For our most recent Seed Series we spoke with Eric Hippeau, Co-Founder and Managing Partner at Lerer Hippeau, a seed and early stage fund in New York City, founded in 2010. Hippeau, like a few folks in the New York tech scene, came out of publishing.
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He was the publisher for PC Magazine pre-internet in 1989. He went on to run the show at Ziff Davis and had an eye on the first internet wave and then crash at SoftBank Capital. Lerer Hippeau came out of an angel fund that grew up to become an institutional fund. Hippeau shares some of the secrets to the success of Lerer Hippeau’s approach to investing mainly in the New York tech.
Gené: I want to start by going back in time as you have been around tech and publishing pre-internet? Tell us about Ziff Davis in the early days.
Eric: What made Ziff Davis the dominant publisher in the technology world was that they were the first media company to understand that the PC was going to be a business machine. PC Magazine was very technical, very analytical. It was a magazine that tested a lot. We had a lab called PC lab. We were very much of the belief that the PC was going to revolutionize business. And it did.
Gené: How did Ziff then transition to the internet era?
Eric: We did it in a variety of ways. One is we covered it. We were the first ones to explain what the internet was, what the web was, when it became a graphical user interface. And then we were the very first to put our content online, through a division called ZDNet. And we actually took that public in the late 1990s in the good old days of tracking stocks. We were very early in understanding the impact of the internet.
Gené: This is your second time around on the investing side because you were at SoftBank Capital. A lot of the big names are part of SoftBanks portfolio namely GeoCities, Verisign, Yahoo!, eBay, and Alibaba Group. Many successful companies. That must have felt very heady to be investing in all of those key companies of that era.
Eric: Well, a number of them happened because of Ziff Davis. We were the center of everything that happened in technology. We had early warnings about great new projects, great new companies. And Yahoo is the best example of that. Right before we sold Ziff Davis to Softbank, we were going to make a smallish investment in Yahoo!, about $5 million. And Masayoshi Son, the CEO, the owner of SoftBank, liked Yahoo so much that we made a deal to own a third of the company at the IPO. So he ended up investing about $112 million and that’s when I joined the board of Yahoo and stayed there for 15 years. That was one of the greatest VC investments.
Then you had other companies like USWeb, GeoCities. All these businesses came about because of Ziff Davis. But also at the same time SoftBank started their own funds, with Softbank Technology Ventures Fund, which were very successful. Those funds morphed into a firm called Mobius, when SoftBank decided that they wanted to put their attention somewhere else. And all the Mobius partners have done extremely well.
Gené: What happened during the crash years because Softbank Capital pulled back from investing in 2002. What was the experience like in 2002 for you?
Eric: I joined SoftBank Capital in 2000. I opened the New York office. Those were tough years. A good part of our job was to manage the investments that were done in the heyday of the dotcom boom. It took us a good three to five years to figure out how to stabilize those companies. And then return money. The first few years were a lesson in what you do after a crash.
Gené: And what do you do after a crash?
Eric: You roll up your sleeves and you go to your companies’ and you say, guys, it’s a different era. Money is going to be very tight. Let’s work with you on streamlining your operations, making sure you are focused on the right customers, and let’s hunker down. It’s going to be a lean number of years, and you’ve got to come out at the end with a customer base, with enough money in the bank, because no one’s going to give you money.
Gené: And that lasted for how many years?
Eric: I think we started to see the light at the end of the tunnel in 2004, 2005. And then we raised more funds.
Gené: And for the companies not going to make it. Did you make those decisions early on, or does that play out over time?
Eric: When you analyze a portfolio, clearly you form an opinion as to which one of these companies are going to be the drivers, and which ones are on more shaky ground. And so you work with everybody. But those who are on more shaky ground, you might have to take more drastic action. They might have to cut costs more. You might look for merger partners. You’re trying to make sure that they’ll be around, but some of them might have to close.
Gené: Was the internet’s reputation at the time vilified? A huge amount of money had gone into the internet. And then there was this big crash.
Eric: There was a lot of skepticism on the consumer side. All these companies had taken in a large amount of money, and had not much to show for it. But Pets.com was not one of those. USWeb was. You had to make them prove that they have market fit, because the financial community, and the VC community were very skeptical. But on the enterprise side, people really understood the value of the internet. In financial services, as an example because we are in New York, a lot of products were running on the internet and despite the crash, people were not going to give that up. They might have been a little bit more cautious in terms of deploying all of their services. But everybody understood the value. This is also when email took off on a big scale. People understood that the internet was going to be a major force. It’s just that there was all these excesses on the consumer side, and that created a lot of skepticism.
Gené: And then the consumer side did come back?
Eric: It came back. You can argue that these companies were way early. Broadband deployment was very poor. There was still dial-up if you remember those days. There was no no mobile. There was not even tablets. You had to be at the computer. It was expensive. There was no cloud. Everything relied on servers, on computers that you had to run for them. Compared to today it was slow and klugie, but it gave you a good preview as to what the possibilities were, and what eventually came about.
Gené: So you went from SoftBank, back to publishing to Huffington Post?
Eric: I had led the series A at Huffington Post, and a couple years into it, we were looking for a new CEO and we just couldn’t find a person that we liked. Arianna and my partner Kenny approached me and said, well, would you like to do that? My first career was journalism and so I felt that that was one of these real opportunities. Huffington Post was really a game changer when it came to news. Originally we were aggregators but by the time that I became CEO, we were creating most of our content. And we were creating a really large amount of content. The New York Times might publish 120 stories daily around on their website. We were publishing 600 stories. And we had the participation of the community. Today you have to shut down your comments because they’re taken over by pretty horrible people. But in those days, there were more ways to control it. There were actual debates and actual good conversations. It was easier to kick out the people who had nothing to do with the discussion that were just there to disrupt. It was very, very exciting. I enjoyed it tremendously. And then a little less than two years into being the CEO, we sold it to AOL.
Gené: And how did Lerer Hippeau come about?
Eric: We had started a small fund. Now we’re talking like 2009, 2010 and New York was starting to boom again in terms of startups.That had to do with two main reasons. One was there was cloud. It was cheap to launch a company or use a computer or two. And you had access to the same technology, same tools that the people in your area had as well. The technology advantage was broken down. You could be anywhere in the world, and have access to technology. That was one thing.
The second thing is what we refer to as the urbanization of technology, where younger tech workers did not really want to be in Silicon Valley anymore or in the suburbs or small towns. This is when you start to see their migration from Silicon Valley to San Francisco, because they wanted to be in dense, culturally diverse urban areas. And what better urban area in the United States than New York. Because we are well known in New York, we were exposed to deal flow, and rather than act as angel investors individually, we decided to regroup. It was more of a side project, it was a couple of million dollars. And then when we sold Huffington Post we decided to invest full time.
Gené: Who was around at the time in 2010, 2011 investing?
Eric: It was a number of West Coast funds that would parachute into New York and do a variety of Seed to Series B, Series C investments. And then you had New York based funds, people like Greycroft, RRE, and Founder Collective had an office here at the time, and First Round. There were established players but clearly, there was a dearth of capital. In 2011 when we raised our first professional fund with institutional investors, the space was relatively wide open.
We decided on two things. One is that we wanted to be seed first investors. And then secondly, that we wanted to be New York first investors. The majority of our companies would have to be in New York. Let’s really become the most active investors in New York and focus on that. Not to say that that’s all we’re going to do. About a third of our companies are on the West Coast. We have maintained that strategy since then. With the difference being that whereby we would start with relatively small ownership initially, today we target much bigger ownership. We want to own 10 to 15 percent of the company at the onset. Our funds have grown commensurably. But we’re still very much seed first, New York first investors.
Gené: You recently raised Fund VI which was $112 million in 2018?
Eric: We actually raised $122 million. We have a family of funds. The core found is the seed fund. We were going to cap it at about $120 million so that it remains a seed fund. We raise more money more often, we raise about every two years. But now we also have a Growth Fund, which we call the Select Fund. And the Growth Fund then allows us to continue to exercise our pro rata rights when we want to invest in the B and C rounds. And we decide to do some select Series A as well. And then we have a whole separate business which is a secondary business. On the primary side, we managed about $450 million and then the secondary side we manage about $300 million dollars.
Gené: How much do you like to invest in each round? What is the range of your investment for this 10 to 15 percent of ownership.
Eric: If it’s a seed round today, I’m talking East Coast. West Coast has different ways of thinking about this. On the East Coast a typical round would be someone raising $3 to $4 million, selling 20 to 25 percent of their company, and we basically like to take at least half of that. More often than not we lead the round, we price, organize the syndicate etc.
And then over the years we’ve built a platform that has a lot of content on it, a lot of activity on it. We have three people internally, who are on the platform team. We have a full-time recruiter, we have a full-time marketing, and communications person. Every company that we invest in is plugged into this platform and there’s essential services that you need. As soon as you raise a round the first thing you want to do is hire more people. Because all these companies are just in the market, or about to go to market, then you need to be better known, so you need communications and marketing. And then you want to make sure that you do not repeat the same mistakes that everybody else has made. You’ve got kind of best practices. The platform is also a communications platform with all your colleagues who are founders of other companies. What we try to do is populate this platform with real practical advice and resources and help, that will make you smarter and make you utilize your money better. Not go after customers where you should not be going. Not pay more than you should for customer acquisitions. All these things that seem kind of almost boring today. But maybe not as obvious if you’re a first time entrepreneur. And what have people done so that you don’t repeat the same mistakes.
Gené: And do founders like to share, or do some feel like they’re giving away the secret sauce?
Eric: Everyday there’s really active conversations on our platform. Part of it is because we’ve kept it really private. And we also make sure that we have plenty of face-to-face meetings so that people know each other, and trust each other. And secondly, we also put some people in categories. If you’re a SaaS business you can talk to other SaaS entrepreneurs. If you’re a direct to consumer commerce business, there’s other people that have gone through this before. We think of it as if we were building a business.
Gené: And you have at this point eight to nine years experience among those founders, or even possibly longer if they have run previous companies.
Eric: There’s a real network effect. We’ve got 250 active companies on the primary side, and another 100 on the secondary side. Everyone’s plugged into the same platform. It generates a lot of data for us in terms of what are the exit valuations in a certain sector. How much money on average will they have to raise. The more companies plugged in, the better the data.
Gené: How many investments do you do per year in the seed fund?
Eric: We do about 20 investments per year.
Gené: And then when you invest in Series A, what’s the ownership that you’re looking for?
Eric: Currently our series A efforts are done through our Select Funds. We’re not looking to lead at this stage, we’re looking to participate. These are for companies where we’ve not done seed. Maybe it’s companies that we have missed altogether, or companies that emerged afterwards. We want to participate. Our ownership will be smaller than the seed round. But maybe over the years we will grow that as well.
Gené: And who do you invest alongside?
Eric: Literally, pretty much everybody. Certainly all the top tier firms in the valley or San Francisco. All the VCs in New York, we have worked with at one time or another. And that is really no concentration. We are very collaborative. We don’t have any preconceived ideas about who to work with or not work with. But we do like to work with top tier VCs.
Gené: Does that mean you spend a lot of time in the Bay Area?
Eric: We have a number of companies that we support in San Francisco on the West Coast, and also we’re very active in LA. LA is a bit like New York was about five years now. When we visit we meet with other VC firms, because it’s really important for us to understand what the individual VC strategies are. And within the firm’s what are the individual GPs focused on? Are there companies in our portfolio that they would be interested in? What kind of metrics are they looking for if they’re going to do a Series A? Our goal is to be very efficient and only send the West Coast VCs companies that we know they’ll be interested in. It’s also very efficient on the part of our companies that are fundraising so they don’t waste their time. Same with your GPs. They’ll be more likely to pay attention because they know that we know what they’re looking for.
Gené: What have you learned over the seven years, or what are you doing differently as a fund now, besides your increased ownership stakes?
Eric: I think what we’ve learned is that consistency pays off. As a firm, it’s a good idea to have a point of view, and how are you going to differentiate yourself from others. But it’s really important that you stick to that, fund after fund. Venture capital is a long term game. I always say to people who want to be in VC. I always say, great, but you’re 25 years old or 30 years old. Are you ready for this to be your last job, because you can’t be a VC for two or three years, go do something else. That is not gonna pay off for you. Taking a long view playing a long game. That’s one thing. Second thing is that paying attention to the companies, being really helpful. If you’re going to make an investment, make sure that you can do what you can say you’re going to do and add value. All of that leads to building a brand.
I think we were pretty much at that stage where good quality entrepreneurs in New York know about Lerer Hippeau and they say, well I will speak to Lerer Hippeau as part of my fundraising. For us it’s good business because hopefully we’ll be able to see the best companies as a result of that.
Gené: You talk about investing in all categories. Is there a certain wave of technology that you’re riding. Or a technology focus?
Eric: So it’s across the board in the sense that it’s all digital technology and it’s all cloud based digital technology. Which is pretty broad. The second filter is that it’s got to be a product or an area that we understand. From day one we want to be helpful. We touch a lot of different sectors. Today we’re very busy in digital health as an example. We’re not biotech investors. We will never do a biotech deal. We don’t understand medical devices, or your medication. But we do understand how digital technology has the huge potential of making this really complex inefficient, unfair, super-expensive marketplace, to try to make sense out of it, to the benefit of the patients who often are at a complete loss as to what’s going on. If I go see a new doctor, why isn’t my data automatically there? I know that I have to rebuild my data every time I see somebody. That makes no sense whatsoever. It’s just a small example.
Gené: Any other area that you’re focused on technology-wise besides digital health?
Eric: We continue to do a lot of direct to consumer commerce. We continue to do a lot of SaaS enterprise software. You know in the areas that are a bit more leading edge we do a little bit of blockchain. We have a few robotics companies. We have a couple of drone companies. We make sure that we follow the trends. We have been in the technology business for a long time, we have points of view as to where it’s going and where there might be sectors that might be interesting for us to invest in. But by the same token, we also follow what New York is doing. So, we will pick up on trends in New York, because we want to continue to be the most active investor in New York.
Gené: Are there any exits that stand out in terms of exits that were big for the fund?
Eric: SmartThings was an early exit. It’s an IoT platform that was sold to Samsung which now has become the platform across all Samsung companies and all Samsung devices. An exit… Resy, which is a restaurant reservation system sold to American Express. It was a very good return for us.
Gené: I guess the final question is just a couple of companies today in the portfolio that you’re excited about, and what market to their address.
Eric: Well, there’s more than a couple. We’re just talking about digital health. We have a company called K Health. I know a lot of people say I’m AI driven. These people are truly AI driven. They can answer pretty precisely all your health questions. And it’s a consumer app you can download. If you feel something going with you, it can answer questions depending on what is wrong with you. It could be a few questions, or it could be 25 questions and then what comes out is very, very precise. And it’s based on a 20 years of historical data. This is an Israeli company that moved its headquarters to New York, but kept the developers in Israel. And so they were able to access health data from the local Israeli HMO of about 10,000 doctors over 20 years. And so that’s the basis of their data platform, the AI. And now as people utilize the platform with the network effect of more data, they become bigger and better. If you use the app then you have the choice of very quickly getting on in a telemedicine way talking to an experienced doctor. It’s also a B2B business where you’ll see it appear at the front end to a number of different kinds of service providers, who would rather have something like this as the first point of contact. It might be a hospital or it might be a clinic so that they can better direct the patient to the right service.
Let’s talk about Guideline. They are a San Francisco based company. And one of the big issues in the U.S .is retirement. People are just not saving enough. If you’re a small business, it’s very difficult to offer any kind of retirement plan, particularly the 401 k plans.
We are a small team. There’s about 20 of us. Over the years we’ve offered 401k plans through big insurance companies. And it’s tons of forms. You are never up-to-date, you never get reports, you never know the laws. We have a company called Guideline. They basically offer a very easy, low cost for SMBs. They do all this hard work for about $8 per employee per month. And so they now originate a huge percentage of all new 401K plans in the United States. And it’s literally push button. It’s easy to administer. It’s all online, it’s easy to add or remove plan participants. It’s easy to choose among about 40 different low cost mutual fund investment opportunities. Every employee gets a regular report, it’s easy to take money out if you’re eligible.
Gené: Who are they, targeting, is it smaller tech companies?
Eric: It started out in San Francisco, mostly with startups and now they’re very broad based. They’ve really taken off and they have a fantastic reputation. But it’s still a fragmented market. They’re not the only ones, but they’re the only ones that do it so easily at such a low cost.
Gené: Thank you Eric. I think we covered it.
Eric: Thank you
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Illustration: Li-Anne Dias.