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I sat down with Dan Rosen, Founder of Commerce Ventures, a fintech and retail-focused fund that’s been building an impressive portfolio since 2013. Some of their investments include Bill.com, Marqeta, Socure, Moov, MX, and many more. Dan is also a veteran VC that’s been investing in tech for over two decades.
In this episode, we discuss:
Building a Venture fund and how their thematic strategy has evolved in the last decade
“It's so disappointing, but if it's somebody who's truly outside of the areas we believe we can be helpful… We wish them well. And we will sometimes introduce them to friends who we think know those areas or can be helpful in those areas. But ultimately, for us time is the scarcest resource.”
Commerce Ventures has a distinct and strategic approach to building their investment portfolio. This approach is characterized by a focus on relevance and thematic investment, coupled with a unique strategy for capital deployment. Commerce Ventures prioritizes investments in sectors where they believe they can be a significant difference-maker. Investing in areas they know well is important to them, rather than venturing into unfamiliar industries. This focus ensures that their investments are not just random bets but are in domains where they can add substantial value. The idea is to avoid the 'lottery ticket' approach and instead invest where their expertise and network can genuinely contribute to the success of the venture.
I also find Dan’s portfolio construction especially interesting - the firm adopts a thematic approach to identify potential category leaders. They invest significant time and resources in understanding and developing these themes. Initially, they make small, non-lead investments in companies that align with these themes. This strategy allows them to participate in rounds without being competitive and maximizes their chances of investing in companies poised for significant growth. Once they establish a strong relationship and prove their value, they seek opportunities to increase their investment. This incremental approach to investing, starting small and then scaling up based on performance and rapport, has set them apart from many other firms.
Qualities of great tech and fintech investors
“Ultimately, its results, of course, what shows you whether or not an investor is good. But that's just the output.”
The essence of a top-tier VC lies beyond just delivering substantial returns to investors. According to Dan, there are a few critical qualities that define a great investor:
Balancing Data Analysis with Thematic Investment Strategy: Having the ability to blend rigorous data analysis with a strong thematic investment strategy is key. This approach involves more than just being a 'big-brain computer' that identifies patterns for money-making opportunities. It's about having a clear, well-defined investment thesis and strategy that guides decision-making. This thematic approach ensures that investments are not just opportunistic but are aligned with a broader vision of market trends and sector developments. Rosen emphasizes the importance of aligning capital deployment with these thematic insights to create a cohesive and effective investment approach.
Emphasis on People and Talent Networks: Another critical aspect, especially for early-stage investments, is the focus on people and talent networks. While this as a fundamental requirement, Dan believes that the true differentiator for a VC is how they leverage these networks and insights about people. It's not just about having access to a great network but about how you harness and extract value from it. This involves identifying high-quality talent and committing to invest in it throughout the startup's journey. A VC's ability to understand and support the human element in startups is crucial for nurturing successful ventures.
The real advantage of second-time founders
“I don't know that it's the challenges themselves, that always end up being the issue for a founder, it's actually the way that we respond, or that a founder responds to those challenges.”
Second-time founders are not rookies in the startup arena. Having already navigated the treacherous path of building a business from scratch, they tend to have a refined understanding of the challenges ahead. This experience is invaluable. As Dan points out, creating something from nothing is an arduous journey, laden with obstacles. Repeat founders have embarked on this journey and could be equipped with the right skill set to map a course through adversity. Their prior experience means they're less likely to make foundational mistakes, whether it's in equity distribution, hiring, or investor relations.
Additionally, second-time founders often have a different approach to facing daily challenges. Their past experiences have taught them not just to anticipate difficulties but also to respond to them effectively. This resilience is a critical factor that can define the success of a new venture. Finally, repeat founders bring more than just experience; they bring a network and an understanding of the market. They are likely to have a clearer idea of who their first customers should be, how to reach them, and perhaps even have pre-existing relationships to leverage. Their past journey might have provided them with insights into product development, sales strategies, and market needs that are directly applicable to their new venture. This strategic advantage can be a game-changer in the highly competitive startup ecosystem.
Why we are starting to see signs of a comeback in the growth market… and a lot more!
Return to Traditional Valuation Norms. One of the key indicators of the late-stage market's recovery over the last few months is the return to more traditional valuation multiples. After a period of inflated valuations, there's a noticeable shift back to fundamentals. This change is evident not just in market analyses but also within Dan's own portfolio. He notes that semi-mature companies in their portfolio, with significant revenue figures, are receiving term sheets with valuations reminiscent of the pre-2020 era. These valuations are not just high but are grounded in more realistic and sustainable multiples, suggesting a healthier, more rational market environment.
Dan’s book recommendation: 'Project Hail Mary' by Andy Weir
Episode Summary
00:00 Introduction and Background
00:40 Changes in the Venture Industry
03:18 The Evolution of Commerce Ventures
07:21 Thematic Investing at Commerce Ventures
11:02 Internal Division of Responsibilities
15:33 What Makes a Good Investor
19:15 Portfolio Construction Process
25:17 Challenges of Working with Founders
27:11 The Rise of Repeat Founders
32:31 Thawing of the Growth Stage
34:56 Book Recommendations
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Miguel Armaza is Co-Founder & General Partner of Gilgamesh Ventures, a seed-stage investment fund focused on fintech in the Americas. He also hosts and writes the Fintech Leaders podcast and newsletter.
Dan Rosen, Founder of Commerce Ventures - The Real Advantage of Repeat Founders, Qualities of Great Investors, How to Build a Top Performing VC