Transcript: Martin Tobias: Founder of Incisive.vc

Host: This episode of Startup Project is brought to you by Bear.tax. Bear.tax compiles all your crypto transactions and makes it easy for you to file your taxes. Check out Bear.tax, that is B.tax.

Host: Hey Martin, welcome to the show.

Guest: Hi, thank you for having me.

Host: Uh, so I was thinking about how to structure this conversation and because you have done so many things in your career, but I thought the best way to start with uh is how did you first get started with Angel Investing and what was your first Angel investment?

Guest: Ooh, that's a good question. My very first Angel investment. Nobody has asked me that. Um, I know what my first fund investment was, but my first direct, my first fund investment, I joined um SV Angels, Ron Conway's group.

He raised 30 million, um, and invested in a whole bunch of startups in the um early 90s and um, one of those happened to be Google. Um, and he distributed Google shares, which I still own.

Uh, so that kind of got me hooked on the idea of Angel Investing. My first direct investment after that, um, I think it was in an e-commerce or an electronic software distribution company. Um, and now you stumped me because I'm forgetting the name.

I was on the board for five years. I'll get back to you on that. It was an e-commerce software distribution company.

Host: How did the process or you know, your thinking change from that first investment to now?

Guest: Well, um, the way the that that I started as an angel was like a lot of people do. And one of the reasons I joined Ron's fund is I said, hey, he's a smart guy. He's going to invest in a lot of companies.

I'm going to see how he thinks about and I'm going to get into a lot of deals that I would not otherwise have gotten into. So, I would say the first um, you know, 50 investments were basically using a shotgun.

Almost any investment that somebody sent me, a friend of a friend or whatever, I would write a check.

And um, frankly, you know, I started Incisive Ventures after, you know, the pandemic because I stopped after doing about 150 investments and I went back and reviewed in a pretty methodical way all the investments I'd ever done, which ones turned out well, which ones turned out poorly, how which ones, what was I using to make the decisions at the time?

And frankly, I didn't put any framework around my Angel investing or my early stage Angel Investing for probably 15 years.

Um, and uh, I would not suggest that other Angel investors wait to write 150 checks before they stop and think whether how how they're doing. I would suggest you do it in fewer investments.

Host: But today, uh, I was going to your website, uh, and you do have a certain theme or certain criteria in which you look at today, right? You call them as Meta things. Can you talk a little bit about what you look in Yes.

Guest: You know, I put those meta themes together because I stopped and spent like three months and analyzed every investment I'd ever done.

And, you know, which ones did I know have some asymmetric information advantage, which categories did I uh know something or believe something which was a counter intuitive thesis.

So everything on my blog has really you know, is really um coalesced itself in the last year, which is probably year, you know, 25 of my Angel investing. I would recommend that Angel investors try to do that thinking before 25 years.

But um, um, you know, what I'm doing now going forward, how it's changed is, you know, rather than using a shotgun and just I mean I invested in biotech companies, I invested in hardware companies, I invested in consumer packaged goods.

And what I found out by going back and reviewing all my investments is that there were certain categories that I just wasn't any good at.

I didn't I didn't have the right network, I didn't add any value to the company, I was just following the other co-investors. And frankly, I think that's a an error a lot of early uh investors make is they overweight the co-investor.

They say, oh, you know, Sequoia is investing fine.

You may be do okay with that, but I really believe that every investor needs to come up with the particular area that they think they have some asymmetric information advantage in combined with the area that they believe their network connections are really going to add value to the company.

And for me that came down to those seven themes, which can be really summarized to be, you know, a software innovator that's reducing friction in some new market, hopefully creating a new market category.

Um, that means I'm not investing a lot in crypto, hardware, biotech, consumer packaged goods. That leaves out uh a lot of areas that may be good investments, but they're just not the right investments for me as an investor.

And I would recommend every investor go through that process.

Host: One of the things you said is you started Incisive uh in the middle of a pandemic, right? Uh how did do you think I mean in your perspective like investing used to be in a way regional, right?

That's why you know Silicon Valley has a lot of investing firms or private equity firms. Uh, but now we are in suddenly a global remotely connected world, which we were in before, but we were not, you know, leveraging away.

So how did starting Incisive as a remote first, right? You're operating completely remotely, right? How did the due diligence process? How did the whole investment uh decision making sort of you know, for you was in between a pandemic?

Guest: Well, um, you know, the pandemic has I think been really great for companies and for capital.

Um, because you know, in the past it was a very regional thing and, you know, if you couldn't for some reason get to Silicon Valley, you couldn't get access to the biggest capital pool.

So you were limited to the geography where you were at, um, and the investors that happened to be there.

Now, um, one of the great things about coming up with a thesis that is, you know, software companies, you know, reducing friction, is that you are now free to look for that thesis anywhere and you're not geographically focused.

You know, there are regional VCs that I think have done okay, but they're limited to their region. You know, both the capital and the companies were limited.

When you have a thesis about a particular sector, and I know people that are like great in crypto, and they'll invest in crypto companies anywhere in the world.

So one of the things that pandemic did in a lot of areas is to pull forward trends that were already going on.

You know, this idea that I could invest in a company, um, you know, in another city, was always there, but nobody, very few people did it because there were um, you know, this predisposition to want to meet people in person.

The pandemic made it impossible, so now, if you're going to have a Zoom call with somebody across town, why don't you have a Zoom call with somebody in India?

So, I think that the pandemic um actually opened up the capital markets to for startups to people all over the world and opened up the capital markets for investors to companies all over the world.

If you're and and you know, that's why I say you got to have a theme as an investor because now you can look for that theme anywhere in the world.

As far as the diligence process, when I'm looking at an investment that is particularly far away, you know, outside the United States. I've been in every city in the United States, so I always know somebody in those cities that can help me.

I use I almost always have somebody locally who has made that personal uh connection.

You know, in India, I'm a partner in a fund called 2 a.m. ventures and they know all the people, they go in and and have the personal meeting with the CEO and they help uh on the diligence side. So I will co-invest with them.

I would recommend if you're going to be doing a lot of these, you know, farther flung uh things that you uh have if it's not yourself, if you don't already know the person, you know, you then have somebody on the ground that will do that.

You know, I invested in a company in Mallorca last week, but it was, you know, founded by a guy who I used to work with at Microsoft in Seattle, who I've known for 20 years. I saw him every day two years ago.

I haven't seen him in 18 years in person, but I still had a, you know, enough of a relationship with him that I, you know, could do the diligence that way.

Um, I just invested in a company right before this call, um that was founded by a guy I met at a dinner in Los Angeles six months ago. And now he started a company.

So the diligence process, um you have to have some personal connection with the CEO, I think, but that can be done by uh somebody that you trust.

Host: So, since uh you know, you brought up India and to a venture, how did you get into uh you know, investing in Indian companies? Or was it a natural extension with Incisive or were you thematically looking for, you know, diversifying and investing in India?

Guest: Well, the minute that I decided, you know, I'm looking for companies that fit my themes, the next question is, am I willing to look at for those companies all over the world?

And um what I saw happening in India is uh obviously, you know, it's a giant market, but there are also certain aspects of the stage of development of that market in different sectors that make it a better opportunity than America.

Um, you know, in America, we've gotten so capital efficient. I remember I invested in the 90s in a company called Cloudmark, which was doing anti-spam. And at the time anti-spam spam was a big problem.

And um, you know, I invested in Cloudmark and literally within a month, there were 50 startups all going after the anti-spam space, all funded by top tier VCs and it was a freaking blood bath uh because we have such an efficient market here.

And I thought to myself, you know, is India less efficient? And as an investor, you want to be in a little less efficient market. And so uh that's earlier. Um, and when I started talking to people in India, uh it turned out that that was the case.

They're they're younger in terms of the, you know, capitalization uh phase. There's less money there even though more money than there was even five years ago. Um, a lot of the markets are earlier.

Ideas that have already become unicorns in America have not yet started in India. So just from a stage perspective, um, I think the opportunity can be bigger uh there because it's earlier in all aspects of the market.

Smaller capital chasing, you know, fewer deals. You know, when I invest in a company there, there might be two or three other startups going after a similar thing as opposed to 50 in America. As an investor, that's what you want.

You want to be betting on the best jockey you can, but you want to have as few people in the race as you can.

Host: Uh, so are there any specific sectors that you like in India versus are there any specific sectors that you don't like or specific, you know, types of companies overall in based on your observation?

Guest: Yes. Um, I like the ones that are uh not simply copying something from America or China that they saw, but doing something which is fundamentally exploiting something, you know, about the Indian market.

For example, I invested in this company called UvaPay. UvaPay has a Fintech platform that works without an internet connection.

And one thing that I didn't realize, you read all about broadband and smartphones and everything and how it's free in India and yada yada yada. And yet they still sell 15 million dumb phones, feature phones, not smartphones a month in India.

And in rural India, the cost of a data plan is still prohibitive relative to the income.

So there's a giant, hundreds of millions of people who are on a technology platform at scale, uh, who want access to advanced internet features but don't have an internet connection.

Um, so companies can target that and that's something specific about India. Um, that that opportunity is not here in America. Uh people are not buying dumb phones in America.

I invested in a company in um that's operating out of India called uh Mango Sciences. And they're doing uh analysis of um health records to try to target uh novel cancer therapeutics, um, um, to uh, you know, help uh cure cancer in India.

There's some things about the Indian market that make it different. Uh, in America, this company would not be possible because we have HIPPA regulations, which means that data mining companies can't get access to medical records.

In addition in America, despite our healthcare issues, you've got 70, 80% of the population have insurance. In India the population is much smaller and 95% of cancer care is out of pocket pay, so you don't have the insurers in the middle.

Um, so you've got some certain things about the Indian market, the ability that to mine records, which you can't do in America and a huge uninsured population that makes the particular thing Mango Science is doing, you know, sort of unique um, uh in in the world even.

Uh, so I like to invest in things that are, you know, doing some um, exploiting some dynamic that's unique about the Indian market as opposed to copying uh something from another market.

Host: You know, one of the uh sort of points that comes up whenever I talk to investors uh from, you know, who are not Indians uh is where the company is registered.

Like for example, um YC often asks Indian companies to flip the structure to a Delaware um LLC or C Corp, right? So, do you how do you think about uh that factor when you're investing in Indian companies? Is is that a deal breaker or uh?

Guest: Um, it is not a deal breaker. I have invested in India-based companies and frankly, I leave that up to the CEO. Uh, YC is correct in that if you want to attract American investors, having a Delaware Corporation makes it easier.

Um, but um, it's not impossible and I have invested in in I think the that the CEO has to decide what he or she wants to do with the company eventually.

If you want to attract Indian capital at some point or be listed on the Indian exchange, you need to be an Indian company. Um, if you primarily are going to be raising from foreigners, you might want to be a Singapore or some other company.

Uh, for me, it's not a deal breaker either way. I think the CEO should make the best decision based on, you know, the future he wants for the company.

Host: Yeah. One other fascinating uh thing about you is you've done so many investments, you've seen multiple cycles in terms of IPOs. Um, I mean right now the valuation across the globe are really high whichever stage you pick, right?

Uh how do you come to the terms of, you know, uh valuations that we are seeing uh in private markets? Uh, whether it's high, whether it's low and how do you, how are you navigating that uh, you know, the valuation uh dilemma?

Guest: Well, as an early uh investor and as a smaller investor, you are 100% of the time a price taker. You're not a price maker. Uh, my fund is not leading any uh rounds.

So, you know, your only decision is, am I willing to pay the price that the company wants? Um, and uh, so, you know, you really have no leverage as an investor uh and right now. Um, so that's the only decision.

Then the question becomes, um, you know, uh are the valuations that the company's asking for too high? Uh, I tend to not do a lot of YC deals because in general, I think that their prices are too high.

Now, they also have a ton of unicorns and more valuation created than any other accelerator, so they can justify those valuations. Um, I just think you have to risk adjust that as an investor.

Uh and decide, you know, if you're uh okay because at the end of the day, um, you know, like for example, Google. Um, you could have said Google was overpriced every time they raised money. And yet, you know, it's worth a giant amount of money.

Sometimes the best companies are overpriced because they're the best or feel overpriced because they're the best companies.

Um, one concept that I have started to apply to uh valuations is the concept of uh notional capital and the preferences that you're getting as an investor.

Um, I started to think about this when um Andreson Horwitz wrote $100 million check into Clubhouse, a company that was barely a year old at a $3 billion valuation. I said to myself, is it really worth $3 billion?

But if you think about it, um the Andreson Horwitz and all the investors had a total of about 150 million into Clubhouse.

So in order for the and they probably had it in at preferred shares, which was the first money to come out in any sort of a liquidation. So given that, your hurdle rate to get your money back if you invest at $3 billion is not $3 billion.

It's $151 million. So, um, given the right preferences, you know, usually the last money in is the first money out.

I don't worry as much about valuation if the notional capital, the total amount of capital that has been raised is small relative to the valuation because even if Clubhouse sold for $500 million, Andreson Horwitz would make money.

Now, the press would say it's a failure because the last round was $3 billion, but Andreson Horwitz would still make money.

So, uh as an investor, I always consider the the concept of notional capital and my preferences in the capital stack in relation to um valuation and when those are all positive, I'm more comfortable paying what might feel like a higher valuation.

Host: I think this is also something that that is not often talked about in the press about when SoftBank or Tiger Global does larger rounds in late stage or you know, even at CDCC series B.

I think the preferred concept is not at all talked in media and that's how people always think about the downside being, you know, zero.

But uh they often tend to miss the you know, the dynamics and calculations that come in uh, you know, in in an undervalu sale because they the last in first out concept is something not at all reported anywhere uh in your regular.

Guest: No. It's not well understood outside.

Host: Yeah, that's a very good point actually. Uh so one other uh interesting thing while I was going through your portfolio was your investment into Docusign uh and how early it was.

Um and I think at that point of time it was almost illegal to do uh electronic signatures as well.

Uh can you talk about like the story of how that came about and you know, why did you think to even, you know, fund something that is, you know, that might never actually be legal.

Guest: Right. Well, um, that is one of the examples of what I call having a counter intuitive thesis and being right.

The only way to make outsized returns as an investor is to believe something that other people think is generally silly or stupid and to be right about it.

Because the reality is if everybody agrees that the investment is a great idea, it's usually one of those things that's priced very high and very fairly at the time when they raise money. Um, and you know, even you could even say that about uh Google.

You know, when Google went public, um Altavista was a more valuable public company. Uh, there were Yahoo was it worth three times more than Google was.

Um, but you know, you had in order to buy Google stock, you had to have a counter intuitive thesis, which is like this little up andcomer is going to beat these guys.

In Docusign's case, the counter intuitive thesis was, um, you know, based on my core thesis, which is software that reduces friction and hopefully can be a category creator.

I'm like, here's the first company to create a platform that can do digital signatures. Signatures are used on hundreds of millions of documents every week.

Uh, it's a huge need having ability to do it digital reduces so much friction, makes it so much easier that if they can just get through the regulatory issues and a few other scaling issues, they could own the market.

And so it was very counter intuitive and I know a lot of people passed on it when I invested because they said, hey, these things are illegal, that's never going to change.

And I said, well, we're just going to give the company enough money to change the law.

And we did and they did and if you look at the value created in digital signatures, you know, there were other companies that could copy that feature and um, you know, but none of them were valued as much as Docusign.

Docusign probably got 90% of the value created in that category. Despite there being 20 other companies that could write software that did a similar thing because they created the category, they got, you know, they came became to be a platform.

That was the other counter intuitive thesis for Docusign why a lot of people passed. They said, this looks like a feature, not a company. You know, Adobe could add this to PDF in five seconds. Well, Adobe dragged their feet.

Docusign got enough of a brand. Adobe ended up buying a company called Echosign, adding it to PDF, but Docusign is still a hundred times bigger than Adobe because, you know, they were able to uh be in the market early enough.

So, those were some of the counter intuitive things that I turned out to be right that I believe that other investors didn't. Other investors thought it was a feature. Other investors thought that the regulations wouldn't change fast enough.

Um, I believed something different and I was rewarded for that belief.

Host: I think uh a similar thing that reminds me of is probably the legal battle Uber had to face uh for about in terms of scaling. Uh the closest thing I could, you know, compare with that example.

Uh I think I want to slightly shift gears and talk about, you know, your uh efforts in Incisive and the way you're doing it with your syndicate, right? Um was the plan always to go through via a syndicate and do something with a syndicate?

Because by that time you're already investing, you know, via funds, you're also investing as an individual. Uh, so what really led to that of going and, you know, going that route?

Guest: No, I I actually, you know, never wanted to run a syndicate or really manage a fund.

I have always just invested money myself, but when I decided to ramp up my own investing and I told, you know, 20, 30 of my friends that I had been investing with before, they said, you know, we love what you invest in, we like your track record, we'd like to invest with you.

In the old way to share deals with your friends is you just send the deck around to a few friends and they have to call the CEO, but it's like hurting cats.

It's really a strain on the CEO to have, you know, 20 different meetings and all this kind of thing. Nobody in the group is sharing diligence.

So um, I said, well, let me look at the syndicate thing because the great thing about a syndicate is I can write up all of my analysis about why I like the company, I can share my thought process.

I can very with a push of a button, share it with a lot of other people. If they agree, they can click one button and the money's in the bank. You don't have to do separate wire transfers, no faxes for, you know, wires information.

They've they've fundamentally reduced friction for an investor to share with other investors a deal that they're doing. So for me it was simply a way to get more money into companies that I was already writing.

I thought I have a $2 million a year allocation to write checks out of my own account into early stage investments.

And I thought to myself, you know, if I could turn that $2 million into $6 million, the the companies that I'm already investing in are now getting three times more money. Um, that's good for everybody. It's good for the company.

It's good for the people that invest with me because they had to do less work to decide on the investment. Um, you know, it's good for everybody.

So as long as there was an incredibly low friction way to do that, like I I don't want to hire a whole bunch of people, associates and staff member. I don't want to have an office, I don't want to have a giant back office that's doing K1s.

I don't want to call lawyers to create the SPVs. The the beautiful thing about Angelist, which I wish I had invested in 10 years ago is that they've fundamentally reduced the friction to um get larger checks into Angel deals.

And, you know, that's proven itself out. I mean, I think the numbers from Angelist, they've done two or $3 billion worth of SPVs through these syndicates in the last year or so.

Um, Angel syndicates have turned out to be a substantial part of the early stage investing uh thing where five years ago they were nothing.

Host: Yeah. And they've they've changed the game so much. They've resulted in like uh micro VC funds.

There are now, you know, collaborations which are even though the overall amount of capital is limited in terms of how much Angel contributes to VC ecosystem, the number of deals are actually significant, right?

You can get the piece, it's almost like you have an you have now a private exchange of your shares and I think one of the things they'll be probably launching this the secondary share platform where, you know, uh the private shares um would actually be exchanged and there'll be more liquidity in later stage startup equity.

Guest: Absolutely. I mean, there's competition coming, you know, for Angelist from Carta, from allocations.com, from other platforms. And, you know, they're they're going to have to keep innovating.

You know, they've made some innovations recently that are good, the rolling fund and, you know, things like that. They're probably going to add secondary shares, but that that's just great for the whole ecosystem.

Uh because it just means, you know, more capital, more liquidity, easier, faster capital for founders.

Um, you know, all of these things build on top of each other, you know, when, you know, 10 years ago a CEO might have to spend a year to raise a $500,000 seed round. You can raise that in a week now. Um it is it is just so much more efficient.

And uh and that's what capitalism is all about is making things more efficient.

Host: So what's your goal with Incisive? Uh do you have a particular milestone that you want to head with Incisive? I know like, you know, Jason has he always claims to have the biggest syndicate ever.

Guest: Yeah, well, I think he probably does. He's been doing it longer than than most people.

Um, you know, I I don't have a particular, I mean I you know, Jason's playing the, you know, get management fees for putting a lot of money to work uh game. I don't really want to play that game.

Uh, I'm not out there trying to build a brand like he has. He's got a great brand. Um, and and he is, you know, getting um a huge amount of deal flow because of his brand. I I I my brand is not as broad, you know, as his.

He's trying to do every deal that's any good. I'm trying to, you know, help founders grow companies that I know how to grow and can help, which is something different.

Um, I can't imagine, you know, doing in my syndicate more than 15 or 20 deals a year because I spend so much time with the CEOs and understanding the market and this and that. And you know, Jason's doing a hundred deals a year.

Um, I just don't and he but he's got a team of 30 or 40 people doing it. I don't want to have employees. I don't want to do that many deals. I want to write my own checks and if people want to write checks with me, that's great.

I'll make it easy for them to do that. If they don't, I don't care. I'm writing the check anyway.

So for me, it's just an the Incisive Ventures is just an extension of what I'm already doing and, you know, time will tell, you know, if if I'm any good at it, but I'm putting my own money at work and nobody is risking any more money in one of my deals than I am.

So pretty low risk for LPs.

Host: Yeah. So another thing I thought uh you know, would be interesting to talk to you about is, you know, how how did you get into biohacking? Because I know you've done a ton of work.

Uh you also got associated with Dave from Bulletproof Coffee and then Upgrade Labs um and I was, you know, listening to the story of how you helped your daughter uh when she had a trouble.

Uh but I was curious how did you actually enter and got this, you know, uh into biohacking itself.

Guest: Well, that was another uh just serendipitous sort of universe type thing. So, um it started at a poker game. Well, right before a poker game.

Um, so when I was off uh in between companies, I'd sold my company and I was retired and just sort of farting around playing a lot of poker.

I had a very long list of things that I wanted to do and one of the things that I wanted to do was to learn to meditate. And so I downloaded Headspace, I downloaded calm, I tried these apps.

And I thought to myself, these apps are okay, they've increased, you know, access to meditation teachers and now in my pocket, but I still have to sit here for 20 minutes and it seems like it takes a long time and I read the studies and it can take like 10 years to get the benefits of meditation and I just thought to myself being a computer hacker, I wonder if anybody's hacked meditation.

I wonder if anybody's figured out a way to get the benefits of meditation in less time, which is basically the core of biohacking. Find trying to hack, you know, your biology, which I did I'd never heard that word before.

So I had this thought on a Tuesday.

On a Wednesday, I happened to be listening to Dave As someone sent me Dave Asrey's podcast about this program he has called 40 years of Zen, which uses neural feedback to hack meditation and give you, you know, 40 years of meditation in a one week process.

And I thought to myself, now that's a hack. If I can get 40 years of meditation in one week, I'm in. So I call him up and I say, how much is it? And they say $15,000. And I'm like, huh, that's more than Headspace. Let me think about it.

I go to the poker game on uh Thursday night, which I played in Seattle for years and years. And guess how much money I won. 15,000. Exactly 15,000. Not 15,001, not 14,50, exactly 15,000. I said to myself, the universe wants me to go to this class.

So I took the money, I sent it. Uh, two three weeks later, I'm sitting in 40 at 40 years of Zen. Dave happened to be there. I met him. I said, this is a really smart guy. I have no idea what you're doing. I said, are you raising money for Bulletproof?

He says, actually we are. I got out my checkbook. I wrote him $100,000 check, probably the shortest diligence I've ever done on a company. I didn't even see a deck.

Uh, and then I got to be friends with him and then he said, okay, you know, now that you've done this this biohacking thing, this is what 40U Zen does. There's all these other ways you could biohack.

You can, you know, drink Bulletproof coffee, you can eat these things. And so I sort of got sucked down the rabbit hole by Dave because of uh 40 years of Zen. And thank God that I did.

I think I told you, we were talking, I was mountain biking three weeks ago and I broke three ribs and my um scapula in my shoulder.

And because I'd done all this biohacking, I did all these crazy things to try to heal my bones faster, like stem cells and pulsed electromagnetic fields and hyperbaric oxygen.

I went and got an x-ray from my doctor and he said your scapula is 50% faster healing than I would expect from normal medicine. What are you doing? And I told him all the biohacking but um, you know, this stuff I know it works.

Um, you know, I got really deep into it. I ran a biohacking company for Dave for three years called Upgrade Labs. And um, that's how I got sucked into biohacking, a poker game.

Host: Fascinating story. So, we're almost at the end of our conversation. So one final thing I'd like to ask you about is uh what's the one thing that you'd recommend for anyone who's interested in biohacking? Uh a book, blog or even if they're interested in knowing more about their health in general.

Guest: Um, I would say follow Dave Asrey or Ben Greenfield and uh or this other guy on Instagram called Tim Gray. Those three guys are probably doing the best job of describing um, you know, how to do biohacking to solve some common problems related with sleep or or health. They all have books too. I would pick up one of their books.

Host: Thanks. Um, thanks for making time, Martin and this has been a fun conversation and uh hope to talk to you more.

Guest: I hope to talk to you as well. Thanks. Take care.

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