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Charles Moldow is a General Partner at Foundation Capital, a 30-year-old venture capital firm with $3+ billion in AUM. Charles joined Foundation in 2005 and over the last two decades has led early-stage investments for many companies, 14 out of which either went public or were successfully acquired. Some of his investments include Lending Club, DOMA, Rappi, Rover, and OnDeck Financial.
I learn a lot every time I talk to Charles and I hope you’ll enjoy this conversation as much as I did.
In this episode, we discuss:
Why data is the new gold and a framework on how to invest in the sector
“We know that the prospectors, if they get it right, if they find the gold, and they can build a business around that unique data set that they've acquired, they can build tremendous defensibility and advantage, and extract economics as a result of that, and build really big businesses.”
Data is more important than ever as it’s the oxygen for LLM AI models. It’s essential for their functioning and growth. This presents a challenge for startups because unlike the early days of the internet, where small tech companies could easily outmaneuver incumbents with innovative solutions, today's startups face a significant hurdle – they don’t have large volumes of proprietary data, which creates a barrier for new entrants. This has important implications – but how should it influence VCs investing in the sector?
Prospectors vs. Purveyors: Moldow categorizes data-centric startups into two groups: prospectors and purveyors. Prospectors are those seeking unique data advantages, mining for precious data gold nuggets. These companies, if successful, can build substantial, defensible businesses around their proprietary data. However, this path is extremely difficult. On the other hand, purveyors focus on enabling incumbents to leverage their existing data more effectively. These companies provide tools and solutions that enhance decision-making and operational efficiency, offering a different value-prop. While purveyors may not possess unique data themselves, their success hinges on other factors such as user experience, first-mover advantage, pricing pressures, and strategic partnerships.
Charles’ investment philosophy focuses on the importance of startups securing unique data or creating unparalleled value from existing data. The competitive landscape will continue to be shaped by data accessibility, and those who manage to harness and protect valuable data assets can achieve significant market dominance and create near-monopolies in their niches.
The reason why different market dynamics require different types of founders to succeed
“The reality is, there is no prototypical founder. And we've not been able to figure out the set of personality traits that would suggest that one founder can be successful or not.”
“And that's what I think most people miss, which is, the opportunity in some way should dictate the experience and knowledge and personality type of a founder.”
"Founder-market fit" is a concept that focuses on the importance of aligning a founder's traits with the specific demands of the market and opportunity. There is no one-size-fits-all prototype for a successful founder. For instance, in highly competitive "race condition" markets, where multiple startups are gunning for dominance, a founder with a visionary outlook, expansive personality, and strong leadership skills is essential. They can rapidly recruit, motivate teams, and drive the company forward with an intense, wartime CEO mentality. Conversely, for deep tech ventures requiring prolonged development cycles and a high degree of technical innovation, a more introverted, highly technical founder who can focus on intricate problem-solving is better suited. Mismatching founders to market conditions can lead to failure regardless of the inherent potential of the business.
Thinking selectively about credit-driven fintechs
Over his venture career, Charles has invested in about half a dozen credit-driven businesses, all of which have turned out to be great successes. That said, the inherent cyclicality of credit fintechs makes them susceptible to macroeconomic factors such as interest rates, unemployment, and GDP growth. While lending businesses can experience rapid growth during boom times, they are equally vulnerable during downturns when capital markets tighten. This cyclicality requires a deep understanding of market dynamics and favorable timing. Despite the successes in his portfolio of companies like Lending Club, Ox Money, and Kiavi, Charles has not made a new investment in a lending business in a long time.
Valuable portfolio and liquidity management lessons… and a lot more!
“We need to be grounded and say our job is to return capital to the people that gave us money. Our job is DPI.”
Distributed to Paid-In Capital (DPI) is king in venture capital. The need to return capital to LPs should be an investor’s primary responsibility and the industry got greedy in 2018-2021 chasing ever-higher valuations, instead of managing for liquidity. Charles reminds us it’s a "trap" to hold out for potential future gains at the expense of realizing current returns. He advocates for a disciplined strategy of liquidity management, where a portion of investments is cashed out early to ensure tangible returns, while still allowing room for high-risk, high-reward outcomes but also mitigating the risk of capital being tied up during market downturns. Foundation Capital approaches DPI with the a "third, third, third" model—selling one-third of a position early, another third over a medium-term period, and holding the final third for long-term gains. This strategy is not followed blindly, but it’s further refined by analyzing market conditions: selling more aggressively during market peaks and holding back during troughs.
Charles’ Book Recommendation: Forward, by Andrew Yang
A lively and bold blueprint for moving beyond the “era of institutional failure” by transforming the USA’s outmoded political and economic systems to be resilient to twenty-first-century problems. Amazon Link
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Charles Moldow, Foundation Capital – Data: The New Gold in FinTech, Secrets Behind Successful VCs, Importance of Founder-Market-Fit