The King of Marketplaces with Fabrice Grinda of FJ Labs

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March 10, 2022

This week I chatted with Fabrice Grinda, Founding Partner at FJ Labs. FJ Labs is a VC that specializes in marketplaces and invests in every geography in every category at any stage. As Fabrice puts it they do angel investing at venture scale, meaning they don’t lead rounds but do a massive number of investments every year. Last year they made almost 200 investments.

Fabrice is super interesting beyond being a VC. He’s been a serial entrepreneur for a couple of decades at this point and has interesting views on wealth and impact.

He started what was essentially the ebay for Europe and then OLX, the Craigslist for the rest of the world.

During our chat he shares some incredibly useful tips for entrepreneurs - especially for those who are interested in marketplaces. We talk all about his approach to venture capital, how FJ Labs operates and makes decisions and much more. Enjoy.

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Transcript (this is an automated transcript):

MPD: Fabric, thanks for being here.

Fabrice Grinda: Thank you for having me.

MPD: I've been very excited to have you on I think you've got a lot of wisdom and you do something that most people don't do and that you practice radical candor. It feels like in everything, every time I've ever talked to.

So I think we're going to get into some really interesting topics today. And I think I have a feeling you're going to share more than people normally comfortable with, which I think is very powerful. You're going to help a lot of people. Let's start though. Let's level set this can you give an overview of FJ labs?

I think people need to know what you're doing for your day job before we extend beyond. Sure.

Fabrice Grinda: So my my current day job is to be the founding partner at FJ Labs which is a venture fund - actually it's an accidental venture fund. It really came out of my angel investing activities while I was an interpreter.

So for the last 24 years, I've been building companies, I've been running companies and. Other founders kept approaching me for me to invest some of them. And for the longest time I thought they were, should I be doing this right? Is it a distraction from my core mandate as a founder to be investing in other startups?

And I'm like, if I can articulate lessons to learn to others it probably means I've internalized them. And so it's okay. And meeting all these amazing founders beyond helping them realize their dreams is also an amazing way to keep my fingers on the pulse of the market. So by 2013, when I sold my last company, which by the way, was like dried or missing.

I don't know if you want to cover that until I went, the last company was real quick. So the last company was a company called oh blocks. It's today, the biggest classified site of the world. It's a 11,000 employees in 30 countries. It's the leading classified site in Brazil and all black tem and Russia, Ukraine, all of these sued Europe and India, Pakistan of all the Southeast Asia and the UAE and all the middle east.

And it's basically what Craigslist would be or should be if it was running. By someone like me, meaning a modern UX UI, integrated payments and shipping and escrow. Exactly. No, no spam, no scab, no birders, et cetera. And actually targeting primarily women in a female friendly space, given that women are the primary decision makers in all household purchases.

That companies like over 300 million new users of mothers is absolutely ginormous. And after I sold that already at 150 investments doing really well already pulled them with my current partner. And I was like, I like building companies like invest in companies. Let's create a structure that allows me to do that.

And I never really set out to build a venture funds. And I think by virtue of being visible, I started being approached by potential investors and said, Hey, we would like exposure to where you guys are doing. Do you mind if we co-invest with you? And so 2016, we took our first investor LP for 50 million, one LP outside of our own capital.

Yeah, it's again, what I be basically they're people that had it, it's a company called . They were a big telco in, in Norway. And they had backed my biggest competitor when I was running about locks and ultimately we fought a big war and we merged 51 for us, 49 for them. And by then we, all of this I'd like unwell.

They'd made like a billion dollars and they ended up owning a whole bunch of classified assets around the world. And they were like, Hey, we love you. You've also made us a lot, lots of money. We'd like to understand what's going on in marketplaces in the U S to either bring it to our markets or defend against disruption.

And so it was really both strategic for them. And financial in 2018 we raise fund two and they're like, Hey, if you want to bring other people on board, why not? And other people's sorta approaching us. So we started getting like a lot of family offices that were being disrupted by tech and a lot of other strategics were interested in investing in the category.

And so we finished deploying that and that was a hundred, 225 million finished uploading that in July of 2021. And then we close fund three, which would be like three, 400 million with either amazing founders that I've worked with forever, like Reed Hoffman, or, whatever Kevin, Ryan, or the founder of Wayfair or these family offices were actually strategics interested in either buying or investing leader seizures in the companies move us.

So I guess w w. That was a long-winded way to answer your question. So my day job is running FJ labs. FJ labs is an a, a venture fund specializing in marketplaces. We invest in every geography in every category at every stage. But the focus is we really do angel investing at venture scale. We don't lead, we don't price.

We don't take board seats. We decide after two, one hour meetings, whether we invest or not with full transparency, we tell them why we're investing, why we're not investing what we need to change for us to change your mind. And we try to be as Frey, founder, friendly as possible. So we're not setting the terms we decided very quickly.

And we're super prolific. To give you a sense of scale to date, we've invested in overheat 150 startups. Last year, we invested in 281 startups, so 180 new investments or 101 followups, and it's a lot for a venture firm and it's been going really well. We've had 265 exits and so far in a 45% realized I are.

So things are good.

MPD: That's great. Okay. So what's the typical investment profile. Cause when you say angel investing at a venture scale, I get the angel investing part that your, the process is less rigorous it's you're looking at more strategic elements rather than doing your own diligence.

I get that nothing wrong with it. The question is when you say to venture scale, is that the reflection of the volume, the amount of capital you're managing the volume, what is it? The check size?

Fabrice Grinda: Yeah the angel investing in venture skills really because of the overall. Capital deployment. We're deploying a hundred million a year, 150 million a year potentially, but this funds which is way more than typical angels deploy.

Now, the reason it's still angel investing is writing small checks relative to the lead. We don't want to compete with the top VCs in the world for allocation. We want to be their friends. In fact, most of the deals come from friendly VCs or sharing deals with us in return. Of course, we send them all of our deals.

And so our pre-seed check size is going to be like 200 K or C check size, like 300 K or eCheck size is 3 25 or beyond words is 7 25. So it's fixed check sizes that we'll take lots of philosophers available and they're always small relative to the lead. And that's why it's kind of angel investing in venture scale.

But I'm more than happy to talk to you and walk you through the process of how we decide whether we invest or not. If you've

MPD: teed it up, let's do it.

Fabrice Grinda: Yeah. So actually, before I get to the process, I'll walk me through the flow. These days, every week we get about 200 inbound deals and often many more than that.

And they come from three sources, a third comes from the friendly VCs and every eight to 12 weeks, we sit down the top hundred VCs in the world, covering every siege, every category of geography and we share deal flow. And it goes from everyone the amplifies or whatever first submitted to the pre-seed stage with the.

General catalyst, Bessemer Sequoia first walk in the middle, all the way to whatever the tigers at the leader stages, where we bring them all of our best seals. And in return Bain by to some of the deals where we have expertise. So mostly marketplaces about a third of the deal comes from fellow founders.

So at this point we've backed almost 2000 founders in the 835 companies. And they come back for their next company. They send us their friends. They've sent us their employees to becoming founders and about a third of the deals come in cold. And it actually, we review even the cold inbound deals and that 16% of the investments we've made have come from cold.

And some of the very best investments come from cold. So we get these seals they're assigned randomly to one of the team members, unless someone says they want it. We we're four partners, three associates, and one analysts. And we reviewed the deal we decide, is it appropriate or not for us or not?

And usually about. Three quarters of them are not there. They're amazing, but they're not for us. They're like biotech, hardware, space SAC, and we don't feel that we have appropriate expertise. So we review and we, the other 50, we take a one hour call and that one hour call, we try to assess four things and that's actually the evaluation criteria.

Do we like the team? Do we like the business? Do we like the deal terms? And does it meet or pieces of where the world is heading? Now, let me double click on all four of these. Do we like the team. Every VC in the world will tell you. I only invest in extraordinary people. The thing is that's extremely subjective.

What is an amazing team? And we've actually looked and thought through what it meant for founders to be very successful for us. It's someone who is both a visionary and an execution machine. And that means someone who is extremely eloquent and as extraordinary communication skills. But that's not enough because if you only have that, maybe you build a you build a very large company, but one that's not profitable or it doesn't scale, et cetera, but that's, that is necessary.

It's a necessary but insufficient condition. Because if you have an amazing, if you're an amazing or rater or public speaker, you can attract better teams. You're going to raise more money. You're going to get better PR and you have better. But you also need to be able to execute. And we look at that, that we evaluated over the course of when our call is, how well do you understand the business, your hand?

How well do you understand you did economics? And we want you to be able to articulate even pre-launch, we want you to have done the lending page analysis and done a customer, cocky a customer acquisition cost analysis, and compare that to look at what the average order value in the industry is.

See what the net margin structure you're expecting is. And you should be able to articulate that intelligently and the Venn diagram of people that are amazing storytellers and people that are amazing at execution is actually the intersection is very small and we want people that are both number two, Businesses that are compelling.

And for and so for many, some VCs, by the way, number one is enough. And if you're pre-seed, pre-launch obviously will, this is the most relevant metric once you're post-launch actually we do care, but the other three number two is, do we like the business? Which means for us, is the category large enough?

Or can it be larger enough through your execution and, or the unit economics is compelling and we are extraordinarily unit economic driven in marketplaces. And obviously this a little bit different if you're in e-commerce is a little bit different if you're in SAS. But we try to invest in businesses where you re.

You're fully loaded customer acquisition costs on a net contribution margin basis after six months. And we'll use three X your CAC after 18 months now. And ideally we don't know what the LTV to CAC is because you have negative churn. In which case, who knows it's 10 to one, 20 to one, et cetera.

And if your unit economics are underwater, which can happen, we want you to be able to articulate why with scale. They will automatically fix themselves. Maybe you're in a food delivery business. And right now you're doing one delivery per hour, you're paying $15 an hour. Your delivery guy, your unit economics are under water, but the minute he does three deliveries an hour, it's $5 a delivery.

And it works. Something like that. Like I don't, it should not require every story. The multi-payer so align for you now, economics to work. And we really care about that because otherwise you may build a very large business that doesn't make any money, which in the long run doesn't really work out. Number three, what are the deal terms?

And we are. Yeah, nothing's cheap and tough, but we want something that's fair. In light of the size of the opportunity, the quality of the team, the traction that you have,

MPD: what is fair? How do you think about that?

Fabrice Grinda: So evaluations went up, especially in the late stage last year and, something I covered in one of my macro articles, but the median pre-seed the median valuations didn't move up nearly as much as you might think.

And crypto falls a little bit of time that route, but then the median pre-seed for us until 2020 was like three to five pre raising one. And last year went up to six, seven, but not that much more. And so if you're, pre-seed raising a 30, more likely than not, we're not going to do it. The median seed used to be like re three raising at eight and nine pre and last year we went up to 12 and that's still reasonable for us and the median a, you used to be, you're raising seven at 22 and iRacing 10 at three.

And those are fair by our standard with relevant traction. So as your seed ran, we're expecting you to have whatever, 150 key in GMV per month with a 10 50% take rate of the, a Rand, you're doing 500 K in GMV and the B round, you're doing 2 million GMV per month, more or less, it depends on the take rate you have, et cetera. Now there are exceptions, right? Like the rounds you've been reading about in the press are like, oh, they raise a $50 million series, a two 50 pre total, and these crazy. But yeah, we wouldn't do those deals. There were amazing for the founders and the companies that actually I can make an argument.

Many of the companies that dies because the company, the founders raise too much money at too high, a price. They don't grow into that valuation. And that kills the companies because of like anti-pollution provisions and it one more Sudan, Rams. It's really one of the top reasons companies die is founders raising too much money at too high a price.

So we don't do these deals. So the mean by the way is way higher than mean seed a and B is way higher than numbers I gave, but the media actually is not. And we're so prolific. We have a good sense of where the market is. And so we stick to our with the exception that if you're a returning founder for us, that has done well before we will back you, no matter what, no matter where you build, no matter the raise, et cetera, you don't even need to take a call.

We'll just send you the check. And so we have done a few crazy deals by that's the reason it, also many of those deals are out of scope for us. Like we had the founders of a. Vettery, which was a labor marketplace then decided to go. And we sold a deco for a hundred million made of whatever, 8.5 extra money.

Everything was great. And then they went on to build Archer, which has an electric flying taxi company. And they're like, we're launching we're pre-seed, 80 pre or whatever, a hundred pre. And we're like, okay, here's the check

MPD: is those is the re-upping founders, your lumps,

Fabrice Grinda: Ever increasing because we have 2000 founders, we backed, put it differently.

30% of the portfolio is non marketplace. And many of those are the re-upping founders which is a good sign that they have they're coming back and they would have worked with us. But we also do like tools around marketplaces, et cetera. And we're doing a lot of stuff. That's like an interest things that interest us, which actually leads me to selection criteria.

Number four is your idea in line with our thesis of where the world is. And we are extraordinary thesis driven. We have a clear thesis on the future of finance, the future of food, the future of see the future of automotive, the future. And even within marketplaces, we have three core thesis on marketplaces that we look for and we want ideas that are in line with that.

And in a way we're also mission driven, right? The reason I'm a VC, the reason I'm an investor is I, the world is facing a number of fundamental problems. We're facing a climate crisis. The, we have a social inequality and inequality of opportunity or social injustice. We have a mental and physical we'll be in crisis.

And the, I do not think that a. The political system is going to address any of these. And so it's up to us as founders to use, to be solutionist to use technology, to find solutions to the world's problems. And so it is mission driven from that perspective. I want to try to invest in companies, founders that are trying to address these fundamental problems.

And by the way, the bigger, the problem, the bigger, the economic opportunity, and it fits better in a for-profit model because this actually ends up being more scalable and more effective. And here we have it. If we'd love the team, we'd love the business. We'd love the deal terms. And we think that the ideas in library, their thesis, we invest and we can decide that in one hour.

MPD: That's great. What's the what are the reasons why a founder should choose to work with you guys? This is my underhand pay.

Fabrice Grinda: And take a swim, the were former founders. So we actually know what it's like to operate a business and we can talk extremely intelligently about the complexities of operating a business.

We've probably seen more marketplaces than anyone else either. And in addition to the fact that I run marketplace, I've run marketplaces for most of my life. And so when it comes to everything from like building liquidity, do you start with the supplier, the demand, should you go hyper-local or national or international?

W should your rake be 5% of 1% of 20% you'd have, how do you measure it? Let's see supply demand. We're probably more. Versed. Any other investors out there in this category in terms of being able to help you and last but not least, we're in an ma because we don't lead and we don't price. And we have these amazing connections with all the other VCs, we will get you funded.

Like our superpower is we will get, if you need help raising your filling this round, we will do that for you. And more importantly, and most people do not need help raising a specific, the ran they're typically talking to us about but if they, when they go to the a, when they go to the beach and they go to the sea, we will ensure them to whomever, like first of our grade lock and Driessen whomever is right for them.

We will make the intros and is extremely valuable for them because it directs the fundraising and makes it a lot simpler. We will give them feedback on like them, but back on the pitch on the process. And it's also super efficient because you'd we have 850 companies in the portfolio and yet.

We're often the most value added investor these founders have because we really focus on when to help them, we'll do, we'll help them right before they go fundraising the next ran and that's the most valuable for them.

MPD: Okay. So there, there is a implicit piece of this that I think is the most interesting.

It's the sheer volume of your portfolio, right? There are a couple of firms out there that have huge volumes Techstars. My buddy, over at David phone number Techstars has a huge volume. He's had a very different model than you. You have a huge volume. It's not as common. Most firms are going out there and targeting 25 deals in a portfolio.

Is something there about what is your thinking around the optimal volume in a portfolio?

Fabrice Grinda: First of all this is a reflection of my personality and not there's no intelligent portfolio construction. So I actually have done the research. And what is the ideal portfolio construction by the portfolio of F J labs is completely built.

Bottom line. We meet people. If we'd like them, we invest. If we don't like them, we don't invest. And at the end of the year, the chips fall where they may, and it just so happens. Of course, there's more seed deals and ideals, more aid deals and deals and CDLs, there's more U S deals than European deals or European deals in India and Brazil deals.

And so if you look at our portfolio for a number of deals for of, we're mostly seated a then a few B's and very few season and not too many pre CD there. And then we're 55% us Canada. We're 25% Europe. We're 10% Brazil, India. We're like the rest of the world and really all over the world.

But it's not by design. Now in terms of number of deals to answer your question specifically, is I diverged on portfolio construction. The I actually I think there are many problems to solve in the world and I like finding ways to address many of these because we choose not to compete with the major VCs.

We could actually not run a concentrated portfolio. So first of all, by design, if I wanted to invest in 30 companies, I would need to be a lead and I would need to ride like five, 10, $15 million trucks. Then the entire strategy. Of working with the other VCs and being their friend and other competitor becomes invalidated.

But more importantly, as a reflection of my personal philosophy, I just like, meeting lots of interesting people and being exposed to all these different areas. And I get I, now I have a great sense of what's happening in like everything from climate to to automotive, to real estate.

And I think it's fascinating there also the corollaries between these other industries, which are the marketplace dynamics so much closer to people suspect. I find that fascinating. And so it's more a reflection of my personality, but that said there is data, but what is the correct portfolio size and angel listed and analysis of what your return profile looks like based on the number of deals you have.

And basically because venture follows a power law. The best deals return, do most of the returns you need to be in those best deals. And the best way to be in those best deals is essentially to be in every deal. And so the angel was study, which actually was published in peer reviewed and all that is the more diverse your professor of your portfolio, the higher your IRR and your returns that you should invest in all qualified.

And they have a definition of what qualified beans deals possible. Now, the reason most VCs are not built that way by the way, is actually driven by the LPs. So LPs heat that diversity. Because they see their jobs as themselves picking the VCs that are more specialized. So the LPs are like, oh, I'm going to have this fund.

That's going to be my series, a B2B SAS company. I'm going to have this one. They're going to be my series B DDC e-commerce in Europe, whatever. And they do, they're like little funds of funds, strategy and fund that does all that for them. They really don't like, because in a way it's like the job they should be doing.

And so LPs are not super keen on that diversified strategy. And so it wouldn't work for most, but it really works. And the benefit is over longer periods of time. We're always going to be in the title. That's solid before now and anyone fund life, by the way, we're never going to be top decile because if you imagine a fund, eh, is hyper concentrated, they do 10 investments.

One of those is a hundred X. They're going to be at a 10 X funds and they're going to be topped us all, but they're going to have massive variability, next fund they're 10 may not hit and they made Richard money. And by the way, most VC funds actually don't return cashflow cash money beyond the S and P the top Cortel does.

And the top quartile is actually highly correlated over, over fund life by most do not it our case. We I've been, if you include all of my history as an angel investor and but not as a founder, right? I'm not including my benefit. The equity I got into companies I've founded on the 270 exits we've had a 45% realize I are over 24 years either.

That's I don't know where that ranks. It has to be in the top 10%, maybe in the top 1% over that time, Peter.

MPD: Given that you're diversifying so much, is the core value add more sourcing or is it more deal selection? Because one of the things, theoretically, arguably the best portfolio is one investment, all the money in the world and the best company, the best returns, that's it.

But the presumption there is that someone could be a good enough deal picker and get access to it. The core issue for a lot of VCs is they're not great deal pickers. So how do you think about this? Is that the message to LPs like, Hey look, we're good deal pickers, but we really don't have to be because we play the game so broadly.

Is that part of the narrative for you?

Fabrice Grinda: Not really. So we were actually would argue we're very good deal pickers. We will buy often. We will not be in the top 0.1% of deals by the way, because we're so sensitive on price. And we're so sensitive on unit economics, either like we would have passed the Facebook, we would have fastened Google because neither of them had business models when they launched, nor could they articulate where those models, the, those those models were.

But we have a lot of singles and doubles and triples. So even though our portfolio is so broad, we've actually made money in over 50% of our exits which for a seed, mostly seed fund is extraordinary. Last year we had 41 exits, we made my name 24, we lost one in 17. And obviously you make a lot more on the 24th and you lose on the 17.

So I think we were very good pickers, number one, but two, obviously our deal flow is amazing because we built a brand as these founder friendly. Guys who've decided after you investor died, who were super helpful. And if you're doing anything marketplace related, by the way, marketplace, let me define it pretty widely as if you're building something that's an intermediary between a seller of something and an a at a buyer or something.

And that thing could be anything. So to me, most of FinTech is the marketplace because, think of Clarita. It's an intermediary between providers of capital. Typically the banks will give you the lines of credit and consumers that are borrowing. And many people wouldn't think of it that way.

But to me, those dynamics, if you're matching sellers, the buyers, regardless of the category it falls in the marketplace definition for us, which is obviously why we can invest at 300 marketplaces in a year.

MPD: Okay. So there's a little bit of learning here. I think you're a bit of a pioneer in this type of volume for something outside of an accelerator incubator model.

Yeah. Whereas this model gone wrong that you had to correct. What did you learn along the way? That's nuanced to not being a VC and not being an investor, but being a high volume VC or high volume investor,

Fabrice Grinda: The way luck what's I don't know if it has gone wrong in the sense that we can typically.

First of all, I don't think it's necessarily easily replicable by most because we are in extraordinary privileged position to answer also part of the previous question where the deals come to us, right? Like most associates and analysts and most VC firms spend their time like networking and finding deals.

In our case, we're like drinking at the fire hose of incoming deals and we're reviewing the incoming deals and we would like to do more at boundaries, just we're too busy, previewing main band. And we have the 200 Ben bands. We'd there's. Yeah, we do miss seals as a result of that. So I D we are trying to change that to some extent, even though, so first of all, there's the, part of the reason I can share my entire strategy online, including everything, the deal memos, the philosophy, et cetera, is even if you had all of it in your mind would encode it, even though probably hard to do without the 24 years of like ad bats of seeing 5,000 companies a year without a deal flow.

So I really replicable now where it's gone wrong. Yep. Sorry.

MPD: And as I say, FJ labs is a

Fabrice Grinda: marketplace. Yes, we are our marketplace. Absolutely. We're matching founders with money, from our LPs. And by the way, our LPs I'm the largest LP in the fund, right? Like about 450 million we've deployed to date, over a hundred million of that is my own money.

Maybe one 50. I actually, haven't tried to look at it too closely because this started as a frankly personal investments for my partner. I said myself again, the accidental VC thing. One more thing. I know, I didn't answer the question. One more thing we do very differently by the way is the following.

So we. We don't reserve capital for follow-on. So we'll invest that of whatever fund is currently active. The follow-ons. So we tell our, because we don't always follow on we'll evaluate follow-ons as though they were new investments, knowing what we know now, the company of the team would the terms, would we invest?

And often the answer is we love the team. We'd love the company, but the valuation is insane, so we're not taking our Paratas. And so we're, we've been following on and maybe 33% of the deals. But as a result, it doesn't make sense to reserve capital fellows in a fund. So we do it in other funds, which leads me to the issues in a way we face, right?

Like the problems we face. As we have had a really hard time, much harder than ever to expected raising capital other than the capital that keep to us automatically. So we've had these LPs that are like friends. They're like, here's a check, they know

MPD: you were, I know your success,

Fabrice Grinda: those exactly, or strategics that we've worked with from across many years who want to exposure where we do or family offices.

And so there, the capital'