Jay Levy on The Power of Relationships When Raising Money


Today, on The Early-Stage Founder Show, I’m talking with Jay Levy, the co-founder and partner at Zelkova Ventures, a venture capital fund that rolls up their sleeves and partners with their portfolio companies for success.

Zelkova has an impressive portfolio including companies like Kapost, Customer.io, Help Scout as well as 17 exits from companies like Rapportive and Klout.

In our chat, Jay covers why Zelkova was drawn to the B2B SaaS arena, the framework they use for evaluating potential investments, and unravels some of the common BS you hear so often in the startup and VC world. Where we really dive in, though, is the power of building relationships when it comes to raising money.

Whether or not you are considering pursuing investment or maybe already have taken on investors, this episode is packed with actionable advice you can use to build a better business.

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Topics covered:

  • (00:55) – Overview of Zelkova Ventures and how it came about.
  • (03:36) – Why Zelkova was drawn to the B2B SaaS arena.

    • (03:53) – Jay's early forays as a web designer and the lessons he learned from his clients that helped shape his investment strategy.
  • (07:16) – How Zelkova strategized to have more winning companies in their portfolio.
  • (08:32) – The framework used by Zelkova to evaluate new companies and investment opportunities.

    • (08:54) – The three core fundamentals most oft discussed.

      • Team, market, and product.
    • (09:42) – Factors not usually talked about.

      • Price, structure, time, and terms.
      • Syndicate makeup.
    • (12:30) – The importance of aligned expectations across all parties.
  • (14:19) – The reasoning behind the polite excuses you are likely to hear from investors who don't want to invest.
  • (16:51) – Why valuation is such an important consideration for Zelkova Ventures.
  • (19:49) – The practical ways in which Zelkova is involved with their investment startups.

    • Reporting infrastructure, data infrastructure, analytics.
    • Actually working in their offices on a daily basis over a set time.
    • Consulting when needed.
    • Messaging, reporting, and constant communication via text.
  • (22:14) – How Jay encourages open communication with his founders and startups.

    • (22:21) – Why investor relations is of critical importance.

      • Don't provide data that isn't of value to your company
  • (23:56) – Lessons Zelkova learned about investor relations through their survey efforts.

    • Regular updates
    • Don't surprise your investors
    • Share bad news
  • (27:10) – Advice from Jay for early-stage founders preparing to raise funds.

    • Ask for money, get advice.  Ask for advice, get money.
    • Build relationships with investors early.

Rapid-fire questions:

  • (28:31) – What do you spend too much time doing?
  • (28:55) – What do you not spend enough time doing?
  • (30:39) – What are you hoping to accomplish in the next six months?
  • (31:18) – What are the potential obstacles to those goals?

Related episodes:

Steve Tingiris on Unconventional Strategies to Fund Your Startup

Resources mentioned:

Where to learn more:

To hear more from Jay, reach out and interact with him on Twitter @ZelkovaVC, or follow his blog on Medium.


Andy:  00:00:02  Hey everybody, welcome back to episode number 39 of the Early Stage Founder show.  The podcast for B2B SaaS founders looking to accelerate their growth.  I'm your host Andy Baldacci, and every Tuesday, I'll bring you a brand new interview with startup founders, venture capitalists, consultants, anybody who has been there before and can provide actual 00:00:19 [Inaudible] of your startup get to the next level.  
Today, I'm talking with Jay Levy 00:00:23 – 00:00:39 [Edit Out] the co-founder and partner at Zelkova Ventures, a venture capital fund that rolls up their sleeves and partners with their portfolio companies for success.  Jay, thanks so much for coming on the show.
Jay:  00:00:50  Thanks for having me, I'm really looking forward to this.
Andy:  00:00:55  So what is Zelkova Ventures and how did it all come about?
Jay:  00:00:56  So yeah, we're an early-stage fund.  In today's nomenclature, a seed fund.  We launched in 2007.  Based in New York, with the thesis at the time that New York was a very difficult place to raise your first million dollars.  
There was a lot less early-stage funds at the time in New York.  In fact, if we go really way back, we started as very much focused on clean techs.  00:01:33  At that time, oil was somewhere, probably north of $150 a barrel.  00:01:39  And we saw a lot of opportunity there.  
What we quickly realized was that there were three things against us in the clean tech space.  00:01:52  There was a lot of capital chasing it.  So as an early-stage fund that was difficult, because we weren't as large as a Sequoia or Quiner 00:02:03 [To Be Confirmed] 
00:02:03  There were a lot of very high valuations, because of there being a lot of capital.  And at our stage there were a lot of science experiments, I call them.  00:02:12  So, we quickly realized that was possibly not the best place for us to be deploying capital.  
I have always had an interest in SaaS software from my days in financial services, where I saw companies starting to move to the Cloud.  00:02:37  So we quickly started looking at deals outside of clean tech.  But the thesis of bringing an entrepreneur's mentality to early-stage investing in New York never changed.  And that's our thesis today, it was our thesis ten years ago, and hopefully it will be our thesis in ten years.  So that's kind of the back story.  
Obviously New York has grown as a market.  The data when we started showed something like less than 20 seed funds.  00:03:11 And they weren't even called seed funds at the time in New York, and it was really like four or five.  And the last report I saw it was north of 150 seed funds.
Andy:  Wow!
Jay:  00:03:22  So, you know, we've seen probably 10X expansion in seed funds, and probably 50X if not more in actual capital as seed funds get larger.  So the dynamics of New York has definitely changed.  
Andy:  00:03:36  And so when you are in the financial services industry and you start seeing that slow, kind of move to the Cloud, and you see that there's something there, what was it that, other than seeing it as something new, what was it that drew you, and as of VC especially, what is it that draws you today to B2B SaaS especially?
Jay:  00:03:53  Yeah.  So there were two things.  It was financial services, and then even part of that, going back to when I was in high school, I started a web design company focused on small businesses though I did have one publicly-traded company as a client, which surprises me to this day.  
But I saw them looking for products that didn't have high infrastructure costs and set-up costs.  00:04:25  They didn't want to have to make large investments.  Especially on small to mid-size.  And then you started to see that also within finance services, that they were slowly adopting 00:04:33 software.  
The first software I saw work had adopted was a investment banking and analyst tool in the software space.  And the bank didn't want to make the investment or build around their own, and they were like, "This data is important, but it's not…" — I don't want to say — it's definitely mission critical, but it doesn't need to live here.  They weren't as concerned with security.  
00:05:07  So we started to even see 12, 13 years ago, certain firms adopting it, and ultimately what I liked about it is that it was a product that helps people make money.  I feel if you help businesses make money, you will ultimately make money.
Andy:  00:05:21  Right.  It's a much easier pitch to prospects that, "Hey. Because of X,Y,Z reasons for these case studies or whatever, we will help you make more money."  Rather than when you compare it to the consumer space, it is an entirely different ball game.
Jay:  Yeah, so alright.  One of the things that we looked at, was how we can have more hits in the portfolio.  So traditional, if you're a consumer fund, you might be looking for the next Twitter or the next Facebook, that big home run grand slam.  What funds that do that focus on the early stage, on the B2B side, is more doubles and triples.  
So, it makes those funds have, in some ways, more predictable returns.  While they might not have a 100X funds return, the likelihood of them having a zero X is probably lower.  That's why we like SaaS
Andy:  00:08:02  Right.  Because those typical situations, the distributions of outcomes is usually going to be more balanced than when someone is just swinging for the fences. 
Jay:  00:08:12  Yeah.  Exactly.  And it's I don't think one is right or one is wrong, I think differently people like to invest differently.  And some investors and managers like to want to be part of that billion dollar company, and a lot of other managers are happy being part of a lot of 30, 40, 50, 100 million dollar companies.  Which there's nothing wrong with.
Andy:  00:08:32  Right.  And so let's talk about that a bit more.  When you are evaluating new companies, new investments I mean, and someone is pitching you.  What are you looking at?  What sort of framework are you using to decide whether a potential company is a good investment for you and Zelkova VC?
Jay:  00:08:54  Yeah.  So it's a lot of factors.  The three that everyone talks about is team, market and product.  In that order.  00:09:05  And I tongue in cheek say it is 97% team, 2% market, and 1% product.  And that's probably directionally right with the waiting.  
Because we are going in at the early stages, so the product is really nascent.  Hopefully the market is there, but we want to see a really strong team that works at — to work with for the next three to twelve years, if not longer or potentially shorter.  So that's the core fundamentals that everyone will tell you.  
00:09:42  The other stuff that is critically important to us that doesn't really get talked about, is structure, terms, all that good stuff.  00:09:54  Because price is really important for early-stage investors.  Your seed investors will be the people most closely aligned to the founders, in regards to returns.  Ultimately down the road.  
So for us, price really matters, because this is going to be a long road.  There's going to potentially be more dilution.  Whether that be from more rounds of financing, or whether that be from employee stock pools, and dilution definitely hurts and you also have to look at your RIR on your investments.  And time.  
00:10:35  So, the difference for us at getting in at a 3 million PRI versus a 5 million PRI 00:10:42 [To Be Confirmed] can be huge in our returns.  So we're very valuation conscious and we do tell people that.  
And the other is the syndicate makeup 00:10:54.  So by that I mean, who are the other investors that are investing, and what is there experience, what is their appetite for future investments, what are their expectations based on performance of company, and future fund raising.  
00:11:11  We tend to look for companies that can be capital efficient and grow revenues relatively quickly.  Now that's kind of what every VC looks for.  Let me put some numbers around that.  So, data shows of successful companies, 88% sell for less than 100 million and 90% of those 88% of successful companies sell for less than 30 million.  
So, the vast majority of MNA activity 00:11:49 [To Be Confirmed] are not unicorns.  Are not — we’re not seeing billion dollar exits in the venture community.  We’re seeing 30, 40, 20, 50, 100, 200 sometimes if we’re lucky, as exits.  00:12:02  So, in order for us to succeed, we need to succeed — I know there is an altruistic view of seed investors, but at the end of the day, we have financial investors who are LPs 00:12:19 [To Be Confirmed] who expect to see returns.  And are weighing these returns versus their other investments in the private markets and things of that nature, public markets and private markets.  
00:12:30  So we need to understand what is the path and do the other investors have the same view.  So a good investor is if our expectations is a company is going to raise no more than 3 million dollars, but the other investors want this company to go out there and do a quick Series A for 10 million, we're probably not the right — it's probably not the right match for us.  
So those are conversations we like to have really early on with the entrepreneurs and really early on with the co-investors.  00:13:00  And also, what are the expectations of the entrepreneurs?  Do you expect to build this to a billion dollar company, or are you aware that how fast you're going to grow this to 20 million in revenue.  You're going to, at best, probably get a 5X multiple.  That's kind of average.  So this is a 100 million dollar business.  Well, if it's a 100 million dollar business, you can't raise 30 million dollars for it.  If you think you're going to have success for yourself and your investors.  
So I think those are the other things that are really interesting.  Along that line, not to plug my Medium blog, because I need to do a much better job of writing on it, but I had written a post, and I'll pull it up here, about the ten reasons you aren't getting funded 00:13:50 [Resource Mentioned].  
And these are the ok, the real reasons investors typically aren't writing cheques into your company.  And it's the stuff that we won't tell you.  We'll always use the polite way.  It's not alright to say it.  We're in the mix essentially to be competitive.  Right now the timing isn't there, it's…
Andy:  00:14:19  What is the reason for those polite excuses?  Is it just because it is easier?  Or is there more to it?
Jay:  00:14:25  I mean, no one wants to be a jerk.  We need to look at the ten real reasons I wrote, and I'm happy to tell you a few of them and kind of go through them.  They're all like, kind of mean.  And it's — for instance, number one we say all the time right now, we call the sexy founder.  And that's the founder who thinks entrepreneurism is sexy.  And is doing it for the media headlines, and to get write ups on Tech Crunch and to be able to run around town saying they have a startup.  That is the total wrong reason to start a company.  
00:15:00  This is an emotional rollercoaster, this is brutally hard and the odds are against you.  So these are the types of things that we were able to pick up signs of, that we might not tell you that's why we're not investing, but we'll give you another reason.  And typically, I try to give a little bit of feedback for the business alongside any pass which we do 99 times out of 100.
Andy:  00:15:38  Right, because looking over these, which I'll link up this article in the show notes and yes, looking over them, it's not necessarily that they're mean, but it's that it's a kind of critique of who the founder sort of is as a person.  Which is a much more personal thing to say than something about the business.  
So, as a founder, this is probably something that is really good to run by some of your close friends who won't sugar coat things, and ask them if they think that some of these things could apply to them.  And honestly, just be honest with yourself about if you have some of these criteria.  But one thing I want to go back to, is you talked about the importance of valuation, and if you look at traditional institutional investors, not in a venture world, but in equities and other spaces, that's an obvious statement.  Valuation matters.  That's the entire game, is to try to find undervalued companies.  
But if you talk to a lot of the big VCs in the space, a lot of them will say that valuation doesn't matter, obviously that much, because what they're saying, when they're going for those home runs, that one home run, it doesn't almost matter what price you pay as long as you get that home run.  
00:16:51  So what I wanted to ask is, is the reason why valuation is more important for your funding, for other similar funds, is because — to me it seems like it's because you're not necessarily going for those home runs, and also because the length of investment is longer, so the IRR is going to be impacted a little more by, just by that.  Is that — am I on the right page, or are there other reasons?
Jay:  00:17:13  100% the valuation is incredibly important to all investors, and I think some of the investors who say it is not important, are potentially the larger investors who might be doing seed deals and don't care about valuation because they are writing a small cheque to get an option, to get a seat at the table 00:17:42 to get an idea of what their — really get an idea what the company is doing so that they can then invest at a later round and I'm sure they're trying to make sure the valuation is right for them at that round.  
And that's actually one of the challenges that we have as a seed investor, is the signalling effect 00:18:06.  If we get a later stage VC to come into a seed round with us, on one hand it's great, on the other hand there's a giant signalling effect 00:18:18 of that VC and if they don't move the next round, there's a very big question about what do they know that we don't know?  They've been involved for 18 months, they're sitting in on the board meetings, or they're getting regular updates.  What do they know, that an outside investor doesn't know?  
But, I think the recent, some of the recent ITOs 00:18:43 that haven't went so well, have led all investors, late-stage and early-stage to realize that valuation matters.  And I think for the early-stage investors, a lot of those 00:18:56 [Inaudible] company sells at 30, 40 million and they went in at 10 PRIs ((?)) 00:19:00 [To Be Confirmed] and so they got their money back.  Where if they were to have went in at a more reasonable valuation, they could have at least made  2 or 3x on their money.  That has a real impact on fund returns.
Andy:  00:19:14  Right, so there's a bit of this sort of, not necessarily survivorship bias, but you have the big winners who did get those, not even just home runs, but grand slams, who had the outside returns and then said valuation doesn't matter, because it didn't matter what they got in at.  
But when reality hits, and when you look at some of the more recent exits in the —  a bigger picture of the distribution of exits, like you were saying, the vast majority are under 100 million, and the vast majority of that are below 30 million.  It does make clear sense that valuation does matter.  
00:19:49  And one other thing I wanted to talk to you about is because through your website and reading a bit more about Zelkova and your philosophy, a big thing does seem like you're willing and ready to roll up your sleeves and really partner with the companies that you invest in.  What does that typically mean?  After the wire is hitting their account, what is your role in a general sense?
Jay:  00:20:14  Yeah, so every company is a little bit different.  And every company we have a little different relationship with, but I can give you some examples.  Two weeks ago, I spent a week at the office of one of our companies working with them on their reporting infrastructure, the data infrastructure, their analytics, and helping them get that in a good place.  They wanted a semi-outsider's view who had some experience within this area to provide, essentially consulting services right to them.  So that's what I would say is a relatively extreme example, because I'm there working in their office, go back do it again.  I'm happy too, and frankly, I really enjoy it.  
00:21:06  The more typical we tend to take an observers seat with most of our companies, which gives us regular updates, regular involvement.  The vast majority of our founders I'm text messaging with daily, weekly, and kind of going back and forth and testing.  
There was one company that launched with two employees a few years ago, and I was essentially their head of product for three months.  There's another company that we just invested in that I haven't — we haven't announced yet that I was helped to incubate the idea and will continue to be incredibly involved.  So for us, 00:21:55 wherever the company need us, if we can offer help, we will provide that.  The key to that is having good open communication.  So, you know what's going on and we can help. 00:22:09  If an investor doesn't know what's going on, they can't help.
Andy:  00:22:14  Is there anything specifically that you do to try to better encourage that open communication, or is it something that's a bit more free form in how it happens?
Jay:  00:22:21  Well, not to plug my Medium post again, but I actually — investor relations as I call it, or I guess that's kind of what you think about the term for public companies.  Investor relations for startups I think is critically important.  In fact, there's data, and I don't know how good it is, but there's data that says that informed and up to date investors invest 200% more than those who aren't.  00:22:53  So if you're an entrepreneur, if your only reason to update — keep investors updated is for your own good, do it twice a month.  That's not only reason to do it, but if that's — you're the type of person that, you know, I only do what benefits me, do it.  You're going to get twice the amount of money.
Andy:  00:23:12  You'll still get the benefit.  
Jay:  00:23:14  So, I think that there is a lot of different ways to keep investors updated.  I think the key to keeping investors is to do it regularly, to do it timely, to do it effectively and efficiently.  I'm using a lot of buzzwords here, I guess, but most importantly, don't do it if it's not — don't provide any information that you wouldn't as a founder find valuable.  00:23:43  I don't want you spending three hours creating reports for me.  I want you spending three hours creating reports for us because you need the data.  There's no data that I need that you don't need.
Andy:  Interesting.
Jay:  00:23:56  There's some interesting platforms out there now that are trying to tackle this challenge to help with investor communication.  And the one thing that I learned — we did a pretty large survey of investors and founders — the one thing that investors hate, not to be surprised, is surprises.  So don't surprise your investors.  Good or bad, by the way.  00:24:21  They don't want to be caught off-guard.
Andy:  00:24:26  Interesting.  And is a lot of that — I'm assuming it's just the standard reasons why people don't want to be surprised about that stuff.  Whether it's in a relationship or anything else.  You want to know what's going on, or at least have an idea in your head if you haven't been in constant contact with someone of what they're doing, what they're working on and no matter if the surprise is good or bad, if it is something that is a true surprise, it can kind of shake up that view you had and say, "Wait, this is completely out of left field" and makes you rethink everything.
Jay:  00:25:01  Exactly.  And it also puts you in an awkward position within your partnership.  If you're not aware of what's really going on within the organization, or within the startup I should say.  So that's one that regular updates, make sure the information is valuable to you and the investors, and eliminate surprises.  
And the other one is, there's always bad news.  Right?  Everyone's not just killing it.  I promise you that.  There's always bad news.  Share the bad news.  00:25:36  Because when I get an update that's all positive and up and to the right, I know that there's shit being hidden.  
Andy:  00:25:46  Oh yeah.  Because it's just the nature of business.  Especially of an early-stage startup.  When you don't have it all figured out and you're constantly learning, or at least you should be, is that there's going to be something that you learn that you made a mistake, or that things change, or whatever.  
And so I think it's important that you did harp on just the value of real transparency, but also in a way where it doesn't take all the founder's time to put together these reports just for the sake of having a report.  Because one, it's a waste of time, and two, you probably don't want all of that.  You want what is needed and nothing more.  
Jay:  00:26:22 And I would say that you can sit down with your investors and potential investors and advisors, can get active with information, and define the scope of data and push back when something — if they're asking for something, them being the investors, are asking for something you feel isn't worth the time, ask them why.  What am I missing, why is this information valuable.  Because maybe the founder doesn't realize that — why this data is important.  Because the investor has experience with other companies or other outside knowledge to know that these data points are important because of X, Y, and Z.  And if they can't explain that, they'll probably realize that we don't need this.
Andy:  00:27:10  You gave a lot of really actionable information there.  A lot of stuff that founders can take to heart when they're pursuing investment, or at least considering it.  But to tie it all together, is there any sort of parting advice that you would have to that early-stage founder who's getting ready to prepare to raise money?  Anything that they should really take to heart before they start what is usually a long and not very fun journey.
Jay:  00:27:37  So two things come to mind.  Ask for money, get advice.  Ask for advice, get money.  So, build relationships with investors early.  Listen to them, communicate well with them and involve them with not just the fundraising process, but in the business building process.  I think ultimately, you'll have good success.  
This is definitely a relationship business and not a transactional business.  00:28:05  And you've got to look at it that way.  As building relationships.  Especially at the earliest stages.  As you get a little bit later, and you have data points, it becomes a little bit more transactional, but still very much relationship based.
Andy:  00:28:20  And so before we wrap up, I like to ask all of my guests a few rapid fire questions.  So what I do, is I go through them pretty quickly, but your answers don't have to be short.  00:28:31  And the first one is just what do you currently find yourself spending too much time doing?
Jay:  00:28:37  Too much energy is spent trying to turn around failing companies that we probably should just write off.  And that is typical of all investors.
Andy:  00:28:51  Sort of the sum cost fallacy.  
Jay:  Yup
Andy:  00:28:55  And then what do you not spend enough time on?
Jay:  00:28:58  The flip side of that.  Spending time on the companies that are successful or are on a path to be successful to help them grow quicker.
Andy:  00:29:07  Why do you think that is?  And obviously, there is that psychological aspect, but it's something that comes up again and again.  And why do you think that is a trap that is so easy to fall into?
Jay:  00:29:16  Because the ones that are successful or are on success, you can almost say they're a little bit on auto-pilot.  They don't need much attention.  Right?  If it's not broken, don't fix it.  Where I think there's that human nature to try to avoid failure.  
So anything we can do to help turn around a company, we're going to try to do.  And as much as we say to ourselves, "Let's not", it's — there's also I think the human element of trying to — we want to see these founders succeed.  Right.  I might have 40 some odd companies in a portfolio, so one failure doesn't have that big of an impact, but for a founder, they've got one company in their portfolio.  One founder has impact and we develop friendships with all our founders.  
So I think a lot of it is the personal relationships of like, just trying to help them succeed and less about us succeeding.  00:30:18
Andy:  00:30:20  Right.  It's as much as it's easy to talk about the rational side of investing, there is, especially in the early stage side of venture capital, there is that clear human element that's just impossible to avoid.  And you almost don't even want to avoid it at a certain point or a certain level.
Jay:  00:30:37  Yup.  Absolutely.  It's critical.
Andy:  00:30:39  And so what are you hoping to accomplish in the next six months at Zelkova?
Jay:  00:30:44  So I have a lot of goals.  One is to implement more reporting internally.  Another is to blog more, because the world needs another investor blogging.  And become just overall more organized.  I hope one of the three of those things is done by the end of that period.  But those are a lot of my goals are just around internal organization.
Andy:  00:31:18  And the last thing is just, what do you personally see as the biggest obstacle to achieving those goals?  Or at least just one of those goals.
Jay:  00:31:24  26 active companies and 800 potential investments that we look at a year.  
Andy:  00:31:32  That would do it.
Jay:  And keeping the balance.  We have a rule that existing investments always come first, and that will always continue to be the rule.  But we can't lose sight of the future and making sure that we continue to source and invest in great companies.
Andy:  00:31:52  Jay, this was such a fun talk for me.  I learned a lot and I'm sure the listeners will as well.  So if those listeners do want to hear more from you and to see what you're up to at Zelkova Ventures, where are the best places for them to go?
Jay:  00:32:05  I'm pretty active on Twitter, so @ZelkovaVC and also, as I said, I blog here and there on Medium.  And that's also ZelkovaVC on there and that's the best way to reach out and interact.
Andy:  00:32:22  Awesome.  And I'll get all of that linked up in the show notes, and Jay, I just wanted to thank you again so much for your time.
Jay:  Great, thank you Andy.