Taylor Clauson, the Founder and Managing Partner at Abstraction Capital, talks about how he builds conviction from the founder’s ‘why story’. Taylor highlights the challenges faced by technical founders outside Silicon Valley and New York, and discusses what really affects alpha in a founder.
Taylor Clauson, the Founder and Managing Partner at Abstraction Capital, talks about how he builds conviction from the founder’s ‘why story’. Taylor highlights the challenges faced by technical founders outside Silicon Valley and New York, and discusses what really affects alpha in a founder.
In this episode, you’ll learn:
[3:38] Why the ‘why story’ is more important than the pitch deck
[8:44] Bangalore is closer to San Francisco than Sacramento is.
[15:12] There’s always a chance to turn a ‘no’ into a ‘yes’.
[20:10] “I'm bullish on overlooked founders” - Taylor Clauson
The non-profit organizations Taylor is passionate about: Big Brothers Big Sisters
Taylor Clauson is the Founder and Managing Partner of Abstraction Capital. Taylor invests in early-stage B2B companies that are building tools for developer productivity and software infrastructure. He spent 7 years at a Kansas-City based firm called OpenAir Equity Partners, investing in and building IoT and data companies. Also, he is a Kauffman fellow, class 23.
Abstraction Capital is a Kansas-based early-stage venture capital firm building tools for developers and software infrastructure. Abstraction also focuses on companies building dev tools and workflow automation that reduces the time required to build, deploy, and measure the performance of the software.
In our next episode, we welcome Jasleen Kaur, an investor at Nyca Partners, to talk about how she finds investment opportunities across wealth tech, SMB technology, and ESG areas.
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Taylor Clauson: I want to hear the story of why. One of the things I love about the developer-facing product space is that you don't run into any mercenary founders. All of these people are engineers that are building a product that they wish they had in their past, or they had in their past and now they're bringing it to the broader world.
Gopi Rangan: You are listening to The Sure 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.
Welcome to The Sure Shot Entrepreneur. I'm your host Gopi Rangan. My guest today is Taylor Clauson. He's a Managing Partner at Abstraction Capital. Taylor, welcome to The Sure Shot Entrepreneur. We want to hear your stories on how you meet entrepreneurs. What questions you ask them? What gets you excited, and when do you say "I want to invest in this company"? Let's start with where you grew up. You grew up in Kansas city and you still live in Kansas city.
Taylor Clauson: True on both counts. I'm really excited to be here. I more or less grew up in Kansas city, like late elementary school on, and it's a great place to live. Winter is a little bleak and that's not my favorite time of year, but otherwise it's not too bad. I studied accounting at university, realized with like a year left to go in that program that I didn't want to be an accountant. It'd be a terrible job and I wouldn't enjoy it. I wasn't sure what I wanted to do and I completely stumbled into an analyst role at a seed-stage venture fund in Kansas that was affiliated with state government. It was an economic development program that also direct equity checks into startups. I spent three years there left with a few distinct conclusions.
One was, I love this startup thing. I definitely got the startup bug. Two was, I am not wired for life sciences. We did a lot of pharma, bio, drug delivery stuff, and I'm grateful that there are people that work on it, but I'm also grateful that I'm not one of them. The third conclusion was I want nothing to do with state government or politics ever again in my life.
Gopi Rangan: Why is that?
Taylor Clauson: It's, you know, I realize the irony of me saying this as an early stage investor where nothing is an efficient market or a rational process, but magnify that by a thousand and you might approach the irrationality involved in political processes. It's a mess.
Gopi Rangan: I think venture capital has this love-hate relationship with government. If you look at how Silicon Valley started, the early days of Silicon Valley was heavily supported by the government and public programs like DARPA and other things. Local governments also provided support. But governments are not really set up to invest in startups. They're good for providing grants and resources to encourage entrepreneurship. I've always wondered how that works and I can understand why you want to be on the venture capital side of the world, the real side of the world.
Taylor Clauson: Absolutely. For what it's worth, I agree with that proposition a lot. I think government is at its best when it's supporting a very wide range of technologies at a stage earlier than they'd be ready for commercial products like venture capital.
I also think that at a local level, the geography involved with politics, getting involved with technology-based economic development becomes very tricky because you mentioned projects like, you know, ARPA or DARPA, or even some of the stuff that NASA funded. These had a national scope. It didn't have to be scoped in Wichita, Kansas, or some other localized geography where it's much harder to make that work.
Gopi Rangan: That's true. Yeah. There was much more openness to those project. Why venture capital? What is exciting about venture capital to you?
Taylor Clauson: I think it's the best job on the planet, frankly. I'm one of those people who's wired to be a mile wide and an inch deep and loves the change of pace. The thing that originally attracted me to working with founders is that it doesn't really matter whether you're talking to someone who has what might objectively be the worst idea on the planet.
He or she is 100% passionate about it. It's what they wake up in the morning to do and they feel like it has to be built in the world. That energy is infectious. That's why I love early stage. You're getting in on the ground floor of someone who has total and complete conviction about what they're building. I can't imagine a more fun job than talking to people like that all day.
Gopi Rangan: It is really a fun job indeed. It's the best job on the planet for me too. Talking to founders is just such a fulfilling exercise hearing their stories. They've usually researched a ton about whatever topic they're working on and they paint very detailed pictures like watching a sculpture being made or a painting being drawn.
Taylor Clauson: Absolutely. When you and I were speaking earlier, you mentioned that you think people relate to stories. I actually never want a founder to walk me through a pitch deck. I think pitch decks are an artifact of the past and are not a productive way to learn about people or a business. At early stage, frankly, I care way more about the people than what's on the pitch deck. I always wanna know. What's the story? How did we get to now? What makes you excited about this? What makes you tick? And that's usually the starting point for building conviction.
Gopi Rangan: That's very interesting. In the world where pitch techs galore, you don't really care about pitch decks. Tell me more, like how do you get to know entrepreneurs? What happens in the first meeting? Can you give an example of one of your interactions?
Taylor Clauson: Yeah, of course. I should also caveat, if someone has made a deck, I would love to see it preferably beforehand. I'll do my best to read it first. Usually the reason for that is because I wanna see how they articulate their ideas. It's not because it's gonna help me form conviction or a lack thereof about it.
One of my earliest investments was a company called BUF based outta Toronto they're API management platform for protocol buffers and GRPC. The founder there is Peter. He's remarkable. It was one of those where I want to understand, in this case, why this.
It's a relatively obscure part of the infrastructure stack. It's not very well known outside of technical circles. Why did it have to be this? This is your life's work. Why have you devoted yourself to this? Just seeing the energy and excitement and a strong form view of what was wrong in the world of software development and why it needed to change and why this was the right way to change it, it's so much easier to build conviction doing that than it is to make a spreadsheet together.
Gopi Rangan: It is indeed. Can you give an example of one of your portfolio companies? How did you meet the founder? What happened in that first meeting?
Taylor Clauson: Yeah, of course. I'll give you another one of my earlier portfolio companies, a company called Fresh Paint. They're out of San Francisco. The company is fundamentally very similar to something like Segment. They're a customer data platform for event-based analytics.
In this particular case, Fresh Paint has two relatively unique value propositions. One of them is that you don't actually have to write integration code to implement their product. It can be done visually by a product or marketing person. And then the other sort of competitive distinction they have is they're one of the only HIPAA-compliant CDPs. This was an interesting one. I had been working on a personal project recently. I taught myself how to code over a decade ago, and there's a ceiling on that.
You'd never hire me as an engineer. I'm sloppy and incompetent, but if you give me long enough, I can hack it together. That was actually part of the genesis for starting this fund, as I frankly just fell in love with the space. But I had recently built a personal project just for fun and had implemented Segment, which was the defacto leader in the space for event based analytics. I was blown away by what you could get out of it but I was equally horrified at how much time it took to write the integration code and maintain it. I mean, if you make a small change, you may have to update it. So, engineering teams at scale may spend a significant portion of their time, which is very precious, just to keep the analytics flowing to the product people.
I saw Fresh Paint launch on Hacker News and was immediately enamored of what they were doing. I reached out to the founders cold and said, "Hey, I actually just implemented Segment on a personal project and I really relate to what you're doing. Could we chat?" And then very quickly afterwards I built conviction that they were the right horse to back in that race.
Gopi Rangan: It's very interesting. The conversation was more real and it was not about a structured process of going through the slide deck. I want to ask you more questions about startups and what happens in those conversations, but we went too deep, too quickly. Can you talk about Abstraction Capital?
What is Abstraction Capital? How is it different from other VC firms? I understand you invest in B2B companies. Are there any specific areas that excite you?
Taylor Clauson: Yeah. Actually, I would say it's a really narrow focus. And, as I mentioned, I taught myself how to code and that was actually what informed this fund. The more I got to know the software development process and everything that goes on when you're building and deploying an application, I completely fell in love with hacker culture and with developer-facing products in general.
Over time, that just became the thing that was keeping me awake at night and I desperately wanted to do deals in that space. I was investing out of a family office before, that I helped them with their venture investments and we didn't cover this space. This was sort of just my side thing that I was building conviction about.
The thesis for abstraction is pretty simple. It doesn't really matter whether you're Google and Facebook or whether you're Home Depot and Coca-Cola. One of the most important assets your company has that doesn't appear anywhere on the balance sheet is software development. It's the engineers and technical talent you have, and that may not be your end product, but it's an axis you have to compete on. There are not enough developers on the planet. There are never going to be. The need is only growing. The importance of software is only growing and the surface area of knowledge required to build, deploy and maintain good software has gotten so big that I think this is just a tremendous market.
So, with that in mind, I launched Abstraction. So Abstraction is a 13-million-dollar pre-seed and seed fund focused specifically on developer-facing tech. The buzz words we'd slap on that would be dev tools, DevOps, cloud infrastructure, low-code, that sort of thing.
Gopi Rangan: Very interesting. Enterprise infrastructure. That's the real tech ecosystem.
What stages do you invest? You mentioned pre-seed and seed. What does that really mean?
Taylor Clauson: Yeah, I was hoping you would tell me what that means. You know, it's funny. I actually like to really dimension it by round size. I say that my sweet spot is really a round size under about $3m or $3.5m.
I'm not based in the Bay area. I realize that might be a pre-seed round in the Bay area. But I tend to do rounds that are ranging between $750,000 and $3.5 million. The other thing I realized very quickly is that I don't wanna have a focus on the Bay area. I'm in Kansas city. So, getting there early can be problematic. Today I have 22 portfolio companies. About a third of those are in the Bay area and the rest are immensely distributed. I mean, everywhere over North America, Europe, India, it's all over the place. I came to the conclusion that, particularly relating to local technical founders here in Kansas city, if you're outside of New York, Boston, or the Bay area, maybe Seattle, finding an investor who really resonates with you as a technical founder with a very technical product is very difficult. So, I'm pretty well positioned to connect with founders outside of those major areas. I like Bay area deals just fine. It's just not really my focus.
Gopi Rangan: I've always argued that Bangalore is closer to San Francisco than Sacramento is because it's a lot easier to connect with people of the same industry building similar things. I totally relate to what you're saying. If you focus on B2B software and developer tools, it's a lot easy for you to connect with someone in Sao Paulo, building this in Brazil. And it doesn't matter that you are in Kansas city. You don't need to be in Brazil. You'll speak the same language. I can see that it's actually working for you at Abstraction.
Taylor Clauson: Yeah, I think it is. I always say I don't really care where the founders are sitting as long as there's a Delaware C Corp attached to it. And I think that's actually, you know, it's interesting because developers are kind of like the OG online community dating back to the pre-commercial internet. They're used to relating to people online in asynchronously. So, it's not really a huge impediment being located in the Midwest or located somewhere else.
Gopi Rangan: So what's your advice to founders? What's the best way for them to have an effective meeting with you? Especially in the first one or two meetings?
Taylor Clauson: I would go back to stories. I want to hear the story of why. One of the things I love about the developer facing product space is that you don't run into any mercenary founders. All of these people are engineers that are building a product that they wish they had had in their past, or they had in their past and now they're bringing it to the broader world. So I want to understand the why behind launching this. Being a founder is tough, and even if you have a co-founder, it's a really lonely job. The deck is stack against you. So, I want to know why. The things I don't care about. I don't care about pitch deck. I don't care about TAM. I think asking a pre-seed company what their TAM is it's a complete waste of time. Nobody knows. They don't know. I don't know. We just have to get conviction that they're at a valuable part of the stack that can create and extract value from customers. The other thing I would say is that I do want founders to understand I'm hesitant to use the word 'competition' because in many cases there may not be a direct one-to-one competitor, but I want them to understand their place in the market.
Where do they sit in the value chain? What are the adjacent points where people might be complimentary or could expand to be competitive? Where do they sit such that they can give themselves a structural advantage to win customers in a way that incumbents can't?
Gopi Rangan: This is very interesting. You don't care about time. You don't care about slide deck. You care about stories and the stories from key founders or building things really resonates with you.
Taylor Clauson: That's right. I don't have any Harvard or Stanford MBAs in my portfolio. And frankly, I would say I'm unlikely to. These founders relate well to other engineers and those are their customers and I think that's a good thing.
I do believe that one of the interesting things about developer facing products in general, and this is particularly true of open-source companies. There are a lot of products that are built that can create value for their users, but are not able to build a commercial product.
So one of the things I do care about is not necessarily TAM or competitive set or something like that, but I do care about how do we build conviction that this layer of the value chain, which may sound like a tiny, small, thin sliver, can actually extract value and that the number of people interested in it is growing or becoming important, or we're building something entirely new to there.
Gopi Rangan: Yeah. The first sniff of possibility of revenue, pedigree doesn't matter, but this is more important. How long does it take for you to go from first meeting, get an introduction, to the point where you say, "yeah, I want to invest in this company?"
Taylor Clauson: Yeah, good question. I should probably caveat this with, I don't lead the majority of rounds I'm in. I do lead some of the pre-seed rounds. Typically, if I'm leading, I would say it takes between two and three weeks if I have that much time. I can move faster than that. If I'm sort of running a process where the round is coming together, either as a syndicated party round, or there's already a lead, or maybe even if there's not a lead, I don't require there to be a lead for me to commit early, I would say usually seven to 10 days is probably the sweet spot.
Gopi Rangan: Seven to ten days is quite fast indeed.
Taylor Clauson: It's very fast. I will also say this is another luxury of investing in a very small space. Between understanding the dynamics of the market and having a network of people that I can go to to help with diligence, it's not hard to get up to speed quickly. And I'm investing in technical founders that usually not every time, but usually have already built an MVP of this product either currently or in a prior role. And so the question is not, "am I taking technical risk?" It's more "am I taking market and execution risk?" That's usually the risk I'm comfortable taking.
Gopi Rangan: What's the most common reason for you to say no? I bet that you say a lot of no's for every yes.
Taylor Clauson: Yeah. Unfortunately I, I think as investors, we always say, no. I'd say the most common reason I say no is what I touched on earlier that I have a hard time believing that a certain part of the value chain or layer in the stack will be able to extract meaningful value from its customers.
Even if I take it on faith that given part of the stack is valuable and growing, if I have reservations that a particular product will be able to actually monetize in the face of adjacent products that creep into their scope... as a concrete example, I've looked at a lot of companies that are in the software testing space. And I have yet to say yes to one. It's not because I dislike the space or don't think compelling products can be built there. I think that there's just a lot of pressure in that value chain from free open-source products at one end and the big CI platforms like Circle or GitLab and GitHub, adding complimentary pieces to their existing products that make it a really difficult space to build an enduring company.
Gopi Rangan: So when you say no, is it a permanent no for that company or is there a chance that they can come back and tell you a more refined story?
Taylor Clauson: There's always a chance. I've definitely had companies where I passed on them and they came back and it ended up working out well. But I would say it doesn't happen that often. I'm sure you relate to this as a GP Gopi. Managing our time is the toughest part and overcoming the inertia of having said no already it's a heavy lift. I do think that if I give a founder feedback and he or she comes back and says, "Hey, I thought about this, and here's how I feel about it." That door's always open. I have also had companies where I was on the fence. I had conviction about some pieces and not other pieces. The founders told me, "well, this is what I'm gonna go do over the next six months." They send me regular updates and they call their shot and they execute exactly against the plan they said they were going to. As an investor, watching from a distance that's really compelling. So those can absolutely end up turning into Yes.
Gopi Rangan: Yeah. For a no to turn to a yes is hard. But if it's a no contingent on a few things, then it becomes the door's open. Then it becomes possible for the founder to come back and say, Hey, we talked about this, actually I did more than what we talked about. Here's the new update versus a no because of some lack of conviction and something. That's really hard to change. Reversing a no from deep end of no to a yes is much harder.
Taylor Clauson: You're exactly right. And I think one of the things that I place a high value on with founders is sort of their ability to iterate quickly and synthesize a lot of possibly divergent information.
If you ask 10 investors for feedback, you will get 10 different pieces of advice. So, navigating to what you as a founder have conviction about is tough, but if I can watch you go through these cycles, collect user feedback, iterate and come back with a more cohesive view, that's really appealing as an early-stage investor.
Gopi Rangan: How many companies do you typically invest in? How frequent are these investments?
Taylor Clauson: It's rare that I have a month where one doesn't close. I have a relatively large portfolio size for my fund size. I wanna plan on between 35 and 40 companies. Typically these are small non-lead checks, so it's not incredibly difficult to move quickly. Over the past few months, I'm overweight by volume and underweight by dollars deployment right now. So, I've been slowing my pace a tiny bit just to write larger checks, but it still happens about a deal a month.
Gopi Rangan: A deal month. I'm sure you're quite busy with that pace.
Taylor Clauson: There's always something.
Gopi Rangan: I have to ask you, now with the downturn likely to happen, we're probably already in it. Has your pace changed?
Taylor Clauson: No. And in fact, it's been interesting. Thus far at pre-seed and seed, I haven't really seen that much change in entry price valuations. Maybe a slightly decreased round size is becoming more common. The thing I have noticed is that this time a year ago, I had maybe five days to get to a yes, I maybe now have 10 to 14, which is certainly a more manageable pace for me.
I plan on continuing about the pace I'm on. When I was starting the fund, I wanted a relatively long deployment period, particularly for a fund of this size, just so that I could get some time diversity, if that happens. So, in some sense, even though I'm not rooting for the markets to have this turmoil, this is not out of scope for what I had planned.
Gopi Rangan: Time diversity is from an investor perspective, investing over a period of time. If an investor invests all their capital in one year, it's not diversified across time. If an investor invests across three or four years, it's diversified across many years. So that brings diversity to the portfolio. Just to clarify what time diversity means.
It's going to be interesting to see what happens in the next six months to a year. VCs invested at a frantic pace over the past few years, two-three years, especially. That pace might not be the same anymore. We might see you slow down, but I have no way to predict. We'll find out.
Taylor Clauson: You and me both.
Gopi Rangan: You've been in venture capital for quite a few years. Now you are a Kaufman fellow. What's one thing that you would like to see change in the venture capital industry.
I think this industry, I'm certainly not the first person to notice it it's so insular. It's the well trodden path to getting into venture or be a founder with a billion-dollar outcome, go to HBS or GSB work in investment banking or PE or something, and then make your way into here.
And it makes it just that much more difficult to actually get diversity of thought, let alone actual diversity when it comes to gender or ethnicity or something like that.
Taylor Clauson: I certainly would like to see more of that. As an investor, I am constantly astonished by the number of investors who require a warm intro to do a deal. I just think that is an example of this insular thinking that is frankly bad for the world. So I'm sure I miss cold emails as much as the next person, but I've done deals that came in as cold emails. And I would encourage people just to branch outside of your network a little bit and start a new note on the graph.
Gopi Rangan: Yeah. When investors don't take cold emails seriously, they miss out on opportunities. But it also creates that clubby environment where you rely on warm intros and it's a very clickish world and that's all of venture capital as it exists today. I'm glad to see that new emerging managers like you and me are changing the landscape of venture capital.
Taylor Clauson: I hope so. I mean, I don't wanna get too grandiose about the things I'm doing, but even in my portfolio, I would say there's no alpha gained by having the right pedigree or the right network in a founder. I'm sure it can make your life a little structurally easier while you're fundraising. But in terms of execution, I really have not seen any lift from that. So, I'm bullish on overlooked founders.
Gopi Rangan: I wanna switch to the last part of our conversation and ask you about your community involvement. Is there a nonprofit organization you are passionate about? Which one?
Taylor Clauson: Yeah, absolutely. I'm a big fan of Big Brothers Big Sisters. I've spent a few years as a volunteer where you're paired with a young person who is just basically looking for a friend, a mentor role model. I think too many people in this world, frankly, just don't have a good sense of what's possible. And it's not because they lack the capacity to do great things. It's just because they need a voice in their ear saying, Hey, you can do great things. I think about inflection points in my life and my career, even though I was born on third base in a lot of ways. Oftentimes the most memorable or impactful moments were just an offhand conversation with a friend at a coffee shop where they just said, "Hey, I think you can do this." So, what Big Brothers Big Sisters does is amazing.
Gopi Rangan: That boost of confidence makes a big impact on people's lives.
Taylor, thank you so much for spending time with me sharing real-life examples from your own experiences. These nuggets of wisdom will be very valuable to many entrepreneurs. I look forward to sharing your nuggets of wisdom with the world.
Taylor Clauson: I'm very thankful to have been here. I'm a big fan of the show. So I appreciate you having me.
Gopi Rangan: You're welcome.
Thank you for listening to The Sure Shot Entrepreneur. I hope you enjoyed listening to 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.