Paul Arnold, founder of Switch Ventures, explains data driven investing in venture capital. He gives real-life examples of founders sharing information to prepare for a deeper discussion in the first meeting.
Paul Arnold, founder of Switch Ventures, explains data driven investing in venture capital. He gives real-life examples of founders sharing information to prepare for a deeper discussion in the first meeting.
Paul Arnold: [00:00:00] I mean, what I'm kind of looking for is , do I have some reason to believe that this person can build something big and people follow them and they have insights about what they're doing and clarity of vision and ambition about it. All
Gopi Rangan: you are listening to the shore shot, entrepreneur.
A podcast for founders with ambitious ideas, venture capital investors and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision.
Paul Arnold is the founding partner at switch VC, an early stage venture capital firm based in San Francisco. He invests in talented entrepreneurs at the earliest stages and takes a data driven approach to his investment decisions.
He's a lawyer turned consultant, turn venture capital investor, and a good friend of mine. Paul, welcome to the [00:01:00] short shot entrepreneur.
Paul Arnold: Thanks for having me.
Gopi Rangan: In today's episode, we're going to talk about a few different things . But I want to start with the question, tell me about yourself.
a little more detailed about your background.
Paul Arnold: Yeah. Where to start. I mean, I grew up, In a small town on unwritten, on ranches in Wyoming, which has a very unpopulated state full of Cowboys and oil fields and cows. And, and it was, great place to grow up.
I spent the first 19 years of my life there not knowing any different really. Went off to college, went eventually off to New York city and back to school. And then some point, it was kind of committed to this idea of coming up to Silicon Valley and be involved with startups and technology and, and came out here have been here ever since, I've worked a number of jobs out here, worked for McKinsey.
I've worked, started executive, and then now doing what I'm doing now with a switch ventures as a seed stage venture investor.
Gopi Rangan: do you think about investments? How is your philosophy different from other venture capital investors? [00:02:00]
Paul Arnold: Yeah, the biggest way that I probably am different than other seed stage venture investors is how serious they are data driven approach using predictive analytics and founders.
It probably doesn't look any different than any other venture fund that they interact with. Any other manager. But on my side, I really do take that seriously and have invested money and time and lots of thought into it. How do you take data about founders and startups and going back for long periods of time and accumulate that data large scale so that you can think in probabilistic terms about what kinds of companies and teams are better positioned for success.
And how can you stack the hands a little bit in this very hard job of picking good pincher investments so that you can, you can have a good, a good roster of people and how can you use the math? And to me, it's really interesting. It's intellectually interesting know it's professionally rewarding because it works pretty well.
And [00:03:00] I do think that's pretty different. some of the later stage larger funds. Do it in a serious way as, quite as a very seriously, lots of several other, the larger funds have serious data science efforts. Hey, on the seed stage, it's, it's unusual and it's, but it's something that I really value and believe in.
Gopi Rangan: What kind of data do you use and how do you use it and what kind of, can you give a description of the predictive model that you use?
Paul Arnold: Yeah, without, without giving away everything it's data around founding teams, it's a stark set of data, hundreds of thousands of founders, frankly, and, and all the venture investments and all those people that ever happened.
And the outcomes of those in turn investment, that's sort of the, the quick brush of what the data is. And then in a lot, and then lots and lots of information about those people. And what I try to do is engineer our features and identify it, about these founders that end up in kind of, in simple kind of, linear aggression type models, but also in complex machine learning, screening and booster type of models, predicting profiles of success.
Gopi Rangan: Is [00:04:00] this a, this is fascinating. You talk about predicting success in the startup world, which is one of the most difficult things to do. Do you feel like the time ms. Come for information this because there's more data available or do you feel like the whole industry is kind of maturing?
Not just like how it happened in mutual funds, where it all became algorithm driven. Is that the direction in which we're going.
Paul Arnold: I would not want to do venture investing in an algorithm. Nate Silver's who, became famous before, his politics and journalism became famous. Some communities for building models that predicted player's performance in baseball.
And he tells a story about when the quants, the famous story of Billy Bean and the, and the Oakland athletics and Moneyball. when the quants came to baseball, They were able to outperform average scout, these talent Scouts would go and they'd sit down at high school baseball games and I'd watch people.
And they would, through some magic, some combination of magic and intuition and whatever else they would, they would pick the players that they thought would become great. And it is notoriously difficult. It's really, really hard to pick the future [00:05:00] great players in baseball from high school teams, but some Scouts were really good at it.
The quants beat the Scouts on average, for sure. But what they couldn't do is beat the best. They couldn't beat the best Scouts. The best Scouts could still beat the quantitative models. And that was that's interesting right there. That's, full-stop pretty interesting, but what's even more interesting than that is that when you combined, an average scout with the quants, they could be at the top Scouts.
So, there's this lesson about using rigorous mathematical models and in combination with human intuition, that is this really powerful combination. It's the exact same, thing's true in chess. there is no player live that can beat the best computer anymore, but a mediocre player, not, not in a grand master, but just a regular good player combined.
With a computer can beat any computer. And so you get this thing kind of similar combination where you get, the powerful sort of analytical models combined with human intuition really leads to the strongest results.
Gopi Rangan: When, when you meet an entrepreneur, what kind of information do you look for that helps, feed into the
Paul Arnold: model?
I don't, at [00:06:00] that point, it's done at that point. I'm just getting to know people and I'm just getting to know their businesses. And so by the time I'm talking to them, that part's ended. And I just, I just really want to understand the model and, it's still a, Pretty aggressive pipeline for me. I talked to a lot of companies for each investment I make.
And it's that part to the founders is going to look a lot, it would look talking to other venture investors, or I'm trying to understand the product, the market, the people themselves at a personal level. The customers, the marketing name, competitive dynamics, that unit economics of that kind of business, all that kind of stuff.
It was really, really digging into it. And that, and then trying to paint a concept from that information and deciding whether it's something I have conviction about or not. And so at that part, the models become irrelevant, but the model stares me kind of in the early process.
Gopi Rangan: Okay. So for an entrepreneur really makes no difference whether they talk to you or any other VC firm, they engage with you in the same way they engage.
They don't, it's not like they need to produce their credit history, things like [00:07:00] that.
Paul Arnold: No, as far as they're concerned, there's no, no difference at all. No difference at all.
Gopi Rangan: So this model and the predictive analytics is your superpower in that, in your back pocket. And that helps you prepare yourself and look for.
Maybe certain industry sectors, certain trends, which trend is a real trend, which one is a short term thing that'll might disappear some opportunities where underserved markets deserve some innovation. Those are the type of things that you prepare yourself for. Is that a right way to describe it?
Absolutely. Okay, great. What do you look for in entrepreneurs when they meet you? I know that there is no standard answer to this. That's the reason why I started this podcast.
Paul Arnold: I never trust, I never trust people. They kind of boil these people always boil down these answers to exactly what they're looking for.
There's this one, there's this magic trade or something. And I'm always a little suspicious of that. I sort of have this view that there's this huge difference between greatness and mediocrity, but greatness can kind of look a lot of different ways. And so [00:08:00] people who are extremely different can each be extremely successful and most people aren't.
So if that, if that makes sense, I mean, what I'm kind of looking for is , do I have some reason to believe that this person can build something big and people follow them and they have insights about what they're doing and clarity of vision and ambition about it all, I'm all I'm looking for them also to have pretty well.
Thought three insights about why there's something that really can be done that they're trying to do and why they can recreate, usually recreate the industry that they're going into and really kind of pressure testing, how thought through that is, or if not, how well can they kind of. They get through new, new thinking about it.
Just, I find that to be really, really revealing about the future trajectory of the company. It's just that kind of quality and depth of insight and vision that our founders is bringing to the table. Whether they can drop people, whether they can lead, whether they have the ambition, as a huge part of it, it takes a lot of [00:09:00] ambition to do it a startup supposed to do.
And it's not natural for the devil person, honestly. And do these, these founders, I'm talking to habits.
Gopi Rangan: Maybe you could give an example of a startup. How did you meet the company? What kind of questions did you ask them and what helped you form the conviction?
Paul Arnold: Yeah, one of my, first investments was, you're, you're an insurance guy, so I know you appreciate it.
wasn't policy genius when they were first starting in 2012, 2013 and parts of Janice's life insurance marketplace, and it's expanded into other verticals of insurance. That's a marketplace model where you receive a quote from lots of underwriters and you choose which insurance company you want to go with.
And they've done really well. But when I first invested in it company, Jen and Francoise were, or both McKenzie and we had known each other at the firm. Jen was kind of on the fast track too. Yeah. The partnership and the insurance practice, and [00:10:00] more than that kind of insurance and marketing and she had.
I think clear insight about what was missing, there, it was just this white space for a company that needed to exist that didn't exist, which is what became policy geniuses, orange, Virginia called no, no, it Al and I had a lot of respect for her, individually as a person, character and leader.
And, but then also just the quality of insight. she developed, we, we went, we were on calls all the time through kind of the thinking and development for the company. And I just knew that I believed her and that what she was saying was right. And it was a right, because it was intuitive to me.
It was right because of the depth of her understanding of what she was, what she was getting into. And I made that about, without any hesitation versus named Jolie later as a venture investor and all the way through, every, every financing that the companies are had. And it's been just a thrill to see it grow.
Yeah. I
Gopi Rangan: met Jen many years ago when she was raising her first seed [00:11:00] round of funding.
Paul Arnold: I wish I invested in the area.
Gopi Rangan: Is that the typical stage where you get it when entrepreneurs are just building their business, they have an idea. They may not have a lot of traction in the market. what would be an ideal?
What's a typical opportunity that you look at.
Paul Arnold: I would say somewhere between day one and year or two, that that's sort of the window of when I'll get involved
Gopi Rangan: the first 650 days of
Paul Arnold: the business. Yeah, exactly. I stay involved with the companies as they, as they mature, but , I that's, when I want to get involved is in those early stages.
And some companies are off to a faster start than others, but it's, it's it's in that time.
Gopi Rangan: Are there things that entrepreneurs do that makes it easier for you to have those conversations that you knew you mentioned earlier, that deep thought on how they're going to build the business, their ideas on how they want to market.
Are, are there things that they can do to make it easy for you to have those conversations?
Paul Arnold: Yes. So [00:12:00] the worst thing you can do is not prepare a VC for the conversation. If you send me your deck, if you send me, a white paper you wrote on your industry a week before we talk, I'm going to use the time to develop.
A thesis before we've been talking and the conversation is gonna be far more productive than the one where you're kind of telling me for the first time in person, you kept it a secret until then you didn't want to share your deck. all these things where there's , I've been kept blind until this moment of conversation.
And so the conversation part ends up being just a waste. It's just this information transmission of the basics. And , I could have used that time to actually come in two levels in. On thinking. And we really could have got somewhere interesting for myself and for you and a lot further down the line of potential investment.
Cause I'm gonna have to get there anyways, but the founders that didn't , kind of give them man enough to really dig in and be ready for that conversation. We're just off to a slow start. And it's kind of a waste in my opinion, founders do it for reasons they do it, but I tend [00:13:00] to think it's a, it's a mistake.
Gopi Rangan: What's your pet peeve looks like we're hitting very close to some of your pet peeves here.
Paul Arnold: I don't know if it's a pet peeve. I mean, I'm not going to get all bothered about somebody. Does anybody just think it's a mistake?
Gopi Rangan: Yeah, I see what you mean. when they, when an entrepreneur sends you information, you invest the time to prepare your research.
You were all geeks in some form. so we geek out on those topics. We come with an informed mind with some questions that we want to ask when nothing is available and the entrepreneur is very cagey and it's not their fault because they might have shared information with another VC who probably not.
Pass that deck onto the internet and that's not the right thing to do. So therefore the entrepreneur withholds everything, and then they want to talk about it in the first meeting that doesn't help us because we don't have prior knowledge on what's really happening with the business. We have to recalibrate and steer the discussion in a direction that, Gets to more meaningful conversations.
Paul Arnold: That's hard. Yeah. Yeah, exactly. What it means is that first [00:14:00] meeting is, is just superficial. And I have to ask the first 50 questions to just paint the picture before I, you can kind of click into level to really start thinking about what that all means. And so it's just a blown opportunity, that that's my take on it.
Gopi Rangan: What about a stealth mode, startups? What do you do in those situations?
Paul Arnold: I think that if I were a founder, what I would do is be stealth mode selectively. I mean, I would still share what I'm doing with investors that I'm trying to get money from and employees that I'm trying to hire and partnerships that I'm trying to build.
I there's all sorts of sensitivity and tactics to that. I think. A lot of times, sometimes stealth is more justified than other times. And a lot of times it's just kind of silly. In fact, I would say most time it's silly, but sometimes it's justified. And when it really is justified, because you've got some hot secrets, which is almost never true, but when it is true, you have to, there's, there's a lot of tactical things to do.
And you can [00:15:00] imagine in that scenario, taking a bunch of extra precautions. I would say it's almost never the case that there was some state CIA secret, that couldn't be revealed. I just, I just rarely see that. I see the perception of that. A lot of the time, founders often think that a lot of times it's just the silliest thing in the world.
The, the, the secret, there's, there's something to old adage that it's, 99% perspiration. It's not people aren't gonna steal the 1%, which is your idea. It's whether you're just going to get the idea going and you're going to win.
Gopi Rangan: Yeah, it's still more to sometimes as a, as a marketing gimmick, it creates a kind of an aura, a mystery around the startup.
So that's sometimes good for a startup. Maybe they use that as a tool for marketing. But I agree with you that with investors who entrepreneurs want to establish a longterm relationship, there has to be some level of trust and openness. The information needs to be shared. That's the risk that entrepreneurs have to take.
Well, this is fascinating. I, I want to ask [00:16:00] you about your involvement in any community leadership roles, a nonprofit organization that you're passionate about.
Paul Arnold: You were, I've been spending a lot more time locally in San Francisco is the Commonwealth club, which has an organization. I think the world of Commonwealth club is a very old.
San Francisco institution that is originally just a civic organization for people to come together and have conversations. No large bias towards issues are on government society and a range of topics. And originally a local body, people in person coming to listen to, their local Senator and have a conversation about the topic of the day and the Vietnam war or whatever it was.
And that that's grown over time into, it is that, but it's also, the radio programs, the 450 affiliate radio stations that the Commonwealth club has played on and has been played on for quite a long time, all around the country, the YouTube and the podcast or anything that people listen to.
But it's, it's a, so far as they share on how are having conversations. They matter for society and they do a fantastic job, [00:17:00] facilitating a broker in those conversations that are important for in, in a, in a sort of society. So I, I really organization. I've enjoyed being involved. I try to help them think about what things I can help them think about and work on, which is for me, it's a lot of digital distribution stuff and, and adapting for the new ways that media is shared, social media and tech tech environment.
But it's, it's a great organization and happy to be a part of it.
Gopi Rangan: I'm glad to hear that. You're a podcast listener. What role do you play with Commonwealth club?
Paul Arnold: I lead a digital distribution effort. Ah,
Gopi Rangan: okay, great. Well, thanks so much for sharing your insights on the startup world. And it's great to hear about your community involvement through Commonwealth club.
Thanks a lot for spending time with me today. It's always great talking to you. I look forward to sharing your insights with the world.
Paul Arnold: Good to chat to you today.
Gopi Rangan: Thank you for listening to the shore shot entrepreneur. I hope you enjoyed listening to [00:18:00] real life stories about early believers, supporting ambitious entrepreneurs.
Please subscribe to the podcast and post a review. Your comments will help other entrepreneurs find this podcast. I look forward to catching you at the next episode. .