“You can't fight your way through extraordinary popular delusions and the madness of crowds.” (on investing)— Mike Edelhart

Today’s guest is Mike Edelhart, Managing Partner for Joyance Partners & Social Starts Venture Capital— investing in the emerging science of health and happiness. The funds have achieved great success, effectively investing in multiple unicorns and companies exceeding 100MM in valuation.

Before becoming a full-time investor, Mike was the original Executive Editor of PC Magazine and was later an executive vice president at Ziff Davis. He has also been CEO at many startups, including Olive Software, Inman News, and Zinio.

Mike is filled with incredibly rich experiences, insights, and learnings from serial company-building, venture-investing, and technology. By combining the best of people with the best of technology, Mike and the team have been able to effectively analyze and evaluate companies at the earliest stages — inception.

ANYONE who is actively involved in building the future will enjoy this :)

“If you just look at historically, a lot of really great companies started during recessions. Why? Because big companies are wide open to new things during recessions.”
—Mike Edelhart

Highlights

Scientific-investing— pipedream or reality?
What’s ‘love’ got to do with successful investing, really?
Combining the best of people and the best of technology to secure opportunities others can’t see.
The merits of 'meritocracy (and other positive side-effects).

Transcript

Mike Edelhart

Happy to be here. I am the managing partner of a set of cooperative very early stage venture funds, Social Starts has been active since 2012, Joyance Partners active since 2016. And those are the most recent expressions of a rather long career doing this kind of thing that goes all the way back to before the IBM PC. So, a nerd of the old school who, in kind of an interesting way, came upon my dream job late in my career helping brilliant young people get their companies started.

Jon Low

Thank you, Mike. And so how did you get into venture and what's kept you in venture for a good amount of time now?

Mike Edelhart

Yeah, it's been a long time. It's like, I think often happens. It's a long strange trip. So I was originally trained to be a journalist, but I always had a deep interest in science. And so, way back when before it was popular, I decided to be a science journalist. It would give me something unique itself. And it worked. I wrote a lot about hard sciences. I did science books, I wrote for the New York Times and magazines about sciences.

I was at a Science Magazine in the late 1970s, called Omni, that, you know, was writing about science as if it were science fiction. And then when computing happened, there were very few people who knew much about computers to know anything about media and bills, it found me and I wound up being a senior member of the founding team at PC Magazine. And then at the other publications.

And we came to the conclusion that to do good journalism about something as new as PCs were back, then, we had to do product testing. We couldn't just say, here's a word processor, we had to say, the parameters of a word processor, go from A to Z, and we've tested A to Z and are showing you the results. So you can now actually make a decision about what you want to do here. And so we wound up in the product testing business, and I had a fundamental hand in setting up those labs and operating those labs.

And because we had the biggest labs, we wound up being the authors of the standard benchmarks and all that. So, it just sort of kept going deeper and deeper. And by the end of that decade, I learned a lot about what worked and what didn't in technology. How things happen, I percolated through business and society. And at the very beginning of the 1990s, the ZIP family decided to sell the business, they wound up selling to Masayoshi Son at SoftBank, and five minutes after we got their songs on, who's quite dramatic in the way he can react to incoming stimuli. Seeing the emergence of the internet said, “Oh, my word, this is a much better business than what we thought we were doing, stop everything and start pounding all of our money into the internet.”

And so we did, we did something like three dozen very early stage investments in first generation internet companies. In one summer, I wound up sitting on boards and evaluating companies and I've been doing that for a living ever since. And it's really kind of natural because it's sitting up in a chair, having a structured conversation, trying to get people that take your phone calls, listen to you, believe you can help them, it's in some ways very journalistic. Pay is better.

Jon Low

And that's interesting that you share your experience and have a solid methodology in evaluating products. Because I mean, just, if we were to go to your LinkedIn profile, Mike or to the website on joy on social sites website, it's not an immediate connection, one can draw between your experience at PC mag, evaluating products, and how that has enriched a lot of your diligence on promising startups. Even today, which products and their services might take a different face. But perhaps the underlying structure essentially still holds.

Mike Edelhart

Yeah, we're different, quite consciously and have been since the beginning for most venture funds. And there are a couple of reasons for that. One is that Bill Lohse, the founding partner and I— I'm 68 years old right now and I was in my late 50s when we really started this— we have this answer…

First, to all techie guys are not going to, you know, if I was 27 years old and I just sold my company to Facebook, I believe that just my friends represent a key population of entrepreneurs and I'll meet them just go there hang out together, we felt like if we weren't activist about finding deal flow, we wouldn't find any deal about it if the strongest companies wouldn't find their way to us.

The second is that one of the things I did when I was a journalist is work with Sir John Templeton on his autobiography, and Templeton is one of the gods of traditional Wall Street investing, and, one of the things that investing says is that if everybody is going to the left, there's no opportunity to the left, because it's too crowded. You can't fight your way through extraordinary popular delusions and the madness of crowds. And so you go to the right even if the right doesn't look like the greater opportunity, it's actually because it's available to you a greater opportunity. And this is Warren Buffett and many super successful long term investors approach things since when we started this there's so we got to do something that gets us deal flow.

So, one, we can't wait. If we go into the A round, we're just going to be at seventh in line to acquire Excel. All these folks are bigger, more experienced, better known— no hope.

But what if they're in front of them? What if we get to know the companies they're in love with before they ever met them? But yeah, we are present at the creation. And we do that? And if so, how? And we have this background in very early structured product testing, and Bill and we were like, well, if they go left and we go, right, what do we have to do? What do we have to know to be effective in front of them? Why aren't they all go away?

And the reason we found that they weren't going early is they all felt the VC community felt what's the point? If you go to the very beginning one, you can't find a company, they're just two guys, two gals in a room somewhere. If you can find them, there's nothing to analyze. And if you can analyze them, you can't put a big enough check to work to make any difference. So, it's a useless exercise. So we're not going to do it.

And we just began taking it apart. Is that really true? Could we not do it? Is it impossible to get in early and do something other than guess? And we came to the conclusion that we could develop a method that might work and we started applying it to the funds. And it's proven that it does work. So, we've been very successful at finding these companies and analyzing them intensely and at finding a set of companies really early that turn out to be valuable. And now, the funds are beginning to get bigger and folks are beginning to pay more attention because they're seeing that. But that's really where it starts. If we didn't find a way to get deal flow through hard work, we didn't think we were going to have any.

Jon Low

Thank you. And it's an incredibly long, long feedback cycle to validate or invalidate your hypothesis of what's going to work, isn't it?

Mike Edelhart

I mean, obviously, if we're the very first money, and we literally wrote the first check of interest in the first check the box in the first check all these companies value, and it takes them 10 years to exit, then it says on paper, it takes our investors 10 years to get their money back.

And we don't really know if we're right, go 10 years from now. But that's not really the case. Because one, we can start to see signals. So again, we're a little data obsessed. Oh, and there's a universe of companies that are worth a billion dollars. That's a fact. All those companies were started at some point and they were worth nothing. They were two people in a garage with a dream.

Between a dream and a billion dollars— are there any patterns among those companies at all? Do they have anything in common with one another? Do they have any signals or indications that turn out not to be present in the companies that are worth 30 million? And actually, there are, we think, and so one of the things we can do is start looking very early at those early patterns and increase our stake in the companies that are showing those early patterns. We may not be right, but probabilistically, we're more likely to be right. And so that's a good thing.

And the other thing that's possible doing this approach is what we call three to five and three to five, which means from the middle of the portfolio company doing well, but not great, but we ran on single digits and a 30 million exit is terrific. And so we can happily participate in those kinds of exits to begin getting money back to our investors much earlier than 10 years and through secondaries hyper interests. A, B and C round investors, we could sell our shares back to them. There are lots of different ways we can theoretically begin to make our investors' positions liquid without just sitting there passively and waiting to see how it all comes out.

Jon Low

And what a long journey and my understanding is if you now on to fun five with social starts.

Mike Edelhart

Yeah, yeah, we are on to fund five on Social Starts and have founded seven overall because we have the funds to fund happily. And you know, there's probably a couple of interesting stories in that. I mean, one is we started incredibly small, 4 million. We're about 70+ million under management now by this time next year, things go as expected, we'll be over 180 million under management and that's a testament to the fact that this method is working and it's attracted really good people.

And the team being stronger is doing an even better job of implementing all this and all that kind of thing. But also, because we recognized the sort of explosive nature of health several years ago. And that's why we started up a fund to focus on that. And it turned out that that was a good decision that helped, even before COVID was rising in importance, rising in venture characteristics, strong companies, lots of companies, lots of exits, lots of interest, and that isn't even close to being peaking. So, the fact that we're now increasingly present in an area that a lot of folks care about is drawing attention and it looks like money to us—which is gratifying.

Jon Low

Thank you, and maybe just for the viewers here, it might help if you can outline Social Start's latest thesis, areas of focus, and a bit about how your team is working together.

Mike Edelhart

Sure, happy to. So, the way we operate the phones is that each year, we do a complete phone teardown. So, we gather the whole team together and drive this notion. The team has gotten pretty used to it. It's kind of unnatural, but they've gotten used to it. The fun doesn't exist, everything you did yesterday is gone. You can't walk out of here and do it. You have to defend it from the ground up. And there are team members there with new ideas that they are intending to support with equal ferocity. And there's this dialectic scrum about what should we do and what does the research show in our people behaving where's the money going, and how the laws are changing and all that stuff.

And out of that, intense, argumentation comes generally eight, maybe ten very specific areas where the group has achieved consensus that there's going to be a lot of valuable rounds in that area.

We don't try to analyze beyond because we think we're just guessing, but we think we can get some degree of factual past into that couple of year process. And then we write those up in great detail, not just we're going to be into microbiome, but we're going to be into microbiome vectors that use external factors like sound or sand and biological markers, like, you know, that kind of thing very specific.

And then our team and our software tools are all tuned for those. And we begin looking at lots of companies. And I mean, lots, we looked at, we found 10,000 companies last year, and evaluated 6,000. So, it's very intense.

Develop a lot of background on where we write, are there a lot of companies— what are they doing? What are the technologies? Where did the investors come from? Are the companies in Europe? Are they on the East Coast or West Coast? And that allows us in our meetings that all of this milling through companies, suddenly there's a company that will just rise? It's very dramatic, like normal, normal normal, normal, normal, oh my lord. And the whole team can see it. And then we pour down on that company because we know it's a good space. And we just saw a company that has every characteristic, we've decided after a lot of work matters.

And that's the one we back and then we start analyzing at that point with the first investment but is it looking like the big winner? Our role is to be helpful. We don't take board seats, we say we're trying to have funds we wish we had when we were younger, doing what they're doing now. Experienced, pretty scientific, well connected, not a pain in the butt.

So, we defined helpful as responsive. We talk a lot to the companies, basically a dialectic and try to understand what they say they want and understand why they want it and then do everything we can to bring it to them. Whether that's deep scientific support, we've helped with clinical trial protocols or connections to companies or recruiting or media Other funds or whatever it is, we believe that a truth base trust based we really mean it.

How can we help your relationship between us and the leaders of the company is the essential we're much more likely to get more money into a company where the founders actually like us. And we are into a company where the documents say we have a right to it. So we were reading those relationships.

Jon Low

Wow, amazing. It’d be a good opportunity to tell more about the kind of team you have behind this venture fund. I mean, just say for example, reviewing 6000 to 10,000 companies is no small undertaking...

Mike Edelhart

No, it's not and our team knows it when they get involved, but it's important to note that of those 6000 almost all of them are one conversation. Almost all of them were this company that does not have what we're looking for. So, fewer than 20% of those 6,000 ever got to the second conversation— our investment rate is sub 1%.

So, we're very, very picky about what we give money to. But the 5,900 other conversations allowed us to know, this company is different. And if we didn't have them, we couldn't know. It was different. So it's not as if we're doing full diligence on 6,000 companies, we're doing full diligence on maybe 600 companies. Still a lot of work but we're, you know, coring down on those based on all that background.

We have 21 folks on the team 16 of them full time, which is most, which is more than a small fund like ours, but generally have and that includes three PhDs in biological sciences, a medical doctor, full time data scientist, full time analyst and software lead. I like to say 20s 30s 40s 50s and 60s Japanese Chinese American with English, German all over the place all over the world, Singapore, or we're where the companies are. And our team likes digging in all these companies and finds the exploration interesting.

So, many of them come from academic backgrounds. And from an academic background, this is the same thing as 1000 petri dishes, you can't know which of the solutions will work. If you don't have 1000 solutions. If you don't have solutions that don't work, you can't know that the petri dishes that do work are actually doing anything. And so it's just classic experimentation. And we have quite a few folks who are young. So we're getting a reputation and we're sort of working as we say being sort of like enterprise car rental or high volume kitchen. So you come into our kitchen, you're going to see more meals in a week than most ones look at in a year.

And so if you're with us for a couple of years, you are going to have dog years Venture experience and so folks with interesting backgrounds sometimes join us for that reason, it's a great place to get your career started. We're meritocratic, I was surprised to realize we're more generous on carry than most of the funds are.

For me, it's like everybody who works here should get carry. And then other VCs are like, hey, you're nuts. I just firmly believe, how could we say everybody's doing this together. But you know, some pigs are more equal than others. It just didn't make any sense. So we're able to get folks together to do that. And, and we've had folks, you know, blow through here in two years, and then go off and found their own funds or come here for a couple years and go off and be corporate VCs or whatever. And we think that's great because it just expands our network.

In terms of how we run it, we have teams all over the world. So it's virtual. We do a lot of conference calls, a lot of verbal interaction. And the key thing for us in that is what we call radical honesty. Our team actually needs to trust one another and we say out loud, love one another. But they are willing to tell each other the truth with love. Not that I am down on you, Jon, but the argument you just made... not so much.

I'm going to dismantle your argument. Because I love you. And we both want to do the right thing we both want to win. And we work really hard to get that kind of spirit in the team so that we're actually looking for the truth together and telling each other what we think and minimizing that, you know, people are polite, then the phone calls over and then they start telling each other what they really thought and shouldn't have said...

I guess, but maybe it’s just pure logic. In other words, if we're looking for truth, our definition of truth if our definition of truth is read, and we're going to see the effects we're looking for, and everybody on the team kind of has to be up for that. And it's a lot of work but we are approaching, which is the hardest working band and show business kind of thing. And that's, that's kind of fun. It's a real high, who, for this group in these partner made me seek out, we just saw the future, when we first saw Lambda School, just to give a particular looking at all these companies, we're looking at all these companies that are talking about how you can get educated and you don't have to pay for it, and new ideas and education, and they're all interesting. And then we come across this company that not only is doing all of that, but solves the big problem, which is how does he actually get paid.

He's chained to the students, and he's taking their future income, but their future income is in the future. And he paid for all this stuff. Now, that's a big problem. And then comes Austin with Oh, I've turned their future income into a derivative and I have investors who are making a market for me in their future income. So, I get paid now and our reaction is, “Oh my god, that guy is simply smarter than anybody else doing that— that is a fundamentally better business model than anybody else doing.” There's just simply no question that was a little view of the future.

And now we're seeing it spread out all over you got four year colleges talking about funding students that way as opposed to student loans. And I think genuinely Austin was the first guy to have that idea and bring it to practical fruition. And we were able to see there and be that and that's pretty cool. And we'll do well, I think on the investment, but doing all that is just a pretty cool experience.

Jon Low

Thank you. And just because we're all almost teeing up in terms of time, one of the things I mean, in my limited 34 years of life experience, what I've often seen during like, economic crises, or you know, global instability is when a group of people have the right incentives, often a new generation of innovators come up with things others don't? And have you observed any of that pop effect within your own team join ons and social sites? And if you could share a few that might be a nice inspirational way to end this interview...

Mike Edelhart

Yeah, happy to well, you know, we've talked about a lot of time. So old I've been through, I wasn't around for, you know, the stock market crash in the 30s. But even Carter stagflation and all that kind of stuff and the 80s and the 90s. And historically, downturns are a great time to start.

If you just look at historically, a lot of really great companies started during recessions. Why? Because big companies are wide open to new things during recessions. Sometimes they're like, we don't got to change nothing around here, everything's fine. When markets get tight, you have to try and think of new ways. And so there's an openness there. And also, people's behavior tends to change. We have that compromise. We have to do things differently. We want a restaurant experience at home, whatever. And so startups can really get going during a downtime stop this current one with this sort of full circle, full economy, faceplant worldwide, nothing quite like that has ever happened, at least not in my life, we seem to be seeing the same effect.

And a couple of folks, I think Holly (Investment Partner) and I have talked about COVID as an accelerant. It's dragging the future forward. So changes that might have happened over 10 years are happening right now, this year. And alterations in behavior that both might I tried it, I believe that they're changing right now. And so when you have radical changes in behavior and radical changes in the business environment, huge opportunities for entrepreneurs, so in the fund, we're talking about this as in historic summer opportunities.

The world is going to be different, the opportunities are huge. The market is sort of perturbative so prices are likely to be low, and I wouldn't be surprised if the greatest Companies are founded this summer.