Rick Smith from CrossCut Ventures

Welcome to the Puck, Venture Capital and Beyond. A show that explores the evolving landscape of the venture capital world. We'll have candid conversations with today's VCs and entrepreneurs who are shaping those changes. I'm Jim Beer, managing partner of Bier and Trough and president of CMG Advisors. This podcast brings change makers to the table to discover the inner workings behind decision making strategies and ultimately how they got to where they are today.

I wrote a memo and I said if we're gonna do one investment, we should do 10. Right? I knew that from being a finance major. If you're in it, you say finance. If you're not, you say finance.

I was a finance major at Illinois. Today, I am really excited to sit down with Rick Smith, cofounder of Crosscut Ventures and one of the pioneer investors responsible for growing the LA and Southern California VC community. Good morning, mister Smith. Good morning, mister Bear. So we've known each other for quite some time and obviously welcome.

One of the things that I wanted to kinda jump into right away is just you have a diverse background. You were a lawyer at one point. Harvard educated as I remember. And you have gone out and worked in, the investment field before the Internet even existed with Sun American stuff. Are there things you wanna show us just in terms of kind of what brought you to Crosscut today and give us a little background?

Sure. Happy to do that and certainly happy to be here. So, yeah, I I think, you know, if you look at back at my journey, I grew up in a small town in in Central Illinois, Decatur, Illinois. It wasn't a town that you really thought about going back to. So I was sort of focused on New York, Chicago, LA.

But for some reason, I always was attracted to California. We had single a affiliate of the San Francisco Giants baseball team in our town. We had nothing else in our town. Occasionally, the Harlem Globetrotters would come by. But for some reason, I just always liked California.

And so I went to University of Illinois undergrad, was a finance major there, did go to Harvard Law School, but I always wanted to go to a big city and always wanted to try California. So I ended up coming out to California, split a summer half in San Francisco and half in in Los Angeles, and I really enjoyed San Francisco, but I just fell in love with LA. So I'm one of those guys that just I love LA. I love the weather. I love the outdoor activity.

So for me, it kinda started with geography. I just needed to find a a place to go. I had opportunities. It was kinda rare, but was starting to become more common back in the eighties, as you may recall, that lawyers could actually go straight into business. I had an opportunity to do that in New York.

I chose not to and really chose LA and thought, well, I'll work work for a couple years in law and then get out. And it ended up taking, you know, six years. Went through a white collar recession, so it just sort of extended my stay as a lawyer. But I think that, certainly, the training as a, I was at a Wall Street firm here. I think the training is a lawyer to think critically, to not panic, to actually just read.

I look at today, people just don't read. Right? And just sit down and read it. You don't have to ask what is a contract. So you read the contract.

Right? It's not that difficult. But you learn all that as a lawyer. I did that for, you know I wanted to do it for two. I did it for six, but I ended up really kinda wanting to get into business.

I just didn't know what that meant. And I had the good fortune to work on several mid market m and a transactions, mergers and acquisitions. And I enjoyed, intellectually, what I was doing. I didn't enjoy the day to day. Right?

Chasing commas and and drafting a 110 page indentures, single space. And ended up going to work for and with, you know, folks we know, started a merchant bank here in town, and that at least got me into the business mode. Right? We we bought Steinway Piano Company. We bought Selmer, which makes band and orchestra instruments back in Elkhart, Indiana.

And to me, once I got on that side of the world and out of law, I was set. And by the way, I took a 50% pay cut. I saved every penny I had as a lawyer because I knew I wanted to get out. So I was spending 50% of what I was making. Most people, you know, spend a 110% of what they they make.

But I I was sort of driven to to get out and figure out what business meant. For me, early on, anyway, it was doing these acquisitions. Steinway is a great company, you know, with seven years old at the time, I think. And it was just a great company to be involved with. But after doing that for a couple years, I I had an opportunity to work with Eli Broad, who if you think about it, right, Eli is one of the best entrepreneurs in the country, certainly in LA.

He started two companies that became worth, you know, multibillion dollars, Kaufman and Broad Right. Which is KB Homes. Right. Right? And then he started SunAmerica.

And SunAmerica ended up being sold for $19,000,000,000. So I had an opportunity to work with Eli, get a front row seat to what an entrepreneur is like, but also someone who's running a major company. And I was there doing mergers and acquisitions. It was there that I became aware of opportunities. So it's 1997 now.

Silicon Valley is just starting up. The Internet is just getting going. And I ran across a couple of friends who say there's opportunity in Silicon Valley for this series b investing. I had no venture experience whatsoever. Venture capital was always something that was interesting to me, but a very high level intellectual level.

My dad was a plumber. I didn't know anything about venture capital, but I was intrigued by it and ended up doing a lot of homework. I went up to Silicon Valley on weekends. I'd go up there at night. I kept my day job.

I did get a sense there was great opportunity there and an opportunity for Sun America who had a very large balance sheet. We had about $3,000,000,000 we were investing in private equity partnerships and funds. And, I thought we can maybe take some of that and invest in venture capital. And that is how I got started. I wrote a memo, and I said if we're gonna do one investment, we should do 10.

Right? I knew that from being a finance major. If you're in it, you say finance. If you're not, you say finance. But I was a finance major at Illinois.

And I said, okay. Got, you know, portfolio diversity, all this kind of stuff. And I went to two people I do well at SunAmerica and said, hey. We got this, I think, great opportunity for SunAmerica to do this, and I wanna head it up. And they both said no.

It's just too much risk for them personally. It's like, hey. You know, I don't need to do this. But I went to a third person, Mark Gamson, and and Mark said, sure. Let's give this a whirl.

And, he ran cover at Sun America. We didn't tell Eli, Eli Broad, what I was doing for probably a year. And I was out looking for these deals. And in retrospect, make money in Silicon Valley in the late nineties, and I was that I happen to be that person where there's just so much opportunity and and and the valuations were growing at such a clip. But that's how I got started in venture, and I I was really hooked from the first meeting I had.

I literally had the same valuation that we paid for Steinway, which is this great company with a great brand name known in the four corners of the world growing at four percent a year, mainly due to price increases. At the same valuation as this Ethernet switch startup deep technology company, and that was my very first investment I made. But I was hooked. I enjoyed, and I still do, the enthusiasm and the passion of the entrepreneurs, the challenge of it all. It's just something that I got hooked into it.

That investment ended up being a you know, we made a nine x in, like, ten months, and then we took stock that went up another threefold. That sort of put us off and running at SunAmerica, and we ended up having, I think, 18 or 19 deals at direct investment at SunAmerica and produced just a great return for SunAmerica. That's how I got in the venture. That was 1997. I ended up doing that within SunAmerica for three years until, we sold SunAmerica, and I I went off and and joined, a firm in Santa Monica and then been doing that ever since.

Got it. So let's transition. I know you went to that other firm in Santa Monica, but then you founded your own venture fund, built a fund, which is also going now from starting as a lawyer now to doing the most entrepreneurial thing in the world, which is starting your own venture company in a sense. So tell us a little bit about that. And I do wanna move in also some of the portfolio and the companies that you've worked with and what you've liked.

But just what was it like for you being this lawyer Mhmm. Businessman working at this huge institution to then throw in your backpack over the wall and basically doing what these other entrepreneurs do, which is to start your own firm. Yeah. And that's, you know, that's the way we looked at it. So in 2006, it had been a rough four or five years in venture capital.

I took what turned out to be a couple years off from venture and, spent a lot of time with my kids playing lacrosse and football and baseball with them and so much so I got tendonitis in my elbow. I was so, so active with them and really enjoyed that time. They were younger then, and it was just a great time for me to spend with them. I also spent time with my parents who were back in Illinois, both of whom ended up passing away during that two years I was off, but I was able to spend a lot of time back there. So it was a a great opportunity for me to have that time to spend time both on sort of the young side and, I guess, the older side of the spectrum and be there when they needed me back in Illinois and and certainly be there for my kids.

I knew it was kind of a I I probably had an issue when my, so my daughter would have been about six or seven came home and said, daddy, I see there's a opportunity to be a a manager at Jamba Juice. And she said, we'll get free Jamba Juice if you go there. And I was like, you know what? I I think I better get a job. And so we basically got the band back together.

Brian Garrett and I worked together from 2001 to 2006 or so, and and we really did well as a team. And I have enjoyed working with him from the start. We hired him in 2001 as a as an associate, told him we got two years out. We don't keep anyone around, and he just became too valuable to us, and we made him a partner. And part of that, you know, he's just got the hustle and the heart and humility that we look for in entrepreneurs.

And, man, you know, he had that in spades himself. So, So, you know, fast forward to 02/1967, I was enjoying my time off, but I knew there was more to be done. And Brian came to me and said, given what's going on in Los Angeles right now, there's an opportunity for us. And very much like the entrepreneurs that we back, we looked at the space and said, okay. We're seeing repeat entrepreneurs come back in LA.

We're seeing some big exits that were happening in LA. LA was starting to well, I can't say it was really getting known back then, but we knew, what was going on. We saw Lower My Bills and Price Grabber and some of these early big successes happen, and we saw the virtuous cycle of venture capital kick in where you got an entrepreneur who makes some money and has success and then cycles that money back into companies, hopefully, right, as an angel investor perhaps, and or as an advisor to the next company, or starts his or her next company. Right? So that is that cycle, that flywheel, if you will, in LA, venture capital ecosystem was starting.

And we said, hey. Let's try to get in front of this. Some of the older funds in LA were disbanding or ineffective or weren't making the transition to sort of the new Internet and some of the consumer facing opportunities that were coming up in LA and some of the deeper technology opportunities as well. So we sat there in 2008, turned out to be August 2008, and we're gonna raise a $10,000,000 proof of concept fund, invest it for a year, see what happens, and then, you know, raise another fund if if it worked. Well, we raised 5,000,000 in 2000 in August 2008.

September is when the financial crisis hit that really, you know, rocked our world or rocked everyone's world in the financial sector. And so we're sitting there. We never went out and tried to raise another 5,000,000. So we said we got a $5,000,000 fund. We're not taking fees, but we're gonna have to make this work.

And to the credit of the entrepreneurs that we backed, those entrepreneurs somehow made it through 08/00/2009, and 2010. It's really hard as the Dow hit 26,000 today. It's really hard to remember the time back then because you could not get funded. I don't care what you're doing, you were not gonna get funded in 2009. And our entrepreneurs were scrappy, and they kept going.

That same kind of scrappiness and entrepreneurism is kinda what drove Brian and I and Brett Brewer, who is a third cofounder of Crosscut. That's what drove us to those times too because they were not easy. Brian and Brett both had full time jobs somewhere else. I was holding down the floor at Crosscut. We were meeting in Starbucks and coffee beans, and, you know, we had partner meetings at seven at night.

It was tough, but we persevered. And we knew we were right. Well, actually, we know we were right. We thought we were right that LA was gonna develop into this great landscape for start up entrepreneurs. We saw it early.

We stuck with it. We had a lot of doubt in 2010. You know, I just didn't see how we were gonna be able to to keep going. We were confident in that portfolio we were putting together. We were not confident we'd be able to raise another fund.

Right. And that's a different story. But it's that same entrepreneurial spirit that our entrepreneurs had that we had to kinda muster. And I think one of the things that we try to remind ourselves of those days because that's what our entrepreneurs are going through today. Right?

We made it through those times, and we're a ten year overnight success now. But, you know, that's what our entrepreneurs go through. And I think it gives us more ability to really understand some of the challenges they have, A lot more so, by the way, than than my prior firm when we were you know, we had so much money to invest in, you know, we had to go and say, hey. You know, you gotta keep your salary down. No.

You can't take money off table, but we were doing quite well. We was the opposite for nine years at Crosscut. We were making less than most of the entrepreneurs that we were we were backing. And I think that served us well. It allowed us to stay humble and hungry and demonstrate, do we really wanna do this?

And what's interesting is now, you know, we're on our fourth fund and we have enough fees now to pay ourselves a decent salary and invest in our platform. And occasionally, I'll get some pushback on fees, and I walk to sit down and tell people, if you don't think we're committed to venture capital, let me tell you the story. Right? Because we're in it we're in this for the right reason, not the wrong reason. We're we're in it because we love what we do.

We love helping entrepreneurs try to build the next great companies, and along the way, hopefully, drive returns that outperform the S and P 500 by 800 basis points for our investors who now are some institutions that are investing monies for widows and orphans and and some good causes too. Some very good causes that have backed us now. So, you know, this has been a it's been a great journey for us. I always said I wanna start a company. I didn't think it was gonna be a venture capital company backing other companies that were starting, but that's what I did.

Right? And I will say too, about the time my, you know, so my my dad passed away in 2006, he was a plumber and, plumber and, did not graduate from high school, dropped out of high school. Because his dad came to him in 1932 and said, during the Great Depression, we gotta put food on the table. His dad was a plumber. He said, you gotta come help me in the plumbing business.

And that's what he did and gave up opportunities, obviously, to do other things, but he loved doing plumbing. He loved he was a repair plumber. Anytime, anywhere, any plumbing, which he did to his credit for marketing, I think. Because a and a, back in the day when when all the marketing was not on the Internet, it was in the yellow pages, alphabetical, AA Plumbing, which was right there, anytime, anywhere, but also fit. You call me at two in the morning, you got problems with your pipes, I'll be out.

So my dad, when he passed away, was had very little financial wealth, but was the happiest guy you ever meet, most content guy. And I remember one time walking through Sam's Club in in Decatur, Illinois, and someone stopped him and said, you're Bob Smith. He was in a wheelchair. Yeah. I'm Bob Smith.

Plumber. Right? Yeah. Plumber. You put the plumbing in this building fifteen years ago, we haven't had a single problem.

And you would have thought you told my dad he just cured leukemia in children or whatever. He was so proud of of that. He was passionate about being a plumber, and I realized, you know, he chose the thing that made him happy. And I chose a path that made me happy, and that is venture capital. Capital.

I know there's potentially venture capital is a get rich slow business if you get rich at all. And so it wasn't the money that was driving me there. It was the opportunity to work with entrepreneurs, opportunity to make a difference with people, and really be able to use experience and knowledge and wisdom to help them fulfill their dreams. That's what we do. And I get paid for it.

I mean, that's the crazy thing. So are you comfortable sharing any of the company stories that have been particularly exciting or interesting to you? For instance, whether or not it's a shoe dialer or what you're currently working on. Is there any particular company or story you'd like to share with us? Yeah.

Sure. I mean, we we love telling our story through our entrepreneurs. I mean, that really is what makes it. I will tell you one store one story that stands out to me from the early company that was based up north in Berkeley in the, advertising technology space, ad tech space. And and we invested in 2000 August or September 2008 or so.

In 2009, they needed more money. They couldn't find money anywhere. This entrepreneur lost his house to foreclosure because we didn't have the money to put more money in the company. He couldn't pay himself enough to cover his mortgage. And he went to his wife and said, you know, we're gonna lose the house, but I still believe in this company.

I I wanna keep going. She said to him, that's fine, but we need to get closer to her parents to help take care of the kids. They had young kids at the time. And he said, that's fine. The only problem is the parents were in Spain and and they were in Berkeley.

And so they moved to Spain. I mentally I can't I don't know if I wrote the company off, but I certainly didn't think it had a great chance to make it. And that entrepreneur, Justin Kykendall, he was on airplanes all the time. We had back office operations in South America. He was flying from Spain to The US, operations in South America.

He was flying from Spain to The US to South America through the Bermuda Triangle back to Spain. It was an amazing story and and that ended up being one of the biggest performers in in our first fund. And, certainly, one of the returns that allowed us to be sort of the foundational returns that helped drive our ability to raise funds two and three and four. Right? And so it was that grit and perseverance and confidence that he could make that work.

To me, when people ask, what do you look for in entrepreneur? It's hard to describe, but, you know, give me Justin Kaikendall. Give me someone who's gonna be that passionate and believe that hard and firmly in what they're doing. Again, that's why this is such a great job to be able to assist and help people like that. You use the word grit and one of your contemporaries, Jeff Bezos, uses the word grit and he talks about working on his father's ranch Yep.

And developing grit and self sufficiency, so to speak. And when you tell your story and when you talk about these entrepreneurs, it sounds like there is a secret sauce. I mean, you have to be smart, obviously. You have to have a good idea. But part of execution sounds like this grit.

Do you help bring that out in people or do you think they already have it? Yeah. I I think, what do they say? Adversity doesn't create character but reveals it. I think grit is there and and it's it's a function of, fortunately or unfortunately, how you grew up.

In a way, I feel sorry for people who grew up with a lot of things and went to great schools and got advanced degrees because they tend not to make great entrepreneurs. There are exceptions to that, but I think if you look back at, you know, most of the people who subject themselves to the rigors of a start up where you never have enough resources, you're always concerned about running out of money, you're trying to convince people to come work for you for less money they can make somewhere else for the upside somewhere down the road. In an industry where eight or nine out of 10 companies fail, that takes a special person to do that. You gotta be a little off your rocker to do what we do. The entrepreneurs that we see at least at the seed level, they're coming in.

You gotta be passionate about what you're doing. Most people are gonna tell you, first of all, it's a bad idea. Second of all, you're not gonna get funding for it. Third of all, you're not gonna be able to hire anyone. I mean, you're gonna be told no so many times.

That is hard. I mean, it's hard for us as humans to hear that, and so it takes a special person to be that driver and to be willing to keep going. You know, I know they have doubts. One of the questions, you know, I started to ask recently, it's a really simple one, which is just how you doing. And I know how the company is doing.

We spent all our time talking about the company and can you help me with this partnership, Rick? And can you make this introduction to this VP or whatever? And, yeah, we do that. But you still have to remember at times, you know, well, how are you doing? Right?

Because it's it's a lonely journey at the top. You have a board on one side of you that has put their money in, but also has put their money in 30 different companies in that portfolio, most likely. You got the people that your reports, your employees, that, you know, you have to keep up the this we can do this to good spirit every day and keep the optimism, and you're stuck in the middle of self doubt and concern and, you optimism. And you're stuck in the middle of self doubt and concern and, you know, it's a tough job. It's a tough job.

And our job is is to try to help them feel like, hey. We're not above you. We're with you. We're a partner here. And I certainly encourage our CEOs.

I know they manage down really well, but you gotta manage up well. If you need us, if you need our your investors to do something, stay with us. Stay honest. We are, by nature, doing a lot of different types of things. We're managing our current portfolio.

We're looking for new deals. We're raising our next fund. And so it can be lonely there as an entrepreneur, but but we try to make that a little less lonely. So this may be a compound question, but I was gonna say what's unique about LA and why should an entrepreneur come to LA. And I'm gonna answer my question and then I'm gonna turn it over to you.

But one reason they should come to LA is to work with you. Because at the end of the day, Rick Smith is in LA and Rick Smith is not in Silicon Valley. And if they wanna build a successful company, they should have an opportunity to get to know you. But in addition to that, why LA? Well, I think LA is just the most exciting start up community in in the country, probably the world right now.

I mean, we're we're growing fast. There's a sense of optimism and hope down here that, you know, I I have not seen this level in twenty years. We are seeing more and more people come down here from Northern California. It's expensive up there. It's crowded up there.

People aren't loyal up there. You know, what whatever it is that they see, that I hear from them saying that to me, and they're coming down here. LA is a entertainment capital of the world. We're great at storytelling, and we're great at, you know, music and movies. And I think there's a there's a sense here that there's opportunities here for people.

You can create your own story. You can create your own movie. You can create your own company here. I think a lot of that's channeling into the start up world now. And so we got more and more funds that are coming here now.

We got capital that's that's flowing here. Our companies have gone on to raise $1,300,000,000 after our money. You can find your series b and series c capital if you're here in LA. The larger funds up north are coming down here. They like what's going on down here.

The other thing that's going on in LA, back in 2008, we had a lot of ad tech and advertising technology and ecommerce. So those are sort of the two drivers. If you look at our Fund One, a lot of our big successes in there, ShoeDazzle, JustFab, Fabletics, were focused on narrower niches. Right? If you look at now what's going on in LA, we have a lot of artificial intelligence happening here, data science happening here.

The SaaS companies are making a strong comeback here. Software as a service, enterprise software company. And certainly, AR, VR, you know, this is probably the center in the world for that. I think esports, the business of watching other people play video games and and participating in that, this is ground zero for that as well, and and we've invested in all those categories. So there's just an unbridled sense of optimism here.

There's also a sense that the tide will lift all the boats here. We are working together. We we help out other folks in the community that could be our competitors, but we wanna help them out. Mark Shuster at UpFront has probably done more for Crosscut than anyone else outside of Crosscut to make Crosscut successful. He has introduced us to potential investors, companies, whatever.

That's the sense of cooperation and community that you don't see in other places to the same degree. And so for that reason, I think LA has just got all the ingredients to continue this run and continue to grow for unforeseen future here. So one of the things we wanna do is prophesize a little and see where the world is going, the puck, so to speak. And one one of the interesting things about venture capital is that it is the seed. It is the early Mhmm.

Stuff. So if you want to forecast where the world is going, whether or not it's as you were talking about virtual reality or AI, self driving cars. So from your perspective, you see this dynamism. Where do you see the world going from a VC perspective, solving some of the challenges we have today? Is there anything that jumps out at you right now in terms of where we're gonna be in ten years?

Let me tell you a story. When when I first got in into venture capital in 1997, a guy named Arthur Rock, who was a legendary seed investor in in Silicon Valley, called me up as as a reference on someone else. And I was eager to learn, and I was a sponge back then. I hope I stay a sponge and still soak up as much knowledge and information as I can get from whoever I can get it from. And I answered Arthur's questions about the the person he was calling me about.

But I said, you know, what can you tell me about venture capital? I'm just getting started all of a sudden. He said, Rick, let me tell you a We were sitting here in 1992, 1993. We thought venture capital was dead. We invested in personal computers and hard drives and all these things, and we were happy.

And he is in the group that would be in the know. He is in that group back to some of the biggest companies you you have heard of early the first dollars in. And he said, Rick, not one of us saw the Internet coming. Not one. We thought in 1992, we just gotta take our chips and go home.

It's been a great run. High five. Back then, it'd probably a low five and go home. Right? So that story has stuck with me.

By nature, we have to figure out where the puck is going, and so we are always looking ahead. And we certainly have thoughts on what's emerging, but the point of that to me is what is whatever you think, you really can't tell. Right? We get paid to guess two or three years out. You know, five and ten years out, it gets harder and harder.

I will say blockchain looks very interesting in a lot of applications that we see coming from that. I don't see esports slowing down. I I you know, that's that's a world phenomenon. You have the ability, regardless of language, to watch people play these video games and participate in ways that you can't in offline sports, football, basketball, whatever. You can actually, you know, be there.

And a lot of lot of interesting things going on there. Artificial intelligence is gonna be big. I mean, it's just no question about that and can be used in so many different ways. You know, we see some really interesting companies doing it in some mundane areas like data processing, but also in some really interesting areas like health. And, you know, being able to look at data in ways that because of the processing power and the algorithms we have today, you couldn't do that five years ago and maybe see things that we couldn't see.

So I think there's no doubt that artificial intelligence is gonna be one of the big drivers in the next five, ten years. Self driving cars, that's I have one. It's unbelievable. We're gonna see a lot more there. You know, we made a small investment in in a very advanced type of transportation technology.

You know, it's just fascinating what changes we're gonna see. And, certainly, our kids will see it in their lifetime in that realm as well. But I do know at the end of the day, I spend less time trying to figure out where we're gonna be five or ten years from now and more time trying to find a passionate entrepreneur who's gonna tell me where they're going. It is their job to say this is what your future is gonna look like, in their opinion. It's our job to take our resources and and and back that person.

But the great thing about our job is that we get three or 4,000 data points a year, incoming business plans to us a year that help us get a sense of where people see the future going. And our job is to is to back their entrepreneurs that we think can make those companies not good companies, but great companies. So you just said you get these thousands worth of dollars. If I'm an entrepreneur listening to this and I want to get my company Bear and then he will he will look at it for us. No.

You know, I tell you what Hold on. Should we give him the email right now? Because that's just the email. Spam dot com right now. So here's how not to reach us, and that is a cold email.

Right. We just get too many. And I'm a formerly nice guy from Midwest, but I'm still from Midwest. But I just can't get back to everyone. Right?

We can't. So a cold spam email just doesn't do the trick. I've been doing this for twenty one years now, and I think only one time have we done a deal that didn't come in through a source that we know. It's not that hard to find people that know us. I mean, we're public.

We're out there. We we can go through our lawyers, the lawyers in town, other entrepreneurs in town, you know, meet us at an event. There's lots of ways to do that. But just by nature, we have to screen it somehow. And we have a pile that comes in from entrepreneurs or maybe real estate brokers we know or other VCs.

Right? That's kind of the referred pile, and then we have everything else. And so the advice is always industry. Just try to find some way to get a warmer introduction. You don't have to know anything about us, but just something that sort of gives us a connection.

Because at the end of the day, the reason why that's important, we're not an LBO firm where we're just gonna pay the highest price, and we're gonna get that deal. And we can run the numbers, and we can look at the projections, and we can figure out what we're gonna do. We are at the earliest stages investing in the entrepreneur. We don't have enough data to go on. We don't have enough diligence we can do that gives us comfort.

Oh, this is a great idea. We are backing the entrepreneur. And so an entrepreneur that comes in cold, it's just hard for us to get comfort. A entrepreneur that comes in through a source, that someone you worked with or or whatever, that's a great way for us to get comfortable with the entrepreneur and therefore, get more comfortable about the idea. It's almost as if their first test is being an entrepreneur is being created to figure out how to market themselves to get to you in the first place.

Napoleon Hill wrote a book called Think and Grow Rich and he talks about the steadfastness of people and their determination to get something done. And obviously, I'm not suggesting that people stand outside your car as you're walking out of the door. But being creative and approaching this from an entrepreneurial perspective of how to solve a challenge is part of, I would think, are they gonna be successful? Do they figure out who they wanna meet with and how the heck they're gonna get in front of them? And they've gotta figure it out.

We back 25 or 30 entrepreneurs in a fund. Those entrepreneurs have to figure out how to raise the next round. By definition, their company is either not making any money or is losing money. And you're afforded the opportunity to lose money as long as the upside is great enough and the growth is there. Right?

Well, of course, you can keep losing money because well, that means you have to raise more money. And so we need someone who can raise more money, be told no 99 times, and still find the hundredth person. And so you're exactly right. That person, in order to get to us, that is the first test. It's the first test you don't know what to test.

Right. And that is, if you can't figure out a way to get to us, then we're gonna have concern about, can you figure out a way to get to series a, series b? Are you gonna be able to hire the person you wanna get? Are you gonna be able to get that first partner for your company that can make or break a company? Right?

Are you gonna break down doors for that? Are you gonna climb Everest without oxygen for that? That is the first test. And, by the way, if you don't know that a cold email is not the way to get to us, then you haven't been reading Schuster's blog or anyone else's. And, again, it doesn't mean you're not gonna be a great entrepreneur.

It doesn't mean you're not a great person. Your mother may like you a lot, but we're trying to screen out who's gonna be the best entrepreneurs for us and, you know, someone who knows the industry, knows how financing works, knows how the business works. That's the first screen for us. Rick, let's shift gears slightly. I know that Crosscut has taken steps in certain ways to help those entrepreneurs who may be more disenfranchised to get a leg up.

Can you speak a little about that? You know, we at Crosscut, we have been certainly aware of and trying to make changes with not just women, but less represented minorities or disadvantaged people in general. I mean, it's just it's hard to get noticed a lot of times as an entrepreneur if you don't have those connections. You don't have all the things we talked about. You know, well, that was back in 2016 where I stood up and say, look.

You know, there's there's a problem here. We need to do something about this. We have, for, three years, put together a a female founders event where we invite as many female founders in LA as we can, invite 15 or 20 investors, and just try to allow them to get to know each other and provide a step or two that they can sort of step up to get on the ladder of how the heck do you break into this world. I will say the venture community is largely you're largely able to break in without knowing people because of the kind of community it is. But I think, you know, for us, it's become apparent the known biases are easy to deal with.

You may choose not to deal with them, but they're easy to the harder ones are the unknown biases. And, hey. Do I wanna invest in someone who is like me? And since 93% of partners are male, are they excluding female led opportunities that they don't even know they're excluding? Right?

I mean, that's the the unknown part. We look back, you know, our fund three, I think, is 25% female entrepreneurs, which is pretty amazing. And but that's been a conscious effort on our part to say, hey. We gotta be aware of, the fact that we may be be excluding certain people. And our job is just to return more capital to our investors than than they gave us and hopefully hire multiple.

Are there opportunities because other firms are, for whatever reason, missing these opportunities with female entrepreneurs? Does that create an advantage for us that it can help drive our returns even more? So we've been a voice and aware of these issues for a while, and we've done a good job at talking about it. The industry is still behind in in making fixes to it. But, certainly, from our perspective, the best way we can do it is by investing our time and effort to help the community be aware of this issue, to help women and minorities get greater visibility in front of investors, and to be conscious of our biases and overcome those biases.

On On our next episode of the Puck, join us as we talk with Howard Koh, a principal partner at Morpheus Ventures, with an engineering background that has served him well, as he navigates the unpredictable path of venture capital investment.