Ben Lerer: The Truth About Venture Capitalism

Ben Lerer

Hello. This is Marc Lichtenfeld, Senior Editor of Wealthy Retirement and Chief Income Strategist at The Oxford Club. You’re listening to my exclusive audio library, “A Wealth of Knowledge.” I’m so excited that you’re taking the time to learn from some of the masters of the money world who I’ve been lucky to cross paths with over my years in the markets.

I’ve been fortunate to interview leading experts from all kinds of different backgrounds. You might recognize their names from the Fortune 500… from top financial publications and media… or even from the entertainment and sports world.

Marc Lichtenfeld: We’re talking with Ben Lerer. He’s the CEO of Thrillist Media Group and the managing director of Lerer Hippeau Ventures. Ben, thanks so much for joining us today.

Ben Lerer: Thanks for having me.

Marc Lichtenfeld: And so, when you’re talking about finding these amazing people, are they people you already know or are already part of your network? Or are people just pitching you and, like you said, you’ve got a gut feeling about a person? Do you accept cold calls in a way?

Ben Lerer: Well, so we’ve never done a deal that’s come in totally cold. I think the idea is that if you can’t sort of manufacture a way to get a warm introduction to us, that doesn’t speak very well to your ability to be able to do the same in sort of building your own business. You should be able to finagle your way into our network somehow.

Because I’m building Thrillist Media Group, my dad and Eric were building Huffington Post. Our other partner, Jordan, has built several companies. We’re all in operating roles and have been in operating roles and are sort of part of the New York tech ecosystem. And so we meet lots of people in the context of our day-to-day operating jobs, and so that’s really where the deal flow starts and where we got into the space.

Over time, once you invest in lots of businesses, we’ve built a little bit of a brand for ourselves now. And so, as people think about going and reaching out to early-stage investors, we’re one of a handful of folks I think are at the top of the list for entrepreneurs looking to raise seed-stage money, specifically in New York, but really nationally.

And I think we’ve also built this network now where we’ve worked with so many entrepreneurs that it’s birthed the next generation of folks that we’ve invested in. And so now we’re investing in entrepreneurs whose first companies got sold, and who are starting new things or people who were senior-level employees at companies that we invested in that left to go start their own things, etc.

And so it really is about sort of building a community and building out from the core group of people who we first invested in.

Marc Lichtenfeld: We’re talking with Ben Lerer, CEO of Thrillist Media Group and managing director of Lerer Hippeau Ventures. So, when you’re investing so early, I’ve got to believe that your win rate must be fairly low, and it wouldn’t have to be that high because I would imagine that the returns on the winners are extraordinary.

Can you talk a little bit about the numbers and how often you have to connect to do well in this business?

Ben Lerer: Absolutely. So when we got started, I think we expected our hit rate to be a little bit lower than it’s turned out to be. Right now in our first few funds that have enough history behind them to sort of – so that we have a pretty good sense of how they’re going to perform.

About 75% or more of the businesses that we invest in is seed-stage companies that end up going and raising subsequent rounds of capital, and certainly more than half of the businesses that we invest in end up building real companies, which I think was not something that we necessarily expected.

Of course, you’re right that there are going to be some outsized returns. One part of our strategy is to follow on with our winners. And so we reserve a bunch of capital in each fund to be able to protect our positions so that we are able to drive those somewhat extraordinary returns.

I think, generally speaking, you’ll see that there’ll be a handful of companies that will drive a large chunk of the returns at any fund, but the strategy really isn’t a total boom or bust one. We’re not taking just blind home run swings. We really are trying to mix in some bets that we really think could go boom or bust with some other companies where we maybe are investing in somebody who’s been successful multiple times over.

They’re in a space where we don’t think they’re building a billion-dollar business, but we do think that based on the valuation that we’re getting in at, we have a lot of confidence that they can 5X or 10X our investment.

So there’s sort of a dual strategy where we’re trying to – you do want to take the big swings, but you also want to make sure that you’re making some safer bets so that you don’t end up with just a ton of strikeouts.

The reason it would be tougher to find good deals today would actually be about competition. That more folks have sort of wanted to come into this space as technology investing has become more mainstream, as some of the sort of technology companies of the last generation – the Facebooks of the world, etc. – have become these big, incredibly important businesses, you’ve seen more money come into the space. And so there’s more competition.

I would say that we’ve also – where we have the benefit of having built this strong brand over the last few years, and so we’re probably able to combat that competition with having one of the leading brands in this space. So we do see the best deals. That being said, the macro trends  play a role in these early-stage businesses, but they’re not totally parallel.

We actually see the cycles around valuation moving up and down much more quickly in early stage. So an example might be that we’ll go through a period where the average deal will be at a $4 million pre-money valuation for a quarter, and a quarter later you may see deals suddenly start to get done at $6 million or $7 million, almost the same asset.

There’s also things like – there’s accelerators like Y Combinator. When Y Combinator sort of graduates a new class of companies that it has accelerated, typically prices go up in the market for a month or two because a ton of really interesting deals hit the market all at once, and every investor wakes up and everyone comes out. And suddenly there’s like a window where everyone fights for these good deals that come out of Y Combinator, and you see valuations spike for a minute and then go back down.

So there are these factors that sort of affect the market. But generally speaking, we see when that’s happening, we maybe take a little bit of a step back for a month or two, we bide our time, and we only move on the deals that we have the utmost conviction for. And then, when we see the prices go back down, we get opportunistic, and we lean back in.

Marc Lichtenfeld: This was fascinating, and unfortunately we’re up against the clock, and I know you’re busy, so I’ll leave it there. But I would love to have you come back again and talk with us, and I also just want to let you know that I really love the Thrillist website.

Ben Lerer: Thank you.

Marc Lichtenfeld: I visit all the time now, so nice job with that.

Ben Lerer:  I appreciate that.

Marc Lichtenfeld: That’s Ben Lerer, CEO of Thrillist Media Group and managing director of Lerer Hippeau Ventures.

So very, very successful private equity investors and just really fascinating guys. They work together. There’s a terrific interview done by Charlie Rose – you can find it online if you just do a search for Charlie Rose and Ben Lerer – and the dynamic between the father and son and two extremely bright guys who really understand investing and private equity and high-tech startups.

It’s really, really fascinating. I love the interview that they did together with Charlie Rose, so if you’re interested in more on this, definitely do a search for that. All right.

So if your broker’s pitching you a mutual fund that has a load, an upfront fee, I don’t care if it’s the greatest mutual fund in the history of mutual funds, run away from that fund and probably that broker ’cause he’s ripping you off.

And I want to talk about mutual funds. So if your broker is pitching you a mutual fund that has a load, an upfront fee, I don’t care if it’s the greatest mutual fund in the history of mutual funds, run away from that fund – and probably that broker because he’s probably ripping you off.

There’s no reason, no reason to ever pay a load on a mutual fund. There’s just no reason. There are a handful of funds that have very strong performance, and maybe somebody’s going to say it’s worth it paying the fee. I’m telling you, it’s not because just because a fund has done well in the past doesn’t mean it’s going to continue.

Yes, track records mean something, and a fund manager that does have a long track record of success probably will continue to be successful – not always, but he probably will be. I will give a quality manager the benefit of the doubt, but again, you’ve heard this expression all the time: Past performance is no guarantee of future performance.

So do you really want to pay somebody 3%, 4%, 5% upfront to take that chance when you can get an index fund that costs you zero to get in and maybe 0.15 of a percentage point to run every year? Absolutely. You do not want to pay an upfront load on a mutual fund.

Of course, I like to pick stocks myself, and if you’re a stock picker, then it’s even cheaper. You pick quality stocks, you let them run for a while, as long as they’re doing well, you’ll hold on to them, they’re paying you the dividend, and it costs next to nothing.

It costs you your commission to buy this stock, so you could have your own portfolio of 10, 20 stocks, maybe it costs you $100 or $200 in commission. And if you hold it for five, 10, 15, 20 years, your costs are next to nothing. That’s the way I do it.

I hope you enjoyed our conversation today! I love being able to share these special discussions because they each offer a different perspective on how to be smart with your money while leading a rich and fulfilling life. Feel free to explore the rest of my archive for more interviews, and as always, thank you for being an Oxford Income Letter subscriber.