Steve Vassallo, a general partner at Foundation Capital, has been known to invest at the intersection of design, technology, and business, but at a very early stage. He said much of it has to do with hearing the lessons of his “helicopter mom,” the late Helen Guillette Vassallo, a well-known business professor at Worcester Polytechnic Institute.
Sand Hill Road Host Scott McGrew spoke with Vassallo, a former project lead engineer at IDEO, to learn more about why he invests early on in startups, his cryptocurrency philosophy, and how his upbringing helped shape his investment ideology.
A transcript of this episode is below.
0:12 As long as we’re playing the guess who said this quote sort of thing, speaking of universities, this one’s from a college professor. “In any group, there are people who make things happen, people who let things happen, people who help things happen, people who won’t let things happen, and people who wonder what happened.” Any guesses who’s that is?
0:34 Sounds like something my mom would say.
0:35 It is your mother.
0:38 Yeah, my mom. She’s a force of nature.
0:47 I’m Scott McGrew, welcome to Sand Hill Road.
1:03 This week, Steve Vassallo of Foundation Capital, longtime investor, and before that a designer at IDEO.
1:10 So you are at Foundation Capital, where the team recently decided to create a new rule: no phones at pitch meetings. Tell me about the decision to, what was it, were people really on their phones as somebody was pitching?
1:29 Oh yeah. I mean, folks, it’s not uncommon in any meeting. I don’t think it’s a unique to venture capital, where folks will get drawn to the notifications that are, you know, ringing away on their phones and their watches and iPads and laptops. And so we, basically, decided, “Hey, we, you know, are one of our core values is respect for entrepreneurs and the entrepreneurial journey and it was, how do we actually do what we need to do?” Which is take notes and meetings. Some people are using these devices, of course, to take notes, and not have anything digital in between us and that honest conversation. And so we assigned, basically, one individual to take notes for us…
2:05 Like an old-fashioned meeting.
2:06 Yeah, have an old-fashioned meeting. Exactly. I can’t say we’re 100% on it yet, but I think we’re definitely getting better.
2:12 And you’re taking these pitch meetings because you are investing at very early stages. This is part of the thesis, right?
2:19 We’re typically the very first institutional investor for about a third of our founders, meaning they haven’t had any angel capital, seed round prior to us. That’s probably close to 40% of what we do.
2:31 Why?
2:32 Well, I think it actually gets down to basic venture math. You know, venture returns follow a mal normal distribution. It’s a power law, right? About a third of your companies will, go away, go out of business. A third of them will return one, maybe, 2, 3X capital, and hopefully, if you’re doing it right, a third will return 10, 100, maybe even 1000 X. And those make up for all the, you know, all the holes from that kind of 1st third, if you will. And the math basically is pretty simple, which is you got to own as much of those winners as you possibly can. Because what happens if you’re the seed investor, the Series A investor: Let’s say you own 20% of the investment of the company at the at that initial round. They’ll raise a series A and a B and a C and be fortunate enough to go public at some point and across all of those rounds of financing, even when it goes well, you’re taking somewhere between 10 and 15, maybe 20%.
3:23 Will you do a follow on the round if you believe? Because the other argument is, no, no, no, let’s save that money to do yet more really early investments.
3:34 We try to own north of 20% of our investments at the initial check. And those that are really cooking, we will do our full prorata at the next round and depending upon sort of how much capital we have in at that point, we’ll invest even more at the at a subsequent round. We also have another vehicle, which we call our leadership fund vehicle, which is to back basically the greatest hits album, you know, back to the best, best companies of the early stage, flagship funds. So we have plenty of capital to be able to, you know, continue to own as much of those companies,, you know, as we possibly can. And that’s the key to this recipe. Is you want, you know, at the end of a fund, when you look back, you want, you know, the vast majority of your capital and your time to be spent on the winners.
4:15 You are enthusiastic about crypto and you lead some of the crypto investments. Before we talk about crypto, let’s define our terms. Are you enthusiastic about the blockchain, about, you know, coins? What is it about crypto that you think is worthwhile?
4:32 So crypto, in my opinion, is very interesting because it offers an alternative to the web infrastructure that we have today that really doesn’t allow for alignment and financialization of of interfaces. And what I mean by that is if I’m building a next-generation application, let’s say I want to build the next Facebook, if I am trying to incentivize users to to contribute content, one way to do that would be to actually pay them literally. You know, if you’re gonna put more posts up on your next generation LinkedIn or Facebook, and you turn out to be a super user and people want to read your content and consume it, then you should participate. Today, you know, if you’re a user of Facebook, you give a lot of content, you are rewarded with more advertisements.
5:19 And, under the current way that Facebook works, there is no mechanism. Even if Facebook wanted to do it, there’s nothing in the plumbing that would allow them to do it.
5:31 That’s right.
5:31 There are, I mean, the average person at home when they know anything about crypto or anything, it’s Sam Bankman-Frie or it’s the Trump family and their world financial liberty, or NFTs. There are lots of credible things happening in crypto and then lots of people making crypto look bad.
5:54 I don’t disagree with that. I think in the early days of any of these new opportunities, you see a lot of speculators, you see a lot of carpetbaggers. I was, you know, working in the valley, in the 1990s when, you know, the, the web and the internet was sort of coming into the fore. There were countless scammy applications and, you know, if you look back at the companies trying to go public in 1999, I think a third of them were less than a year old, right? So, I mean, this isn’t new to to new opportunity. There’s a lot of ways these things go bad and in fact, I think for many people who when I first learned about crypto at a holiday dinner and probably thought it was some sort of, you know, libertarian fad or maybe some Ponzi scheme, that was sort of again, very, very early days. But what I think is so interesting about crypto is that you know mathematicians and cryptographers see this as the most interesting way to basically create immutable distributed trust in the world. That’s very powerful and it’s something we probably take for granted here in the US because we trust our institutions more than in most other countries, though probably less than we did 20 or 50 years ago. But if you live in Argentina and your currency is, is being debased by, you know, 20% in a month as as happened last December, you’re pretty scared to actually hold that currency. You don’t actually trust those institutions. And, so, when you think about parts of the world that don’t have the same kind of substrate of trust as we do have here in the developed world, crypto is water in the desert. That’s what we see as hugely valuable.
7:26 The other thing that a lot of people are thinking about at home and they’re hearing a lot about is AI. Mostly at home they’re hearing about generative AI, but you’ve been investing in more than just that.
7:37 Yeah, we got involved, broadly, in the space now known as AI or artificial intelligence, now more than 15 years ago. So if you kind of look back, you know, AI has been a trend for nearly 60 years or more than that actually. But really sort of the early days of AI as it kind of applies to the enterprise, we’re really sort of machine learning technologies. Often those were really found to be useful for advertising technologies, so retargeting, lots of sort of applications and security. So most of the spam filters that we’ve been using over the last two decades are powered by machine learning models. But if you kind of look at sort of the, the next wave, AI was really sort of in the 2012 timeframe that was sort of the Alexnet moment, if you will, when image recognition by machines got better than humans, which was a pretty big milestone. And then in the sort of 2016 time frame with Google’s Transformer model, now we began to see sort of the benefits of foundation models, which are really what our underlying generative AI and all of the sort of heat around that with Chat GPT of really the last two years now. But we’ve been investing all along, so back in 2008 we made some of our very first investments in ad tech companies. We’ve been investing in infrastructure, so I led our Series A investment in a company called Cerebras back in 2016, which is in the semiconductor system space, you know, purpose-built AI systems. As we began to see these workloads growing by, you know, thousands of factors, faster than…
9:02 I’m gonna interrupt for just a second. I know the listeners saying asking more about Cerebras, but there is a quiet period that we need to respect there. And there was an investment in a company that that that came out of Netflix.
9:14 We’re very close to Netflix, in fact,, we were very early investors in that company back in 1998.
9:18
My partner Mike Shu, was on the board for I think 13 years. So we track a lot of the interesting technologies coming out of Netflix. They were very early adopters, if you remember, there was the Netflix challenge around recommendations. I think it was a $3 million challenge to sort of beat their own recommendation engine, but that’s what, you know, fundamentally underlies the recommendations when I finish a TV show and the next one that comes up for me is, is not a function of someone having hard coded a rule and said, “Hey, if you watched, you know, show A, you therefore should watch show C,” but rather sort of function of the data that’s flowing through the system. So my recommendations are different than yours. That team that built that, which is the Metaflow open source project, actually was one we got to know before they actually even started their next company now called Outerbounds. But we funded them and they’re still trying to figure out what to do next to actually help them pull that open source project out of Netflix, made sure that Netflix was OK that we could sort of support this. As a third party looking back on it, and it is now applied in lots of other companies, hundreds of other companies. Zilla is another example. It’s actually being applied in financial services. And it enables companies that want to be able to have the functionality of recommendations engines the same way we all benefit from them on services like Netflix and YouTube to be able to apply that inside of their businesses day to day. So yeah, while we all kind of love to kind of play around with the notion of what, you know, how is a chat interface cool and fun to interact with, these tools, large language models, machine learning interfaces, statistical inference over large data sets, they’re in almost everything we’re doing today and and and have been for quite some time.
10:51
You were at IDEO for a number of years and it was influential on you. And can you start with explaining to someone who’s not familiar with the firm why it’s special?
10:59
IDEO is really the preeminent product design and and design strategy consulting firm. It was actually started by a Stanford professor David Kelly, who was actually one of my professors in graduate school. And they basically got their start helping companies, many of them here in Silicon Valley, with products that those companies wanted to build that, you know, had sort of aspirations of doing something that they hadn’t done before but had no idea how to do it. And so, you know, Steve Jobs used to call David Kelly when he have these hard problems at Apple, you know, technical challenges that they hadn’t yet been able to figure out and we were kind of work, you know, almost like this little sort of special project down the street and solve some of these hard problem. And then David started getting calls from other companies and, you know, I worked on the very, you know, very first Apple mouse, but then we worked on the very first sort of really commercial mouse from Microsoft and many mice after that and again this is back in the 19 early 1990s, but that product development consulting firm has itself evolved into now sort of more design strategy. If you think about how do companies take advantage of design and design sort of being a very all-encompassing sort of very inclusive concept, but how do they use these principles of design thinking and systems design to sort of design new products, develop their strategies and go to market, see new opportunities through a different lens, and really scale their businesses in ways that they probably couldn’t have on their own. So think sort of product development consulting. It was my first job out of graduate school. I met David, actually, the first Friday when I came to Stanford, and before that I had no idea how products were designed.
12:34 You must have really got involved. I mean, you designed, you have patents, you designed, is there one that you’re particularly proud of?
12:39 I worked on a lot of products. I would say the one that I think has been the most enduring, was the Cisco family of voice over IP phones. That was my last project at IDEO. Worked on that in 1998, 1999. Cisco came to us… you know, Cisco at the time was really building switches and routers but they had this very, I think astute insight which was, wait a minute, we’ve got these IP networks that are running to every desk in the office and right next to those IP networks were these old PBX networks, which is the old phone networks, and they saw that, hey, these had to converge at some point, it made no sense to have two parallel networks. So they basically said we’ve got to make an IP telephony product, but they had never made a product that was not in a data center or in a, you know, a server closet somewhere hidden in a, you know, basement of a building and so they came to us and we had already designed a few phones at that time. But, they asked us to basically sort of run this project from beginning to end and everything from the hardware, the software, the user interface, the, you know, sort of the accessories and extensions. That was about a 2.5 year effort, working closely with them. But they basically declared victory on the category. I mean, Cisco now is the largest player in voice over IP phones. They, they’ve shipped hundreds of millions of these units.
13:54 We were walking through my office. You’re like, “Hey, they are one of my phones.”
13:57 Well, there’s one of my phones. They’re on, they’re on the, you know, they ring in the Oval Office when the president gets an important call. Every slow pan across the desk in the, you know, in TV shows like The Office, they’re, they’re there, but yeah, it’s the one I think for me that I’m probably most proud of.
14:10 You thought about being an automotive engineer. You like cars. What do you love about cars?
14:16 Cars are these extraordinary complex systems that really have to get so many different things right across so many different disciplines. So if you think about, particularly in the case of, say, an internal combustion engine powered car, there is thermal challenges, there’s fluids challenges, there’s structural engineering challenges, there’s just countless trade-offs. There’s electromechanical systems. You just have to bring together all of these different disciplines and optimize around a set of sort of, you know, features, functionality, and use cases that are pretty challenging to get right. And, you know, it’s, I think it’s that and aerospace are probably two of the most interesting challenges for engineers who sort of see not just sort of through the lens of one discipline but really sort of have a kind of more multi or transdisciplinary mindset and that’s what makes cars, I think, so special.
15:08 It’s such a cliched question, but it’s a valuable question. What have you brought from your design background into venture?
15:16 Well, I think when you, when you design or build a product, you know, whether it’s for fun or professionally. I think you tend to see the world through more optimistic eye. You have a sense for what could be because you’ve made products you sort of birthed them into the world. I think when I take, you know, my product design experience of nearly a decade and think about how it has, impacted the way I sort of see venture capital, I think it is, I come to products,, come to companies from a product first perspective, from a product or product design first perspective. I really want to understand what’s special about them, why they deserve to exist, why, you know, this is, this is sort of something different enough, that really,, will punch through the noise of the market. And I think there’s a probably some more tactical things that I learned as a product designer. So one of the things that we used to do at IDEO is we had this sort of philosophy around rushing to prototype, like when you have, when you have a challenge, particularly the sort of the things that you think are gonna be the most difficult elements of a new product, you basically focus on, you build prototypes around those very specific areas. You kind of, you rush to the hardest parts and and you vet those very quickly, and figure out if if you can kind of build something beyond that. And so that sort of orientation around sort of the the prototyping and iteration culture mindset and the last piece I think I really learned from my time in product design and and particularly at IDEO was the value of storytelling. For ideas to scale they have to cross boundaries they have to cross the boundary from you to your team, from your team to the outside world, from you know customers to other customers. And that ability to articulate what it is that is special about this product or service, in a way that is infectious, is something that I think is very powerful.
17:11 No surprise that it’s Apple that does that, I think, the best.
17:16 Extraordinarily well. Apple is, I would say, sort of, you know, they’re the city on the hill with when it comes to sort of extraordinary design. And also in in articulating what are the benefits of their products. I mean, it, you know, as we all know, the the iPod was not the first MP3.
17:29 I was gonna say oftentimes Apple is making something that somebody else makes too, but you can, you can just you can feel in your hand it’s a better product.
17:38 That’s right. And, and the messaging around it. I mean like there were other products that were MP3 players, but they were the first to articulate, you know, 1000 songs in your pocket and to integrate the actual interface of getting those songs onto the device so it felt easy, even fun. I think that whole mindset around delighting the users, making things just sort of absolute, you know, sort of the sort of the essence of of a positive surprise, that’s what Apple does better than anybody in the world.
18:07 You mentioned the iteration. I spoke with another venture capitalist who also worked at IDEO and she said “Building a product product is, you know, requires that obsession on the customer but it also requires a massive amount of iteration. And I think a lot of people, you know, who aren’t in the startup world or who haven’t built products before sort of think you kind of have a direction and you go, but the reality is you are, you think you’re building the right thing and then you are constantly testing and tweaking and iterating.”
18:39 Yeah, I think it’s I think any successful product company has to figure out how not just to build the first product. But really how to build an engine for building many iterations of that product. And, and I sometimes talk about it as, you know, there’s a sort of meme in Silicon Valley around kind of product-market fit as this sort of like, you know, it’s like this milestone that you hit as if,, you know, it’s kind of a 0 to 1 moment and you hit it and then you go, you know, scale your marketing budget, triple your advertisements.
19:12 As if the market is still in space as well. The market’s moving too.
19:17 Bang, exactly. So that’s exactly what happens is the market moves, your competitors catch up, your customers want more. So really product market fit I found is, is a liquid, not a solid. It’s a moving target. So that sort of notion of, OK, what is the next version of the product and the next and the next and the next, and you’ve got to stay focused enough to know what really has to be in the V2 versus could be in the V20 and the discipline around that. And that’s sort of the essence of great product management. But there’s no question in my mind the companies that have, you know, become the sort of, you know, have are around for decades and decades or in some cases centuries are those that have mastered this notion of continuous improvement, continuous iteration. It’s fundamental to the startup journey as well, of course.
20:02 I presume you’ve got a guess as to who the venture, former venture capitalist who worked at IDEO was.
20:06 I’m, I’m pretty sure it has to be my other and better half, Trae.
20:12 So yes, it was Trae Vassallo. We did an interview with her back in 2019, after she left Kleiner Perkins over to Defy.vc. At the time she said she liked the idea of small teams, which was why she was at Defy. Now she’s over at Apple now, right?
20:26 She is.
20:27 OK, one of the biggest companies in America, and nobody should be foolish enough to speak for their wives, but is she doing well on a big team?
20:36 She’s doing great. Yeah, she is having so much fun, loving getting back into the sort of building mode, operating, scaling. Apple, I think it’s just been a, it’s been a terrific, adventure for her. I think now coming on 3 years.
20:49 I think it is, yeah.
20:50 You told Mercury News one of the worst mistakes a startup founder can make is “choosing the wrong partner. Without a partner who has the same value systems and wants the same things, your journey is likely to be nasty, brutish, and short.” I think that’s both true of startups and marriage.
21:09 Yes, indeed. I think in startup land, you know, when you think about the extraordinary companies that are fortunate enough to make it past, you know, 10 years, 20 years, 30 years. But you know what I think, when I meet young founders and oftentimes optimize around the wrong things at their seed round. They might over-optimize around a brand of a firm or the valuation that they’re getting, some very specific relationship. For example, some, you know, services that they think are gonna sort of solve every problem that they have when they’re building and scaling their companies. And I think they miss the notion of like, I’ve got to find a partner who is going to be with me, not for the next 2 to 3 years, but if it, if this works out for the next decade. I mean, the very first investment I led at Foundation Capital was in a company called Sunrun, which was one of the pioneers of solar finance, founded in San Francisco in 2007, and I led their Series A and I was on the board and, you know, served on the board for 11 years for that team through every round of financing, taking it public in 2015, and then another 4 years after taking it public. You know, even when they work there’s just so many ups and downs and white knuckle moments. You want to have a partner that you can call not just when you just scored a big, you know, a big deal, big business development contract or closed a huge customer, but when things get really hard. When you lost your head of sales or when you’re staring down the barrel of a really difficult issue in the company, and that’s when you want a partner that really has your interest in the company’s interest in in mind.
22:51 You mentioned a lot of the startups are young and, of course, you are going in that very early stage funding. So you’re finding them sometimes at universities.
23:00 Oh yeah. I mean, we’re as equally likely to back, you know, a university professor as we are their dropouts. I mean they’re 19, 20 years old, you know, in some cases actually, you know, just, just building this product for the first time, have no sense for sort of go to market or when they’re, you know, they’re literally looking up these terms just as they’re they’re hearing it for the first time. You know what, we love working with founders at every stage and, you know, some of these projects attract founders who are, you know, in their in their teens and 20s, and others like our semiconductor investments, you know, attract people who are in their 50s.
23:38 So as long as we’re playing the guess who said this quote sort of thing, speaking of universities, this one’s from a college professor. In any group, there are “people who make things happen. People who let things happen, people who help things happen, people who won’t let anything happen and people who wonder what happened.” Any guesses who’s that is?
24:02 Sounds like something my mom would say. My mom, she’s a force of nature. And a way with words. Just very funny.
24:12 She was a business professor in Massachusetts. You went to school where she taught, but I understand you didn’t take any of her classes.
24:19 I did, yeah. So my mom taught at a school called Worcester Polytech, WPI. She taught there for 36 years and, I was one of 10 kids as well. So with 10 kids all going to college,
24:32 Let me be clear: 10 kids in your family, not 10 kids in the class.
24:35 No, 10 kids in the family. You know, this is no joke; same parents, too. But no, 10 kids and my mom was a professor, my dad was a physician. And so for any of us who were inclined to be engineers, it was clear you were going to WPI because it was free and also an extraordinary school. And so yeah, so two of my older sisters, one electrical engineer and the other one a biologist were at WPI. My sister, one older than me did take my mom’s class and said it was awesome, but I just couldn’t do it. It would have been too embarrassing. But yeah, my mom taught really the sort of the nodal organizational behavior and science class. She was actually trained as a biologist, as a scientist, but she ended up teaching this class for decades and it was one of the most beloved classes at the school.
25:21 And I assume because you so quickly identified the tone of who that that quote came from, that some of her lectures, that you must have heard a lecture or two… growing up.
25:32
Oh, for sure. My mom was very witty. She was an incredible writer, loved to read and write poetry. She was an author a few times over. Really just, I mean, talk about someone who broke the sort of glass ceiling so many times over in her career, and was also just an extraordinary human being.
25:56 And a helicopter mom.
25:58 She’s a helicopter mom because she was a helicopter pilot.
26:00 Who’s mom is a helicopter pilot at our age, you know?
26:03 I think when she turned 60, she had this idea of becoming a pilot, and she decided that being a fixed-wing pilot was too easy. That was sort of, you know, whatever, that would be too simple.
26:12 Somebody once told me that, you know, that because I used to be a fixed wing pilot , but a helicopter beats the air into submission.
26:22 Yes, yes. I do feel like when I’m flying in a helicopter and having studied the kinematics of helicopters when I was an undergraduate, they’re sort of, you know, somewhat metastable.I definitely sort of, you know, I’m looking at the parts a little bit more carefully when I’m getting in and out of them. But they are sort of these extraordinary feats of engineering for sure.
26:46 I asked you earlier what your background in design had taught you and that you take into venture. What did your mom teach you that you’ve taken through life either in venture or life in general?
26:58 You know, I think my mom had an insatiable curiosity. She was learning every day new things. Voracious reader. Unafraid to explore new areas. When I think about my childhood, the sort of the curious questions that I always was asking and the things that I think take me through from, you know, being an engineer trying to when whenever I see how something works, I wanna then know how it was made and think about how I would make it better. I think about the same thing in the context of venture capital, which is: I’m learning something new every day. You know, we only invest in a dozen or so kind of core investments in any one year, but I’m meeting thousands of entrepreneurs in a given year and, and reading, you know, business plans for many, many more. Even when we don’t invest, I just have this incredible respect and enthusiasm for the founder’s journey and the things that people are throwing themselves into the incredible ideas. That kind of curiosity, even when we don’t invest that curiosity, to learn what they’re working on and to see what’s special about it, to imagine how the world might be better if if they’re right about it, is something I think I, I got from my mom.
28:19 Steve Vassallo, Foundation Capital.
28:21 You heard a brief clip from our 2019 interview with Trae Vassallo, founder of Defy Ventures. Trae has the inside story of Apple designer Tony Fadell’s invention of the Nest thermostat and her investment in it. You can find that interview and more than 100 other venture investors in our past episodes.
28:41 Sand Hill Road is produced and edited by Andrew Mendez. Sara Bueno manages NBC Bay Area’s digital platforms. Stephanie Adrouny is the news director. If you’d like to get in touch, email us at SandHillRoad@nbcuni.com.
