Aaron Michel is a partner at 1984 Ventures, a seed-stage venture capital firm in SF. Previously he was the CEO of PathSource, a career and life guidance company that’s created the #1 ranked career app in the US. In the past few years, Aaron and his companies have been featured in USA Today, SV Magazine, TechCrunch, Inc. Magazine and other outlets. A recipient of the Boston Business Journal and Mass High Tech’s Innovation All-Star award, Aaron graduated from Harvard Business School and the Harvard Kennedy School of Government. He was ranked as one of venture capital’s 40 Under 40 by the Venture Capital Journal.
Can you tell me a little bit about your background? How you were prepared for the role in venture capital?
I came to Silicon Valley about 12 years ago after attending Harvard Business School. When I got out here, I worked briefly in product management, and then started a couple of companies. The most recent of those was a company called PathSource. We enabled people to figure out what career they want to go into and showed them the school and the educational path to get there. I sold into K-12, a little bit of higher ed, adult ed, and eventually expanded into B2C. That got acquired by AcademixDirect back in March 2017. I came on board with 1984 Ventures as a partner shortly after that.
To answer the second part of your question, people tend to have beliefs that validate their life decisions. I tend to have the belief that having been an entrepreneur in the past helps me be a better VC. Having gone through the highs and lows, our entrepreneurial experience helps us when it comes to evaluating both companies and founders. It also helps with the “founder therapy” side of our jobs. That is, once we invest, part of our job is to work with our portfolio company founders and help them through the tough spots, both from a strategic standpoint and from an emotional standpoint. Having been there, it gives us a better ability to empathize and do that.
Can you tell me a little bit more about 1984 ventures? What is the approximate size of the fund and how much do you normally invest?
It's a $45 million fund. We invest in seed stage companies that are using software to tackle unsexy and antiquated industries. Our investment size tends to be around $500K, and we don't take board seats.
In your investment thesis, it said, ‘’We invest in seed stage companies using software to disrupt unsexy and antiquated industries,’’ and you also avoid high technologies, like Blockchain, AR, VR. What are the reasons behind it?
We're big believers in the idea that you can find and build great companies that don't require taking enormous technology risks. There are two elements to this. One is that it’s unnecessary to invest in really bleeding edge technology because then you're adding an additional layer of risk on top of your investment without necessarily getting anything in return. You can build a $10 billion company without going out and splitting the atom. At the same time, the other thing that we try to avoid is hype.
A good way to think about how hype works is that you have somebody who is a big name investor who comes out and says, ‘’I'm going to make an investment in this company.’’ It's a company in a space that no one was looking at, like VR and Magic Leap. And when a Sequoia, a Kleiner Perkins, etc. comes out and says, ‘’I'm going to invest in this space, I picked a company, this is going to be the next big thing,’’ all these other investors start piling in, and they choose the second, the fifth, the 11th, the 20th best companies to invest in.
That drives up the valuations for these companies, so you’re getting poor valuations in companies that perhaps aren't actually all that good. As all that capital is flowing in, other entrepreneurs see that this is becoming a hot space and say, ‘’Oh all this capital is coming into the space, I should start a company here.’’ So more companies start in that space. Now you have high valuations, plus lots and lots of competition.
Ultimately, maybe that first company or the top two companies end up with reasonable exits, but the majority of the investors who invest in that space end up faring very poorly. If you invested in the fifth best company at a very high valuation, you're not going to end up with a good outcome. So for both entrepreneurs and for investors - starting or investing in a hyped up area, like AR, VR, Blockchain, scooters - is not necessarily an optimal idea.
How does KYTE compete in the ride sharing or the car sharing space? Wouldn't you classify that as a pretty hyped space in today's market?
Not exactly. We don't really think about KYTE that way. We think about KYTE as a company that is really disrupting how people rent cars. Car rental is an exceptionally painful, antiquated industry. The majority of the population has, at some point in time, sat in an endless line at Hertz, Avis, National or Dollar, and just said to themselves, ‘’Wow, this is miserable,’’ and then went over to the kiosks that those companies spent large sums of money on and realized that they don’t work. It's a horrible process.
Plus, the KYTE founders recognized that there was a very important shift happening in the way that people use cars. The level of car ownership, both in the US and internationally, is dropping precipitously. KYTE solves that problem for a lot of people, people who don't want to own cars, but still, once, twice, three, four times a month, want to rent a car for a long distance. If you're in the Bay Area, then want to go drive to Tahoe or go camping somewhere outside of San Francisco, you don't want to take an Uber to do all of that. But if you get a KYTE, it solves that problem. It combines the car ownership trend with another major shift, towards convenience. The millennial generation now has cash and is willing to pay for convenience.
The first time you get a KYTE, it's a magical experience. Any time we're considering investing in a B2C product, we actually try that consumer product. So both 1984’s managing partner Ramy and I are KYTE users, as well as investors. When we first tried it, having somebody show up at our door, give us the keys and disappear, and all of a sudden, we've got this car in front of us, and we never had to wait at a counter or walk anywhere, that was magical.
What would you say is the biggest differentiator between 1984 and other venture capital funds?
There are a few elements to it. We’ve built a brand as the folks who entrepreneurs go to when they are building a really unsexy company. If you're building a virtual reality or a space tech company for example, don't knock on our door, but word has gotten around that if you're disrupting how residential real estate appraisals are done or if you're changing the nature of warehousing, we are probably one of the first doors that you knock on. That's one piece of it.
A second piece is that we've built a reputation for honesty and transparency. When we pass on companies, we're transparent about the reason why, which for some reason many VCs aren't. We try to pass quickly and have honest conversations that add value when we're engaging with any company.
Finally, once we invest we really try to add a lot of value to the company in a couple of ways. One is guidance. We work closely with our portfolio company founders on a range of strategic issues as well as founder therapy. Two is we work hard to help get them not just to a Series A, but to a Series A with some of the best early stage firms in the world. We're fortunate that we can get our portfolio companies in front of the top Series A firms. And we work closely with our portfolio companies to help them think about positioning, the story, deck iterations, and ultimately make the introductions that are going to be most useful. Having been entrepreneurs ourselves, we've always been of the opinion that VCs tend to overvalue their advice and undervalue their introductions. So we really try to optimize around making really valuable introductions to help our founders.
Speaking about helping founders, can you give me some insight on how you make decisions in the investing process? How do you decide which company to invest in, and what exactly are you looking for?
It's actually relatively straightforward. At the highest level, we're deciding if this company is solving a real problem. Then, we look at the team. Are these the very best people to solve this particular problem? Next is the market. Is this a multi-billion dollar market? If this is successful, how big of a success can it be? Then we look at product and product/market fit. Are the relevant KPIs going up and to the right? Then behind that are more secondary considerations such as is this a space that has significant headwinds or tailwinds? There are some industries where you can do everything right, and it's still an uphill battle. Then there are some industries where no matter what you do, you've got a good shot at doing reasonably well. Those are all things that we take into account.
Would you be more likely to fund a very experienced team with a mediocre idea? Or would you prefer an amateur team, but they have an amazing idea?
The team is much more important than the idea. My assumption is that most of the time the company will make 1-2 pivots before they really nail the model. It's only at Facebook where somebody comes up with an idea in their college dorm room, and then boom, that ends up being a $10 plus billion idea. The majority of the time, there are twists and turns along the way. So having a team that is able to execute and accommodate those twists and turns is first and foremost. That's why it's the number one filter that I mentioned.
What’s the #1 red flag you see that makes you pass on a company?
I wouldn't say that there's a number one red flag. Frankly, the company has to pass all those filters I previously mentioned in order for us to move forward. That's relatively rare. The nature of the business is that we end up passing on far more companies than we move forward with. Some examples of red flags are teams that don't come across as though they are prepared for the challenge or don't know the space well. Or if they're attacking a small market where even if the business succeeds, you can't have a billion-dollar valuation. Those are the types of things that we look out for.
How do you deal with cold calls and emails? Do you have any advice for entrepreneurs trying to reach out to venture capital?
We try to be responsive to the cold emails that we get. An entrepreneur should expect that even if they get a response from a venture capital firm to a cold email or cold outreach, then the bar that they have to pass is much higher than if they came in through an introduction because the majority of the time, entrepreneurs should be able to network their way eventually to whoever they want to meet, within certain limits. For the most part, if somebody wants to reach us, they should be able to find somebody who knows us. So if they’re not able to do that, it's a little bit of a yellow flag.
When I was an entrepreneur, I was of the opinion that VCs should take cold emails, take cold calls, and look at them the same way that they would if the person came in through a warm introduction from somebody that they knew. So, as a VC, early on, I really tried to open the floodgates and take in a lot of cold outreach. What I found surprised me, which was that the people who I was getting connected to through warm introductions or through my own outbound direct outreach, as opposed to direct outreach by the entrepreneur, tended to be a much better fit for what we were looking for than the people who were reaching out cold. My experience has generally been that when somebody comes in without a warm introduction, the likelihood is that they're less likely to be a good fit for us.
Why do you think that is? Is that because of their inability to network or does that suggest that it’s like an auto filter? People you know would are more likely to recommend qualified entrepreneurs?
It’s more the latter. The people who send us a lot of deal flow are people who we've had conversations with about the nature of our thesis, and the types of companies that we're looking for. So they're not likely to send us companies that are well outside of our scope. Whereas, if you're an entrepreneur, and you're reaching out to us for the first time, you may not have done the research to know that we're not looking for the next big scooter company. You may have a great vision for the future of scooters and think that mobility qualifies as an antiquated industry, so we’ll probably like their idea. You might reach out to us directly, whereas somebody who knows us well would tell you, “No, don't bother reaching out to 1984. That's not their thing.”
What do you find the most difficult part about seed-stage investing?
I’ll answer that in two ways. It’s hard to find great companies. There are not that many billion-dollar plus companies born every month, so you constantly have to be scouring America to find the companies that really fit what you're looking for. The other piece is, frankly having been entrepreneurs ourselves, it sucks passing on a company. Saying no to somebody who is really promising, who's looking for capital, who has the fire in their belly, that is a painful thing to do. The nature of the business is that you're doing it all the time. So you have to get used to it, but it still sucks.
What are the channels that you use to try and find these companies? Where do you think there's the most potential to find these ideas and these people and these teams?
Certainly, Alchemist is a great place to look. We've invested in a couple of companies that have come through Alchemist. We've invested in some companies out of YC. We have inbound from other venture capital firms who know us well and are familiar with how we add value to companies after we invest. We have friends at universities, accelerators etc., angel investors across the US who we work with, and who would like to have us sitting at the table when a seed stage company is going through the process of growing up and ultimately looking for their Series A. So all of them send us deal flow. We're also very proactive, both in doing outbound research and outreach, as well as digitally knocking on doors. We're constantly working to expand the top of our funnel.
Is there any one piece of advice that you'd want to share with founders that doesn't get shared enough in your opinion?
Yes, to deeply diligence your market and test the core hypotheses around customer adoption as quickly as you can. Sometimes founders will look at their market with rose-colored glasses and say that there aren’t any other serious competitors in their space. Often this is a sign that they don’t understand their competition or don’t take them seriously enough. Or, if other competitors in the space are not doing well, then there might be a reason that applies to your business. Founders are well served by understanding their market dynamics and competition today as well as by understanding what happened in their space in the past. You can learn a lot from reviewing startups in your space that failed.
The takeaway here is that there's frequently an assumption among entrepreneurs that you're looking at a given industry or problem better than anybody else has, and you're looking at it in a new way, in a way that no one has ever looked at that problem before. In reality, you really have to be very skeptical of your idea and vision before you decide to spend years of your life working on it.
About the Alchemist Accelerator
Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley—including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.