James Mackey 0:00
For everybody tuning in, welcome to Scale by Design. I am currently chatting with Michael Nogen. Michael, thank you for joining us today. I'm excited to have this convo with you.
Michael Nogen 0:09
I'm very excited to have the conversation as well.
James Mackey 0:12
Let's do it. So tell me about Overton Venture Capital. Tell me about what you guys do.
Michael Nogen 0:17
Yeah. So I'm one of two general partners at Overton. We're an early-stage investor so we really focus super, super early. Usually, there's some product market fit, but not always. As a theme, we're generalists, but the consumer is always been our Northstar. So that could mean a company has a product that they're selling directly to the public but it could also be a B2B2C. So maybe it's a service targeting, escalated small and medium-sized business employees. So again, generalists fund, we've invested very, very early, so pretty Series A. Sometimes there's product market fit. Oftentimes, there may not be revenue. But yeah, we're super, super early.
James Mackey 1:15
So exciting. And so how long have y'all been around? Is this your first fund or how far into the company? Are you guys right now?
Michael Nogen 1:24
Yeah, so in terms of the lifecycle, we launched the fund in the middle of 2019. We're kind of a rolling close, we started making investments out of fund one in 2019. We're about to gear up for what we call an investor roadshow. In early 2020 if you recall what happened, there is something called this pandemic, right? That put the brakes on very quickly in terms of being able to travel. So we ended up having to pivot very quickly to a virtual close. We all ended up closing our fund one, it's a little over 9 million AUM. And we've been investing since 2019. We have about four or five probably new investments to make out of fund one before we started investing, or raising and investing out of fund two.
James Mackey 2:26
That's really cool. And I wanted to get your sense on, right now, what kind of companies excite you the most, within B2B2C or whatever it might be like, what do you see, as the next generation of innovation look like for the companies that you're looking at, over the next year? What type of businesses are you really looking into?
Michael Nogen 2:46
Yeah, so great question, especially since we're a generalist fund. So what does that mean, right? It's very easy to say, well, we only do insurance tech. But one of the big things for us is what I call next-gen commerce. So these are, you know, founders that are transforming this idea of commerce, and meeting that customer or consumer wherever they are, which is kind of like this very amorphous. kind of catch-all. But there are a few key themes within that next-gen commerce that we're particularly excited and investing in.
One is the idea of blockchain enablement. So, you know, we believe that there's this Blockchain, this technology where I guess the most common use has been around crypto, but we're not a crypto fund. But this idea that you can leverage the blockchain technology where it's open to do fractional ownership, smarter contracts. One of our portfolio companies actually enables, if you have a digital asset, being able to take that digital asset offline, you can only authenticate that because of blockchain. So that's certainly something that we're particularly interested in, again, not on the crypto but the actual blockchain. Another area of next-gen commerce that's particularly interesting is what I call social commerce.
So this is, if you look outside of North America, the idea of live shopping, and social commerce, huge in Asia, huge, but here in the US is still very nascent. So, you know, we look for companies that provide the tools to enable that social commerce. And just to give you a sense of just how big social shopping is in the US this year, in the US, I think about $45 billion will be transacted. And that's expected to double in two years. So it's growing very, very fast, but you know, much smaller than last year.
James Mackey 5:01
And that's just to be clear, that's all selling products directly through social media is that just like in terms of the definition of social commerce that we're using?
Michael Nogen 5:09
Yeah, or using it to shop with others. So for example, one of our portfolio companies called Polona that we invest in, it’s this end-to-end platform for brands that enable them to launch within minutes, their own storefront. So that way, they're able to sell through Instagram Live or Facebook Messenger. So it's just another way of being able to reach your customer in a social component. So again, you know, whether or not it's on your phone, whether or not you're in a live conversation with someone. So anyway, there's this rise in social commerce.
James Mackey 5:52
So how's that, what's the difference? I mean I'm going to ask some dumb questions because I'm not familiar with the area. So what would be the difference from like an ad that is driving somebody to the company website? Like traditional advertising? To like social commerce? Could you explain the differences a little bit more, just to make sure I fully understand?
Michael Nogen 6:14
Yeah, so maybe on the marketing side, it might be someone clicking on an ad that takes them to a site. It's more like an affiliate marketing channel. But you don't actually transact through that ad, your transaction transacting on a different page or it's a different experience. This enables you to transact immediately through like an Insta message. So it's actually pretty cool. So any brand can create their own thing, what Shopify does for websites, Polone was able to do through this. Again, they're going after this theme of social commerce that people want to interact through live messaging between brands, it's more of a personalized experience.
James Mackey 7:05
Okay, that's really cool. Yeah, so this is a fast-growing space that you're seeing a lot of founders and venture capital money kind of flowing into at this point or?
Michael Nogen 7:15
I've certainly seen money being poured into it but what I'm seeing as I look as an investor, what's happening outside North America, and if you look at Asia, which a lot of the technologies seem to start there before they come here, social commerce is massive. And here, it's still very decent. So you know, part of my job is, especially early stage, versus a growth investor, like Series B, Series C, you know, closer to a potential exit, my job is to be able to look around the corner to say - Okay, what's going to be the next thing within the next 3 to 7 years, get in now. And then by the time you know, year 7, year 8, hopefully, there'll be some sort of liquidity events, or obviously, in layman's terms in acquisition.
So that is just a key thing that excites us as a fund that we're really bullish on. It's really cool. Another key theme around next-gen commerce is what we call more community driven. So these are businesses or marketplaces that are targeting or serving either communities that were previously underserved or demographic niches. So we may look at demography, or if we look at community driven. So an example of that is one of our portfolio companies, and actually just thinking about underserved communities. There's an interesting stat that I think by 2030 it was, there's not going to be any ethnic majority in the US. So if I think about one of our companies, we typically prefer asset-light models. This one's kind of an exception, it's called Young King haircare. It's the first hair and body wash specifically formulated for black boys are boys with textured hair.
And so James, you know, you have a great do, I don't think that you necessarily walked down the multicultural hair aisle at Walgreens. But if you did, you would notice that there's a slew of products geared towards women, girls, and maybe a few men but no boys. And so the kind of the retail nerd in me was like - Okay, well, what's going on? And so we found this product. This is a company out of Atlanta, Georgia, that launched just two years ago that has basically 10x their revenue, they're now in several hundred doors of Target, several hundred doors of Walmart, and they just did a licensing deal with Wakanda. So, again, look atypical, then, you know, we like niche, and I guess the last piece, I'll say about kind of demographics and so forth. Because I know prior to the show you had mentioned, you're kind of a stats nerd like me and I don't know, have you heard of the term, the silver tsunami?
James Mackey 10:46
I actually haven't. I would love that sounds really interesting, though. What is it?
Michael Nogen 10:50
So if you think about a tsunami storm, this is called the silver tsunami. So essentially just for context, every day in the US 1 in 5 people turn 65. So we always talk about millennials or Gen Z. But we don't realize that people are living longer, they're staying at home longer. So as an investor, we get very excited about what are those products and services for them, especially given the stats, like, okay, one in five people in the US are going to be over the age of 65. That's a lot of older people and they need stuff, right? And so, one of our portfolio companies, actually one of our very first investments as a fund, we found a company called Joy Lux. Joy Lux is out of Seattle, it's a device to treat female incontinence.
So essentially, it's a women's health business, a product, and a service geared towards women going through menopause. Again, not a sexy business, very important business, because you know, it's part of nature. But if you think about just this curve of people getting older, there was really nothing around that, just wasn't a very popular space. Today, it's certainly a lot more popular, people are talking about menopause like they haven't before, because it used to be more of a taboo, just like sexual wellness. So, again, I mentioned next-gen commerce because it's a broad blanket for all these different things that we look at, different types of themes.
James Mackey 12:49
So yeah, it's like what you said, you're kind of looking for underserved communities and pockets within commerce-related fields where you see an opportunity, you're like - wait a second, there really should be more of an emphasis here, there's more of a market to be served here. And so that's the underlying theme, even though it can be a vast variety in terms of companies that you invest in, that may be completely different in terms of what kind of service or product they're providing. But the underlying theme is that it's like almost like it's a base or a solution that really hasn't been thought of before or underserved. That's a really interesting investment model way to look at it. Versus a lot of venture capitalists that are, if it's technology, investing in another revenue tool where you have 5000 of those, right?
Michael Nogen 13:42
Yeah and I'm not saying, this is just kind of one piece in terms of how broad we are, but how we think about where our investments like why should we invest in a particular sector or particular theme? And so, you know, are there areas of opportunity, points of friction in our everyday life? COVID accelerated a lot of the themes and trends that we had already previously identified when we were out there fundraising, trying to raise Overton Fund one, saying - Okay, there's going to be this gig economy, there is going to be this new, there's going to be an aging population here.
These are just certain things that are like, okay, that's going to help us find, proactively look and search for opportunities, versus just okay, well, we're going to drink out the fire hose. And you know, you put your shingle on the door and say, Hey, we're open. We're a VC, all of a sudden, that spout turns on and you have all this inbound deal flow. Sure, I've always found that the best investments are the ones that we proactively do seek out too, let other investors know, okay, this is where we add value. These are the areas that we know, this is where we believe to be opportunities. If you see these things or boundaries that are trying to build, please let us know.
James Mackey 15:16
I like that it's a lot more strategic. And I just like the approach that has a heavy emphasis and, okay, this is a very high-level step back, but what's the future that we believe in? What do we think is, as you said - What, what's the world gonna look like 5-10 years from now, which companies are going to be well positioned to thrive? More importantly even, which founding teams are going to be well positioned to thrive in the future that we believe in?
Michael Nogen 15:43
I was gonna say that the linchpin is this evolving consumer and notice everything I mentioned has to do with people, people are the recipients. And if you want to ask the question, okay, what do we look for in terms of making an investment, because I kind of gave you areas where I believe their opportunities to be and how we think about another big thing that I'd be remiss if I didn't mention future of work. So whether or not it's this great resignation, if we think about distributed teams. You're shaking your head so you probably understand. But you know, COVID accelerated this modern workplace. And then obviously, we think about as people get older, and there's more technology that we're using as part of our everyday life. Some of these old-school jobs go away, right? That's kind of the pros and the cons of technology. So what can you do to upskill, and reskill? And again, as a theme future work is also one of our big focus areas and we've made quite a few investments.
James Mackey 17:20
I would love to hear more about that. And that's actually a topic I know a fair amount about because my company is an embedded recruiting firm. So we've worked with over 150 companies to help them hire and I have another show called Talent Acquisition Trends & Strategy. And all I do is talk with VPs of Talent Acquisition and Chief People Officers. And so I've had a lot of conversations surrounding the future of work. So I'd be really curious to hear about a couple of them or even just one of the companies you've invested in that space, and even more, it's like, okay, we've seen this acceleration of shift of where we are today.
And it's very clear the difference from where we were a couple of years ago to today. But in addition to getting a sense of what kind of investment you're looking for, I would love when it comes to future work, it'd be cool to know, what do you believe is gonna happen 7 years from now? Because I think that's also a really interesting question. The magic 7, right? Or 10? Whatever, like a crystal ball, right? That was really long question. So one, just what types of opportunities and companies have you invested in? And how do you see kind of future work evolving? As a two-part question right there?
Michael Nogen 18:34
Yeah. So as I mentioned, this rise, this gig economy, and just the rise of freelancers. I remember going through college or post-college, and my first job, I was there for two years in a month, before I launched my entrepreneurial endeavor. And I remember having a conversation, conversation with my parents - Really, you know, you can't leave your job, you need to be there for you know, a longer period of time. And now fast forward, I think about just some of the resumes that I see for people who want to either intern at Overton but people move around. I mean, two years seems as slow as molasses that's like, eternity.
So it will be interesting to see how things continue to change, maybe they revert, I still believe that higher education is going to change big time. I'm a firm believer of, listen - I have a daughter who's in third grade. I plan that she wants she's got to get past third grade. But let's say that she graduated high school, I hope that she attends college, but you know, she may not need to go to college, maybe she decides to be, you know, whatever. But like it's almost like what people used to do, it's almost like two tracks. Do you need that higher education? Or do you need to learn your skill?
James Mackey 20:10
It's yeah, so that's shifting a lot. And even honestly, over the past few years, I've seen a massive shift when I've been posting content on LinkedIn. And I would, five years ago post on the fact that I personally didn't think a college degree was necessary for a lot of roles that we saw with our clients across go-to-market and technical and even a fair amount of G&A roles. And it used to be somewhat controversial. And I think to some extent, people really didn't want to let go of the fact of like - Hey, I did this, I kind of paid my dues, or this is the path I took. And I think it was hard for some folks to kind of let go of the fact that there was a different way because it maybe, maybe made them feel like - Hey, well I put in this work to do this thing.
And the way that I look as though there are no shortcuts like whether you do go to school or not you find you have to gain the experience one way or the other and it's interesting to see the evolution of that. And then you're seeing more educational resources online and courses that are specialized. And, you know, I'm part of a group called Pavilion, and it's essentially like a networking community-based company, primarily for revenue executives. I'm part of a CEO group, but they're primarily focused on tech startups. And they're, they're putting together courses, like a CRO course, Chief Revenue Officer, or Chief Marketing Officer, Chief Customer Officer.
So specifically, if you're in tech, and you want to be an executive, you can take a course and learn directly from a masterclass, these are semester-long courses with actual coursework and assignments, and it's highly specialized. So you're talking about next gen commerce in a sense, there's also I think, a similar kind of evolution, in a sense, with higher education, where we're getting a lot more personalized and efficient about tailoring that experience at a fraction of the cost as well, which is really very interesting to me as well.
Michael Nogen 22:17
Well, if you think about it and just from an employee perspective, and since you have the recruiting business, there are millions of people that have to stay competitive and stay not only competitive and employable. But that only happens when you're up to date on the latest technologies, or not even so much the latest technologies, but just how can you use those technologies? And so, do you get that from sitting in a college 101 class? I went to a liberal arts college. I majored in history and German.
James Mackey 23:06
Michael Nogen 23:07
Do I use those skills? No, not necessarily. But I do believe that there is benefit to structured and critical thinking.
James Mackey 23:09
I agree, I do.
Michael Nogen 23:10
But in terms of doing my job better, I definitely believe that we're going to start seeing a shift and how we educate. But you had asked a question regarding one example of one of our portfolio companies going in targeting gig workers and one of them is called Wethos. It's the first operating system that was built for independent creative freelancers, so it enables them to do their job, they can run a virtual design and creative studio by themselves, so they could scope work, can meet other potential team members to farm out work, they can get paid, they can split payments. But effectively, it's a new way that enables tools for this group of workers. And so, that's just one example of how we think about tools, versus - Okay, that's kind of a nice, cool, neat, niche business, but how scalable is this, an investor in something like this that can provide a real use, like, now I can actually do my job all right.
James Mackey 24:33
Well, it's a need have, this isn't something where if it's a down market, people are gonna cut, it would be a core part of how they operate their business. So I think what's really interesting is that we're seeing that in pretty much every industry, just technologies that are enabling folks to basically build a foundation, whether as a freelancer or gig or even just starting out in industry or starting a company. Some of the most interesting innovation I'm seeing right now, in a totally different area is actually in film. There's new AI and machine vision and all this type of stuff coming out right now that's actually enabling special effects on for people that don't have huge budgets and so independent filmmakers can do all this really cool stuff that in the past cost several hundred or millions of dollars to do.
Michael Nogen 25:28
Now you can make you can bring a film made on your iPhone to the big screen which there was a film recently, that was basically a full feature that was shot on on an iPhone, but you're right, a lot of the technology has just come, you know, it gets its part of this whole Murphy's law. But you know, things are getting a lot less expensive.
James Mackey 25:53
Yeah and just more innovative, just some of the different tools like and what AI is doing, and machine learning is doing and all of these different applications, and this is just one of several examples.
Michael Nogen 26:05
By the way, we're not really talking, we're actually using like an open-source AI. And then, it's now creating this text for us because it knows the dialogue, which is actually very scary.
James Mackey 26:19
Yes, it's terrifying and exciting, on this show, speaking on that topic, there's a lot of buzz around biotech right now. And a lot of the stuff that's happening with synthetic biology and engineering, it's just so crazy to see how everything is just seen as an engineering problem at this point in time. And the human genome is considered the last frontier when it comes to engineering and fully understanding and being able to leverage that to help everything from climate tech to personal health and pharma and everything. It's all now just an engineering problem to solve and so it's going to be fascinating, but it's also terrifying. When you think about the application and the potential, and it's something that people are very worried about, obviously, what if we get this wrong? Yeah, yeah, it's the same with AI, just different applications.
Michael Nogen 27:15
That sci-fi movie, but, you know, as an investor, while things like genome, and all these like lab-grown meats, or using mushrooms to create a car, like we're printing a house, all of that stuff is really, really cool stuff. But when you're an early-stage investor like me, and you have a fund that is on average 10 years, give or take one or two years, my job as a fund manager is to find companies, and business models, that I can identify within the first kind of three years, invest, and there's going to be some exit before year. 10.
And so that basically precludes me from investing in some of these crazy technologies that are pre-commercial. And so I think it's really fascinating stuff but, you know, that's just to give you a sense of how one of the reasons why we as a fund, we track it because it's interesting, and maybe some of the applications. But it's not something that we would ever consider investing in.
James Mackey 28:34
Yeah, I mean, that makes a lot of sense. What I also find interesting is just about your team again, just getting back to like your vision of the future, because it sounds like you're coming in at a seed round, maybe even sometimes, like pre-revenue, right? So it sounds like you're primarily banking on the founding team, the future that you mutually believe in. And correct me if I'm wrong, but that's, that's kind of part of the underlying theme that I'm seeing.
And then one thing that I want to slow down with you on is getting into unit economics because it’s important but potentially harder to gauge very early stage. And I'm curious to see when you're going through the diligence process, how far along do you expect your portfolio or potential portfolio companies to be along with defining unit economics? Is that something you do with them? How far along do you expect them to be when they're doing their pitch to you?
Michael Nogen 29:32
Gotcha. So there are kind of two questions there. One is even when to invest, right? Because you talked about like the founding team and market and then there's that unit economics piece. So let's just start with the first one, which is how we identify, when to spend our time, because if you think about it from a funnel perspective, there's lots of great interesting deal flow, but, our job is to say no 99.9% of the time, right? So what's going to make us at least say - Okay, there's enough interest here to move forward and go and really meet the team. But you're absolutely right. It's all about the founding team. But if we took a step back, the big question that we always ask ourselves, even before meeting the team is - okay, we see a deck, an investor presentation, we say - Okay, here's the problem that they're trying to solve.
And our first question is - “is this a hair-on-fire problem?” How much friction is there in the market that people really, you know, give a crap? This goes back to our consumer lens, because to get people to change their behavior, people say, Oh, we're gonna get people to buy, it's like, it's very hard to take them. It's very, very hard. So we always look at that. Okay, the big problem is, how is this hair-on-fire problem? And then is this solution? Maybe not today, but their future vision statement of what they're trying to build? Will they deliver a 10x value? Then, what's currently available today by leveraging technology? Are they making it easier? Is this going to allow me to do my job better than I can? They wouldn't be able to do otherwise and would I care if someone took it away?
Those are basically the two questions, both looking at the problem and then look, thinking about the solutions once we get to that, then we say okay, yes, yes. Now, you know, early, early stage, how do you vet a business? Right, because there's not much history. As you mentioned, I said up front, that sometimes we will have to make an investment decision pre-product market, maybe they're in beta. But yeah, there's 0 revenue. So what we look for is, we put a lot of stock in the jockey, we're missing the jockey, not the horse. So it's all about the team, if this person or persons have the financial capital behind them, they can attract the right human capital. So the talent, can they succeed? And then we as investors, can we be helpful?
And so one thing I should say, that's unique about Overton as a fund, is that early stage, and part of the reason why my partner and I decided to launch Overton, is that we wanted to create a fund where we can be more hands-on, some more value add. Part of it is this innate interest in new things, and being helpful, just as helpful people and having been an entrepreneur, having been in strict corporate strategy roles, former consultant. But at the same time, it's how do we mitigate our investment risk. And so part of our secret sauce to Overton, is that we're unlike a lot of early-stage investors, we have a bench of operating partners that we engage, both in due diligence, but also want after we make an investment to help these companies get over certain hurdles.
So if it's growth hacking or supply chain, these are experts who have been there and done that, we don't own the business, we're even more VC, we're not private equity. So it's different, our job is to help the founder, be there as a thought partner, and help them make critical decisions, but at the end of the day, they make the decisions, but what can we do to help them get to that next stage? If it's a Series A, it’s maybe about thinking it through their go-to-market strategy. Thinking about different channels, strategies should they try, I don't know, direct mail versus email marketing, or a new retail or whatever it is, right?
That is something that we gauge as part of our diligence to the founders. It's like - Okay, are they amenable to working with helpful VCs? Because some, frankly, there are some entrepreneurs who it's like - Hey, I just want to check. I know what I'm doing and you'll get your investor updates and that’s fine. So anyway, I just wanted to say that's kind of how we bet, it's really getting to know founders and teams, and where can we be helpful and valuable.
James Mackey 35:13
Yeah. Yeah, I love that.
Michael Nogen 35:14
Then you asked the question about scalability and unit economics. So when you're super, super early, and you're still testing the market, maybe you're testing pricing strategies. You're certainly not thinking about profitability on day 1, but how are you going to scale? We're thinking about scaling with unit economics in your mind. So can you show early traction, that over time this channel becomes profitable and at certain some point, you are going to be cashflow positive.
And so we always think about and remind entrepreneurs to think about and be thoughtful on their strategies towards making decisions that are going to be economically sensible, versus - Well, you know, we're just going to grow at all expenses, and we're going to raise another round, because we know we're going to hit all these milestones. And so we've told our portfolio companies, especially starting in, I guess, earlier this year because we can kind of see the writing on the wall with the public markets kind of slowing down. You know, let's make sure that you have more than the traditional, you know, 12 to 16 months of runway, does it make sense to either slow the burn, but be more thoughtful on spend. Because, right now, it's about scaling, but scaling where you can. We don't know when that next check is going to come, the next raise is going to happen.
James Mackey 37:11
Right? What's your outlook, specifically for the types of companies that you look at investment in? I know your general is fun, but just getting a feel for the type of investments you're looking into. What's your outlook right now and strategy? Are you kind of pivoting away from the new deal flow and looking at your existing portfolio and putting more emphasis on them or what's your strategy going into 2023?
Michael Nogen 37:35
Great, great question. Since it's two weeks from now haha.
James Mackey 37:39
Yeah, it's coming up. I guess you need to know this stuff. Yeah, it's hard to have a playbook. But everything is so unpredictable, I guess. I mean, maybe it's becoming a little more predictable.
Michael Nogen 37:48
What I can say is that we're now starting to see valuations come down, which is a healthy thing, because earlier this year, even in 2021, there were a lot of larger funds that were coming upstream, that were pushing into these valuations to crazy heights. Now, we're finally seeing things get calmer, where they should be and normalize. Investors like myself, we will have cash or dry powder. So we think there's a tremendous opportunity in the new year because there might have been deals where the valuations didn't make sense. There's a great business model, and a great team but there are certain valuation-type scenarios that we have to be able to achieve.
And so maybe also, now we can achieve them. But I think that what excites us, number 1, anytime that there's a downturn presents a lot of opportunity. Number 2, making sure that there's enough cash, and 3, I'm telling all my portfolio companies just to make sure that they have runway because the fundraising environment, I think is going to be slow, probably through until maybe the second half of 2023. For entrepreneurs, but also for fund managers that are raising.
James Mackey 39:33
Yeah, everybody's getting pitched. I mean, everybody's out there raising events. I think sometimes entrepreneurs forget that when you're running a fund, you're running a business and you're also constantly in fundraising mode. And this is really impacting everybody's strategy across the board, whether you're building your own company or your venture capital partners are kind of in a similar boat.
So hey, look, we're coming right to it, we got to jump off in a minute here. Michael, this has been a lot of fun. I lost track of time and forgot we were recording, which is always a good sign. Just engage in the conversation and learning from you. I wanted to see if people want to engage with you and your company where should they find you online?
Michael Nogen 40:20
On LinkedIn or Twitter.
James Mackey 40:24
And it's Michael Nogen. Well, thank you, Michael. I appreciate you joining me today.
Michael Nogen 40:38
James, thank you! I had a great time.
James Mackey 40:40
Absolutely. For everybody tuning in, thank you for joining us! If you enjoy listening to Scale by Design, we would love a review either on Apple podcasts or Spotify, or whatever streaming platform that you tune in to. We appreciate you and we will talk to you next time. Take care!