Transcription
I commit my life to venture capital because I really see it as an opportunity to have a fulcrum for change, right? I think especially at preede, you're deciding who should get that first million dollars to build their dream, right? Who should get the shot? And so for me, I feel like it's a role of the professional fairy godmother. That's what it feel like sometimes. And I get to meet all these people and hear their story and hear what their deepest passions are. What do they want to commit decades of their lives to?
This is the Angel Next Door podcast where we will talk about all things angel investing. What it is, who does it, how do we find them, what does it mean to invest in an earlystage company. If you have ever wondered how you can affect the change you want to see in the world, then tune in to learn more.
In this episode, I'm talking to Kate McAndrew, founder of the innovative venture capital firm Balunst and a true professional fairy godmother, as she calls herself, of early stage investing. Kate shares her unique journey from studying art history to leading $100 million preede rounds, her passion for spotting overlook founders, and how she's building a VC collective that rewards and uplifts its entire community. Plus, you'll hear her fascinating take on the future of AI, how she's shaking up old school venture capital and insider stories behind breakout companies like baby formula company Bobby Baby. Enjoy the show.
Hi Kate, welcome to the Angel Next Door podcast.
Thank you so much for having me.
Well, I'm excited to talk to you and learn a little bit more about you and the whole VC world that you're living in. Recently, we had Pocket Sun on the podcast and she told us a little bit about all of the ways that she's been thinking about venture capital. and I love all of these different ways that we're thinking about it. So maybe start off, tell us a little bit about your background and how you got into this whole venture capital space.
It's interesting because I'm both a career VC and an accidental VC. So I've been in venture capital really investing at the very earliest stages. So typically alongside angels or at the same stage that angels invest since about 2012. I started an accelerator program and I ran that for two years before moving to San Francisco and joining a startup firm that was brand new at the time. We all preede I went from associate to partner there and then spun out to start my own firm with a couple of partners in 2022. So we raised $100 million venture capital fund in 2022 to lead preede rounds. That's kind of my background in venture.
But prior to that, if you had told me I would have was going to become a VC, I would have told you were absolutely crazy. I studied art history and cultural studies in college. I went to McGill University and I was always more of a creative to be honest and thought that I would go into the arts. But I ended up really digging into this truth about myself which was that I loved to build stuff and I was always starting companies whether it was a vegan cupcake company or a social media consulting company after college. I had this calling towards the makers and the builders and when I found myself on a Habitat for Humanity job site actually volunteering with Americaore and I met these angel investors who were regular volunteers they started telling me about this accelerator and asked me if I would join them to help start this and I was like yeah let's go. So actually with angel investors that got me into VC and I'm so grateful because I absolutely fell in love with the practice of investing and have practiced it ever since.
Wow. And so where was the accelerator if it was before you moved to San Francisco?
You'll never believe it. The accelerator was in Spartanberg, South Carolina. A tiny little town. I know. Okay. A tiny little town. And there were a couple of kind of philanthropists and entrepreneurs there who were really interested in revitalizing post-industrial south. And they wanted to build this accelerator program. And I joined as the program director and recruited the first class of companies and the next class of companies. I built a code school for kids. I built a whole co-working space alongside an arts organization that was upstairs in the same building. And that's where I got my start. I was really embraced by that community. I loved getting started there. But when I moved to or when I came to San Francisco in 2014, I absolutely just knew that this is where I needed to be. I grew up in California and the energy here in 2014 was absolutely electric. So, I moved here sight unseen. Didn't have a job yet. Drove a U-Haul across the country and just got to go in and got my first VC job and I've been here ever since.
Wow. So, what was the role in your first VC's job?
So, I was hired as the first associate in San Francisco and associates their job is really sign deals, right? Sign leads, drive deal flow. And because we were a brand new firm, that meant really two things. So, I was out there at an event every night. I was having coffee meetings, lunch meetings, Zoom meetings. Actually, it wasn't really Zoom at the time. It was all in person in between, but basically back toback all day out in the community. And then I was also working on building our brand to drive inbound deal flow. And so that was really about helping with content marketing and kind of getting our name out there, creating unique events that could bring our entrepreneur to us. Because as many angels know, with preede, it's really about finding the person just as they're getting started. It's really different than latestage VC where you have these existing companies that you can find on PitchBook or Crunchbase. With Prece, it's really about finding the people. And so as an associate, your job is find the best people you possibly can and bring them in and match them in with a partner. I was an associate and then I in a couple of years was promoted to principal where you start really leading your own deals. Meaning I'm going to with a partner get to conviction and I'm going to have the entrepreneur negotiate with me and I'm going to be doing the docs and I'm going to be taking the board observer seat or whatever it is taking responsibility and then as you learn to fly solo and build your reputation, people are coming to the firm for you. That's really when the partner role happened. So I went on that arc from over the course of eight years from associate to partner before leaving to start my own fund which is called Bow Coast in 2022.
Nice. So what tell us at least about one company from that whole first journey when you were like especially when you were becoming a principal and you now were like a little bit more it's your responsibility.
My absolute favorite is Bobby Baby, which is an infant formula company. And I met Laura Modi, the CEO of Bobby, when she was about eight months pregnant and with her second kid. And she was just a standout. You could tell she had been an early exec at Airbnb. She was so compelling, but you can imagine that a woman who's 8 months pregnant who's trying to build a baby formula company in Silicon Valley might have had some trouble trying to fund raise as good as she was, as connected as she was. and I met her and I had actually just developed this thesis for us around direct to consumer and it sit perfectly into the thesis that I was developing and that was the first not the first deal that I championed but it was an early company where I really felt like not only did I find the founder and convince the founder that we should be their investor but I had really built the thesis for the firm around hey here's where I think opportunities are here's what they look like here's what the economics look like here's the attributes we're seeking and I actually did a number of deals in that thesis that went on to be some of the top performers in the fund including Bobby, I'm still a board observer at Bobby. Many years later, they exploded. They in their first year, they did 18 million in revenue. Their first year in market, they did 18 million in revenue. Their second year, over 100 million in revenue. So, it's a really explosive consumer company and just phenomenal in shifting the culture of how we feed our children. Really embracing that you can both breastfeed and feed formula, that fed is best. Really building a brand voice there that I could get behind and also updating the formulations. When Bobby came out, the standards for formula in the US had not been changed since the '8s. The vast majority of formula was pulled corn syrup. So they were really bringing this European recipe to the American consumer and the American consumer was buying formula out of the back of trunks. They were importing it from Europe and buying out of the back of people's trunks, right? So you could just see how it was really time and it took someone like Laura to step up and build this business. Super proud to have bought that company and I think it's a great example of someone who is doing good while doing well.
Yeah. Okay. So you start your own firm. Tell us a little bit about how you think about venture capital differently.
For me, my first of all, I commit my life to venture capital because I really see it as an opportunity to have a fulcrum for change, right? I think especially at preede, you're deciding who should get that first million dollars to build their dream, right? Who should get the shot? And so for me, I feel like it's a role of the professional fairy godmother. That's what I feel like sometimes. And I get to meet all these people and hear their story and hear what their deepest passions are. what do they want to commit decades of their lives to? And I get to give them the resources to make that happen. And what I found is unsurprisingly only 7% of check writing venture capitalists are women. And so for me, I feel like I have an incredible advantage in hearing signal in stories that a lot of men don't hear. I think Bob Bobby the great example of that. And so, while I've always worked at funds that invest in all genders, invest in all races, I have disproportionately deployed capital to women and people of color, because I think I can often hear signal in their stories and take that leap with them in a way that a lot of people who look differently than I do, maybe who came from a different class background, can't hear that signal. And so, for me, it feels like an incredible blessing to get to be that fairy godmother. And I really do see it BC as a huge just lever for change in the industry.
I think secondly, oh sorry, go ahead.
No, go ahead.
Okay. I think so that's one piece that's YVC and then I think there's not only YVC but how VC the traditional VC model I would say is quite egocentric. ego egocentric which is let's pull all the value in right and have it all roll up to a small thiefdom of people and my firm is called baunst and it means the art of building a German compound word bao means building and kunst means art or craft and we really try to practice the art of building valuable companies in an ecoentric model eco egocentric and what that is about is honoring the fact that companies are not built by people they are built by teams And they're not even built by teams. They're built by communities. And so we actually have a collective of founders, engineers, designers, philosophers, artists, investors who are the Balcon Collective. And all of those people are a rich ecosystem from which our portfolio companies are sourced are supported and really unique ideas and surprising sort of products get get bounced around and come out of that collective. And actually anyone who's in our collective who sources a company that we invested gets a piece of synthetic carry in that company. So we're really trying to think about how can we create opportunity and value in unique ways and I like to call it increasing our surfaces of serendipity, right? How can we engineer serendipity and then how can we flow that capital back in to the ecosystem that as it is creating that, right? And we do all kinds of things. We host summits together. We've published six unique pieces of work only just in the last few years. We've done we have had residencies like philosophers in residence. We've done a bunch of exhibitions in our cities art collaboration. So it's really for me so joyful to get to do this work that I feel like is so impactful that can also create a ton of economic impact in the world and to do it in a way that feels creative, differentiated and more honoring of the ecosystems that I truly believe are creating the value.
Interesting. That's very cool. So it's like you have built a community of balcon people around all of your portfolio companies that can then help them scale and grow.
Yeah. And it's interesting like many people within the collective wear many hats. Like we had an LP who or a limited partner who's an investor in a VC fund who was in the collective who then started a company and we were his first call. So he's now an LP, a collective member and a founder. So really many people are many things, right? They're not just one thing. And so they all exist within the collective in that group.
Yeah. So tell me more about you called it synthetic capital or synthetic carry. How's that work?
Yeah. So basically it's a form of carried interest which is upside in a venture capital firm which can either be on the whole fund itself which means it's diversified across all the investments or it can be on a dealbydeal basis. And so in this case we're giving some giving carried interest on the specific company or the deal that person is sourcing. And then synthetic query just refers to a way that the return is managed and it basically allows us to not have to produce tax documentation and K1s and things like that for every person who has it. It all gets shaken out after the fund is returned. So we would have to get John from Kulie on the phone to really walk us through all of the mechanisms of synthetic carry. But it's basically the easiest way that we could offer upside and it is significant. Basically, if the based on our modeling, if a company that we invested in with our average check size and ownership and customary dilution through balance was to exit for a billion dollars, that refer would end up with about a million dollars in their pocket. So, it is a significant amount, but it's just done in a way that is tax efficient and honestly just not operationally ownorous for us. So, we really wanted to create a way that was possible. And over half of the companies that we've invested in so far in the fund have been sourced by collective members. So, we're really excited that is getting activated and I hope that will continue to flow value back into the ecosystem.
That makes a lot of sense, too, because I know I've talked to some other people who tried to do something like that. So, it's good that you have good lawyers at Culie helping you, but it it always seemed like it was very like laborious just trying to be able to figure that out. It's not impossible to keep track of obviously and be able to do something with it when when it takes so long for some of these companies to grow, scale, and then exit. And all along you as the fiduciary GP are trying to return the capital to the investors as your number one responsibility and then past that all these other things. So that's great that you've been able to figure out a way to keep that keep people motivated and also be able to make it easy.
And I think the piece of it that's really important is it's not just for sourcing the deal, right? It's really about being a collective member, right? You have to be actively supporting the network, producing the creative work that we're doing at Balk. So, it's not just, oh, you made an intro and here's your piece of paper, right? That's not what it is. It's really about an alignment with the whole collective and with the role that they're playing supporting the collective and as an active collective member that's just layered on top of the sourcing as well. So, I think that's a critical component both for us spiritually and then also legally.
I love it. Before we started recording, we were talking about AI and how everybody's talking about AI. You got to invest in it and then at the same time it's moving so fast we're not even sure what we're investing in anymore like 5 minutes later. So, can you talk a little bit about your experience with it? And then I know you talked about AI for good, which I'd love to hear more about.
Yeah, absolutely. So, I was definitely an early skeptic, if only because I've been in BC since 2012 and people have been talking about AI since about 2014. I think there had been so many moments that were supposed to be the AI moment. And so, when we were initially hearing that about open AI and things, I was skeptical. And I'm also not an infrastructure investor, right? The first round of investing that was going into AI was pretty much all infra. And those deals were all very capital intensive. So it was really not a great place for an early stage hund00 million fund to play anyway I would say and so I mostly was paying attention at a distance because it wasn't really affecting my everyday lives either as an investor or as a user and then in the last 18 months that's all changed right and I think that what we're seeing is the infrastructure got good enough that the application layer started to be opening up or building an investment and that's where I started to get very excited and I think what I realized is that this is just now part of the software stack and it's an incredible secular shift that we're experiencing and I think that there is an opportunity for AI to unlock all kinds of user paradigms both on the enterprise and in the consumer that may solve some of the ills that we saw in the last era of computing. everything from e-commerce overload, right? And the way that we think about shopping and mind share and influence to quite honestly the way that we haven't been able to solve many of the societal problems around let's say the undue burden that we have on parents and working parents and really the women who are shouldering the burden of being the COOs of their households and working full-time and technology not really coming to their aid. Like I I think the era of AI has the capacity to if designed appropriately has the capacity to address some of the real struggles that I see myself facing, my friends facing and also to look at some new types of user interfaces that might be more beneficial for folks than what we saw in the last era of computing. And that's where I'm really spending my time when I'm looking to invest in AI. I'm really trying to look at what are the consumer positive use cases. Spending a lot of time at the intersection of AI and the family OS. I just led a preede company or preceded investment in a company called Recess that's basically helping parents with the mental load finding and booking of afterchool enrichment and summer camp activities which is just a huge thing. And so I think that's really an AI enabled marketplace. So that's just one example of that. My fund also does a lot of enterprise as well. And so with AI investing in that side of the house and this is actually where we started with AI, we were really only looking at AI applications in the context of verticals where we had a real competitive advantage with knowing all of the big players, knowing the markets really well. And so we were looking in the computer aided design and architecture, engineering and construction areas. So basically design because that's just a space we know really well. So, we were really trying to be very narrow in how we were looking at AI so that we could make sure that we were being super thoughtful about who to back and what we thought would win and what's going to be just a small feature versus what could be a full revolutionary product, right? And a legacy displacer. So, I think those were some of the things that we thought about both on the consumer side and then on the enterprise side of the house as well.
That's super interesting. So, what are some of the other like just concepts that you've heard about that could really be a game changer that we haven't quite seen yet, but we probably will in the next either five minutes or five years?
It's just top of mind right now because I was reading something about it last night. But I think that the way we shop is going to completely change, right? I think Amazon's dominance will be questioned. We're not going to be going to the Amazon search bar and saying, "I need scotch tape or I need tape." We're going to ask our shopping agent, "I need tape." and the agent's gonna go figure out where the right place to get tape is that's in my price point for my use case and they're going to get me that tape and I'm not going to care where it came from. So I think that's a shift that's going to happen and I think that's really going to change what e-commerce is going to look like. So agentic shopping essentially I think that's interesting and then I think one of the other areas is really dynamic kind of professional services. We're looking at a company right now we haven't invested but that's in kind of the co-parenting collaboration space. So thinking about how do we not only get the right information and help get guided through the process of divorcing when we have children, but then how do we have really productive and seamless sort of management of a co-parenting relationship with everything from finances to scheduling to managing all of our documents and things like that. So I don't know about I'm I'm a single mom. I'm divorced and my lawyer is I think $780 an hour. So if you think about diverting some of that spun and just really having a compassionate AI that can talk to you about what's happening for that, I think that's a really interesting use case for AI that was certainly surprising to me and I felt would have been supportive in my life.
Yeah. No, those are some great examples. And the last question, tell us a little bit about where you see your firm in let's say three to five years and do you think you'll be investing the same kind of thing or how will that grow and evolve?
Yeah. So, we really see preede as a stage that's worth specializing in. Many people start at preede as a stepping stone to aggregating more a having bigger funds and writing bigger checks and going later and later. And that's not what we're here to do. We plan to raise successive $100 million funds and really stick to our knitting and build build a brand and build a franchise around leading precede rounds at the frontiers of technology and design. We love our team. the four G the four GPS were all equal partners and we've all worked together in different capacities before myself one of the my co-founders was the a partner at the previous firm that I was at so I've been investing with them for over a decade and in this business when you find people who you trust who you respect who you think have an edge and where you have shared values around how you want to invest and run a firm oh my gosh you want to just go as deep with them as you can and so that's what we're doing we really know that Balounst is the firm that we think the world needs And so we've committed to building that together and really just continuing to do exactly what we're doing today. Hopefully as we get more funds, we'll have more fees to do more with the collective. And I think that I look forward to being able to having more resources to do more storytelling around advancing the art of building and things like that. But for the most part, we're doing it. We're loving it and we want to keep doing it.
That's awesome. I've first of all, I love that you're investing at the preede level. And then do you keep follow on from each fund for the companies that are in that fund in order to invest in later rounds or do you sometimes see that coming from the later funds too?
So it's interesting and this kind of relates to your AI plate. So I think one of the worst things about VC in the last decade was we were really in this raise as much as you can at the highest price growth at all costs and we I do not like that. There are some businesses where you do need to raise a lot of money. We have a company in the battery tech space. That's a capital intensive company, right? But we actually love businesses that can get to profitability, grow profitably, and then raise when they want to. So, we're very happy to have a portfolio of companies that are more in that traditional quote unquote venture trajectory. And some that can get to profitability and grow and scale with inductions of capital as needed. So, first I just want to say that I think it's very compatible with angels. Like we love capital efficiency. Let's not get diluted as long as you're can do it in such a way where you're still building something really big because we want those billion dollar plus outcomes for entrepreneurs who want that. But we love that. So we're very happy with those paths. That said, for the most part, we're putting in the first one to two million and typically the companies are going to need more at some point, right? So of course we are helping companies raise subsequent rounds of financing and we're trying to be very thoughtful about who that's from and how what's the right amount and who's the board member and all of that. So we do support with that. We reserve capital on a 1:1 ratio. Not on a dealbydeal basis, but on an overall basis. And we're very clear with founders that we are not your multi-stage follow-on forever fund. We want to fully fund you for the preede. We want to give you everything you need to get to product market fit proof points and then we selectively will follow on. But it's really selective. It's not a rule that we're going to follow on in future rounds.
Interesting. Kate, this has been awesome. Thanks so much for coming and telling us all about you, your background, your interest in VC and how that's morphed over the years and then also about all the things going on at AI and Balk. So, it was such a pleasure.
Thank you. Thanks for having me.
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