🔥Upside Chat: Vasu Kulkarni, Partner (Courtside Ventures)
This week we had the honor to interview Vasu Kulkarni partner at Courtside Ventures a leading sports tech VC in NY.
📝Show Notes: Throughout our conversation, we talked about how he got into the VC world, what he is looking for when considering investing into a startup, and what he believes are the major trends in sports tech and which sports tech sectors are likely to benefit from the current environment. Vasu also gave us his advice for any CEOs looking to raise money, and navigate the challenging environment with the Coronavirus, and the type of impact the virus could have on the sports tech industry.
🚀Best Quotes: Here’s some of the key discussion points and best quotes from our conversation with Vasu:
On how he started as an entrepreneur before transitioning into the VC world: “Well, I was an entrepreneur for about eight years. Started a company out of my dorm room called Crossover. It was a sports analytics SaaS company. I moved to New York after college, and set it up. I think at our peak we were close to a hundred employees here. We had about 10,000 customers. And basically, I just started by bootstrapping that company, then raised some angel money and then some more angel money and then went out to raise venture money and couldn't raise any. Granted this was a very different time (…) I came out of college in 2008, so it was right in the midst of the last financial crisis, and raising money at that time was not easy. Raising money for a sports analytics company, which no one ever heard of, was even more difficult. And then on top of that, sports just wasn't a vertical that the traditional VCs really looked at”.
On how he got into the VC world: “so I struggled mightily to raise capital for that business, ended up having to raise all of my money from angels and super angels and sort of high net worth... super high net worth guys like owners of NBA and NFL teams. And so in the end I ended up raising a decent amount of money, but it was all raised through non-institutional means. And when we finally ended up exiting that company in 2017, one of the things that I had always thought about was how difficult it had been for me to raise capital even though I had an idea that probably should have been something that VCs would have invested in over time. Perhaps at the seed stage, but once we got to two, three, four, five, six, seven, $8M in recurring revenue, you would think that a VC would pull the trigger and invest in something like that. And yet we were unable to raise any institutional VC money. That was sort of the Genesis for getting into venture after I exited”.
On who backed him up initially to create Courtside Ventures:” I went back to my lead investor in my company who was Dan Gilbert, the owner of the Cleveland Cavaliers (NBA). He ended up becoming the first investor in Courtside. The only other investor actually ended up being WPP, the world's largest advertising firm. And so, we set up a $35 million fund in 2016 to invest in sports and gaming and to prove that sports was actually a place that you could generate venture returns because no one had ever done it before”.
On the fact that many sports tech startups end up migrating towards other verticals over time due to pressure from investors to scale their business: “I think when you think about the traditional definition of "sports tech," what you're finding is many of those companies look at sports as their initial beachhead market for a number of reasons. One, it might be a quicker sales cycle. They may have some ins with some teams or some players. It's a sexier industry to get into and as a result you can get some good PR out of it, some good marketing. So if you have a product that's being used by the Los Angeles Lakers and LeBron James is using it, that's a much more interesting story for the news to write about than having some oil and gas companies using your product, or somewhere in healthcare. And so, you start in sports many times to get that initial market traction and market validation, but then you very quickly have to have other that you can go after otherwise you can't build a big enough business. And for some companies, there's a very clear path to go from sports to another vertical and others, they try to force it because they don't realize that "Hey, you know what, the thing you're building, it actually is only relevant to sports, but now some investors that you took money from is telling you that you need to expand because he now doesn't believe in the size of the market that you were initially going after." And now you start to try to force this product to find product market fit inside of a market where there actually is no fit for it”.
On how he evaluates startups before investing: “Well we have a pretty data-driven approach. We have about 20 different things that we look at when we are evaluating a deal. Every partner grades every deal that we bring in on these 20 criteria. We then sort of take an average across the three partners to figure out what our score is on this deal. Based on that score we pretty much know after we've looked at several thousand deals over the last four years. We've done 46 or 48 deals as of now, so we have a pretty good sense when we look at that score at the end of our grading process. If it falls within the threshold at which we will do a deal or absolutely will not do a deal”.
On the most important factors to make an investment decision: “I believe that there's two things that you look for in every deal that you do if you're an institutional venture fund. The first one is just the overall size of the market opportunity. It doesn't matter how good everything else is that... It might be the greatest product on earth. They might be the best founders of the world. If at the end of the day, the problem that they're trying to solve simply is not big enough, then it just make sense for a venture fund to put money in (..) And then the second thing, a very close second place to market size for me is the actual founders and whether they have some sort of domain expertise, some sort of an unfair advantage, why are they doing this? What is the mission that drives them to build this company? Whether that be a problem that they saw in their own lives or in the lives of a loved one, whether it is... There's got to be a story there that makes us feel like this is the right team that has the right motivation to solve this problem. Because invariably what we have found when, when we're so vertically focused, is that for just about every company that we've seen, there's at least three to five if not 10 other people working on the exact same problem at the exact same time”.
On how the boutique fitness industry might be impacted by the COVID-19 crisis: “If you asked me where the world was in the world of fitness two weeks ago, I would have told you boutique fitness is having a moment. There's studios opening up everywhere, there's so many interesting things happening there. Now, if you asked me the same question, I'd say to you, "Man, I'm worried for boutique fitness studio owners coming out on the other side of this thing. Whether it takes three months, six months, or 12 months for us to get out of this situation, I still worry for them because I don't know how long it's going to take for people to get back to doing the things they used to do." And so all of a sudden, "Hey, if you are a personalized fitness app that allows you to work out from the comfort of your home, if you are a Peloton, if you're a Tonal, if you are a Freeletics..." There's all these different hardware, software solutions that allow you to work out without having to be around other people. That might be where there's some interesting opportunity for the next couple of years, all of a sudden”.
On how the connected fitness (peloton, Tonal, MIRROR), video conferencing (Zoom) and gaming industry are seeing a spike due to the COVID-19 crisis: “if it's Peloton and Zoom right now are the only companies that stock is surging, everyone else is down in the dumps, and so I think the new normal is going to be a very different view of the world than what we thought of it, just a short week ago. I think gaming is going to be another place where we're going to see a massive uptick in valuations given. Hey, if you're stuck at home and you still want to have some sort of social encounter with people, but you don't want to be in the same room as them, well there's really nothing else you can do other than play video games together”.
On the fact that there is still a record amount of LP dollars sitting with VCs right now despite the crisis: “I think when it comes to venture, there's a record amount of LP dollars sitting with venture capitalists right now. More than in the history of the world. So the money is there and VCs don't make money if they don't invest it. So, they are going to invest this money, it just may not happen over the next 30 to 60 days. Again, for a variety of reasons. The most important one being that VCs need to spend the next 30 to 60 thinking about their existing portfolio companies, not so much new ones. They need to talk to all their existing portfolio CEOs, figure out what's going on. I mean, my entire week this week is entirely scheduled with existing portfolio companies to figure out how the coronavirus is affecting them, what are their cash needs going to be? Do we need to bridge them? I have to understand all of that before I can even start to think about making new investments and so that's what these next 30 days are going to be about. It's about figuring out how to make sure that the current investments stay alive”.
On his advice to startups who will need to get cash in the next 60 days: “We've never been in a situation and as far as I can remember, where you literally cannot meet someone. And so it's just a very, very weird situation. But I don't think that the startup ecosystem is going to suffer that much 60 days from now. The issue's going to be the companies that, between now and 60 days from now are not going to have cash and are going to go under if they can't get cash. And they don't currently have a large lead institutional investor that can bridge them. Those are the companies that are in some serious trouble right now. And so my advice to people is, I would be picking up the phone right now if you have an existing investor or group of investors and I'd be keeping them up to date on what's going on, whether you're going to need cash and whether or not you can count on them to give you a cash within the next 60 days, if you need it. And then if you are a brand new company that hasn't raised any capital, you might want to take a couple weeks off. Use it to take a vacation before you come back to market”.
On how he expects valuation of some startups to come down, and some entrepreneurs to be very quick to accept term sheets: “I do expect that valuations will, just in general, drop by a little bit because they can, and because there just aren't that many options out there and or entrepreneurs may be starting to feel the pinch of, "Well I better just take the deal that's on the table now because who knows what's going to happen six months from now. So they may not want to go out and run a full process. If you gave them a term sheet, they may be very quick to accept the term sheet today as opposed to what would have happened two weeks ago where they look at a term sheet and go "Listen, let me go shop this around and see if I can get a better deal”.
On how the best VC deals will always be hot despite the challenging environment: “I think those are the reasons why you're going to see a potential drop in general valuations. But look, the best deals will always be the best deals and the best deals will always be hot. They will always be competitive to get in on those deals and the valuations will still rise. I think times like this basically just separate the best startups from the mediocre ones even more, and so that's all it's going to be”.
On how he expects this COVID-19 crisis to be different from the 2001 crisis: “I don't expect this to sort of be like 2001 where the basis of that entire crash amongst other things was the fact that there were all these companies that had been funded without any fundamentals, without any unit economics making sense, and all of a sudden they have all raised hundreds of millions of dollars and then they're going public for billions of dollars without anything to back up the value of those businesses. That's not where we're at today. This is an actual global pandemic, caused by a virus that will go away, even if it takes 12 to 18 months to go away, and then things will return to somewhat the same level they were at. And so, I think that it's a different situation, but it's still a tough situation”.