advocate.

And so what we're seeing happen in the marketplace is there's a ton of capital. But the, the majority of that capital is follow-on or co-invest capital there's, there's a lack of leadership capital. And even within the venture fund, so people with an institutional fund under manage, I just heard this data point yesterday.

There are five funds that follow. Or co-invest for every one fund, that's a conviction investor and leads, deals and prices them. And so that's creating kind of a strain, some strange outcomes in the market. Um, you have a lot of people that want to follow you. You don't have a lot of people that want to lead.

And so the last three deals that we led and ma gave a term sheet and signed a term sheet, made an offer to were oversubscribed the day that the term sheet was signed. So there were a lot of sense. It's really weird, but there's a line of investors that had pre committed, you know, to these founders and said, as soon as you get a lead, we're in.

Um, even big checks. The last deal we did, the co-investor was a bigger check than us. We did 900, they did a million, which is very strange, but there are large checks that kind of pre-commit, which gives them optionality, which, you know, maybe a conflict of interest. But, um, there's just a lot of capital floating around, but not a ton of conviction at the early stages.

I don't know. What do you see?

MPD: [00:31:03] Yeah, I would assume that actually creates a strategic advantage for you. Right. Like, there's this a little bit of, you can find companies, you're not taking financing risk because you'll know they've got pre committed, a couple million bucks, whatever it is to fill out the round.

And since no one else is leading, you get to kind of pick your spot. I think that's, um, I wonder if there's not a market dynamic that people will see that hole in the market as an opportunity, a couple of years back there, wasn't a lot of series a leadership. Right. It was the same problem. And that seems like it's filled in pretty nicely now.

So I wonder if this won't become an opportunity for other seed funds who are looking at it saying, okay, I got squeezed out of the last two deals where I didn't lead it and no one's leading these other ones. I like, and if I lead them, they're funded because they've already got their fully subscribed.

Otherwise I think there might be an opportunity in that strategically, so, and maybe you're already benefiting from it.

Nick Moran: [00:31:55] Rig