How do you find the next big market, not the next unicorn?

everyone welcome back to fundraising demystified today we have Caitlyn Donnelly GP over at Avalanche Ventures welcome to the show thanks so much for having me I'm excited to have you and I think you have a unique thesis that you coin the concept of avalanche just to jump straight in I want to talk about why you're not chasing unicorns and you're actually trying to create Avalanches is that the the mission there so yeah give the audience Avalanche is sure so an avalanche is a massive sector Trend that is sort of in able and you can see the invisible changes underneath the surface but people aren't sure exactly when the Avalanche is going to be set off and so what we hope to do is invest behind those massive Tailwinds that can create huge outcomes for our investments I think the Unicorn moniker is less interesting because there are ways that you can manufacture a unicorn or even like the term itself is sort of meaningless now because it used to be this mythical creature that would be very rare and now they seem to be not I think a use more useful way of thinking about early stage Venture is being like how can you find the big changes that are happening in society driven by technology and invest before other people see them how how do you find these markets how do you find these sectors and identify them well I keep my ear to the ground first I I've been just like kind of obsessed with market trends I don't know since like college maybe even before and like making predictions about where the future is going and being like how can I be at like the earliest stages of those predictions and see things before other people one of the areas that I've gone deep on traditionally is in education one of like the most powerful AV Avalanches that we've been investing behind is the movement towards alternative education which we call alternative education goes mainstream if you looked at the data you could see this buildup of dissatisfaction with the public education system and a new class of parents wanting to give their kids a more personalized set of experiences you never know exactly what the like inflection point could be but the big ones for that Avalanche are parents could see what they were getting at public schools and realize that they could potentially even homeschool or have pursue alternative education and then secondly a new political Administration that has made school choice front and center of its education agenda so that's an example of a big Trend that you could see coming and then there have been these inflection points in the last year that have made it a very obvious future yeah I love that example and being able to see there's a bet or the inklings of what could become an avalanche but a couple things I guess when it comes to like picking a winner or like kind of yeah something to kind of identify but timing timing the Avalanche and also being able to survive an avalanche how do you think about the timing and the allocation to what you think the the winner will be that survives one of the things we look for and underwrite are founders that are building their life's work so what that usually means is like they have committed their entire career to a sector and building behind it and believe they are finding a company that is building the future that they believe needs to come forth in their sector so like within the alternative education Avalanche we've backed both Odyssey education run by Joe Connor and tether education run by Chris neelen and both of those Founders are serial entrepreneurs building their life's work in school choice matching algorithm platforms to coordinate a more decentralized World both of them are people who have been in this space for over 10 years actually their entire career and then secondly they're never going to give up because if they didn't do their company they would just start the company over again and I think they would have found a way to be Capital efficient and make resources go farther until the proof points materialize and order for them to raise the capital to capitalize on the Avalanche to get the audience a little bit more context on you and how you got to building Avalanche Ventures tell the audience a little bit about your background Pearson and what led you to building the firm yeah so I started my career at McKenzie doing Tech and finance turnarounds after the great financial crisis and then left with a senior partner to join Pearson in 2011 as they were really going from being a print publishing business to a full service education technology firm I then co-founded Pearson Ventures where we invested in edtech and education companies all over the world but also did a lot of thought leadership around where the future of Education was going both from k12 and higher ed one of the papers I wrote was actually called an avalanche is coming higher education and the revolution ahead and we predicted the rise of teal fellows and white combinator being a powerful brand on par with things like Harvard Business School that mukes and Technology would be a disruptive Force to universities to challeng them to provide more than just the content the success of that paper was one of the things that allowed me to think well if you can predict the future you should be able to invest before it happens there's a lot of upside in that and then at the same time coming from corporate Venture I wanted to get back into the industry from the vantage point of being an exited founder myself so I saw a market opportunity with my boss to co-found a company called delivery Associates to work with governments to drive outcomes and Implement technology and we grew that to 200 plus people clients all over the world profitable and sold to private equity in November 22 delivery Associates was definitively Michael Barber my boss's life's work he developed the methodology under Tony Blair it was an idea whose time had come and I think you even see that to you know it was an avalanche in itself that we were very early to because now you have doge is like you know maybe a more aggressive less polite sort of delivery Associates type method but the public dialogue is now centered on government efficiency and and achieving results in the public sector both of those experiences at Pearson seeing how you can underwrite big trends that are coming and then also building a company and having a very successful Financial exit to a financial buyer put me in a spot to be able to partner with Founders at the earliest stages when they're building companies that are part of their life's work tell us a little bit about Avalanche pieces and check size and Stage just so you know in case Founders are listening that might be you know interested uh they you can have some context yeah so we are relatively small fund around $5 million we invest between 100 to 300K in preedee to early seed companies that are building behind an avalanche theme and I've written a lot about what we consider Avalanches on our blog called obviously the future you can check that out um and kind of update them but beyond that at least today like we needed to start somewhere I mean there's a lot of avalanches out there in the world but I wanted to start with ones I felt I had a clear point of view on and could help Founders tactically we invest primarily in companies that transform help people learn earn or own those are three broad categories that really serve Under the Umbrella of empowering people to take charge of their lives and be successful in a capitalist Society what are some examples of The Avalanches you see happening in those categories so in N we have one called everyone is an entrepreneur or or they'll have to learn to think like one I think j z very much gets this that there's no such thing as a career pathway anymore change is a constant that you're going to have to constantly be adapting to your career may look more like a portfolio career and a job that you have in five years may not even be invented yet like no one probably used the term prompt engineer more than three years ago that wasn't something that existed if you pegged your career and be like I'm going to be a senior software engineer the nature of that whole career and its progression has changed so the underlying ethos is that you have to be an entrepreneur you have to be adaptable you have to see where the opportunity is and position yourself accordingly from that come a sort of series of opportunities that we can underwrite at Avalanche one company that's still very early and sort of in stealth is called LMA which stands for local marketplaces and they work with people who own like very Niche communities on social media to be able to allow their Community to transact in a Marketplace and then they take a cut of the Commerce so for example they've started with Automotive sector so there might be someone on Instagram that has a 100,000 people that are obsessed with Jeeps people who are obsessed with Jeeps probably have like you know spare parts different accessories or maybe even want to sell like their Jeep for a different jeep that sort of e economic activity might have happened on Craigslist before or like Facebook Marketplace but the key person convening both the buyers and sellers is a curator of the content and ideas behind a niche traditionally that person probably hasn't earned any income from all the work that they'd been doing on top of these platforms and so we think that the future is that people will be compensated and find ways of earning a living for the work that they do particularly online in the platform economy yeah and to put a term around it like Creator economy like is that kind of the adjacent category but leaving you a little bit of flexibility not calling it Creator economy and you know using yeah I mean we like the word we've been using the word curator a little bit more Creator economy could be another one I like the term digital native jobs if you worked on the internet and were providing value for people online how do you turn that into a job and then when it comes to the own space what's the thesis behind own own is potentially very broad it is things like helping people gain access to home ownership or understand rsus like start businesses that they actually own but within that also for us includes govtech you know there's like public ownership lots of dollars out there that could be more efficient so we invest behind government efficiency procurement Tech and then we invest in technology that allows people to own their own data or their instance of their self online so we were seed investors in The decentralized Social Network Blue Sky most people didn't think that it was important to own you know your Twitter handle or you know your Facebook account and then the election happened in November and people realized like oh well maybe actually I want to be in charge of my own algorithm and I don't want my links to be throttled if someone follows me online I want to actually be able to have access to them they went from 5 million uh users to another at like 32 today that's a quick wrapup yeah well it's one of those that looks as like it's it's an overnight success 10 years in the making yeah it's been around for a while but to see that ramp up and the dueling of social media platforms has been interesting observing big tech companies playing into that you're likely having trouble raising money or selling your company personally I've had four exits and I've raised over $145 million if you want a free coaching session with me just like subscribe and leave a comment down below letting me know what you think of today's video for a chance to win a free coaching session with me I'll select three winners every single month you just have to like subscribe and leave a comment down below for a chance to win now onto the video another thing you've done that's unique is is going solo you know being a solo GP what's that experience like when it comes to both going out and raising your fund but also deploying capital and getting that one point person when I started I kind of wanted Partners actually like I'm a bit more of a team player first of all starting a fund is very hard very difficult like you basically have to foro salary for a year maybe more it's like high risk it's like starting a company not everyone is cut out to be a VC or like they might have a slightly different perspective so I actually had done like quite a bit of GP dating over the years and just never found like the perfect match and I think the advice that I give people or that I think is right when it comes to romantic relationships is the same as business relationships if you can be in a great marriage that's amazing but if you can't be in a great marriage then it's better to be single than to be in a bad relationship I think for me it's like I'm going to be single until I find the right marriage or partnership and I also think the tools of today make it so much easier to be high leverage as an individual because you're constantly collaborating with other people in the ecosystem like my accounting systems and legal are handled by sector specialists in those areas so I think it's easier than ever for to be a solo GP the flip side of that is like being a solo founder all of your strengths and weaknesses are really Amplified because you don't have someone balancing them out that is just like a challenge that you find ways to deal with how does AI help you with that I wish AI helped me more actually seeing to be an amazing tool to make me stronger at what I'm already strong at but yeah filling those gaps I'm not too sure on yeah you can't be two places at the same time right that that's still a struggle when you're digging and you're looking for you you see a bunch of deals coming your way yeah and you're analyzing these Founders you're analyzing that you know they kind of adjacent to the learn earn our own base how are you validating that there's an avalanche coming well I think there's a lot of people that can potentially see an avalanche you can see that school choice is coming you can see that everyone is an entrepreneur or they'll have to learn to think like one but what you're looking for in Venture are really outliers and outlier people who maybe see that Avalanche clearer than I do you know that have like are pushing it forward in a faster way that like have thought about the problem or the opportunity in such detailed Nuance that they've clearly been in the trenches with customers they've been Building Technology like they're educating you and I think that there are frankly a lot of people or Founders that just don't have it all together they haven't thought it all through like there's certainly like an archetype of founder that is like kind of throwing spaghetti against the wall and like seeing what sticks I probably get 100 emails a day of people pitching some sort of company that they're founding the best opportunities are often like outbound or they're ones that you see and you reach out to a founder or a trusted contact has worked with them for a while and thinks you would be a good match and so I think focusing your attention on the right things that can truly be outliers is the most important part of this game and the reality is that like Mo like there's lots of potentially like good ideas out there but if they're not like an amazing idea then it's just not going to move the needle so let's take a step back you mentioned you get 100 emails a day every founder is desperate to make connections and build relationships exp networks they make a desperate attempt to take a shot and get in front of you has that ever like have you opened up a call email and been like wow I need to seriously consider this I think like the right cold email can be incredibly effective and like before my current fund I had an even smaller demo fund and have made a ton of Angel Investments and I remember one founder basically was like look we have 100 Connections in comment on LinkedIn I could find a warm intro but like here's the reasons why you'd be a fantastic investor for this company and he was highly credible it was like a Serial entrepreneur highly credible team it really did hit like he read my writing and it really did hit and so we had a couple meetings and I invested in that company but I think the reality is a lot of emails that people send not they're really not that good they're like congratulations on your great work let's explore synergies or can you jump on a call like like you know when I was first starting to get back into this I had more time and I had more patience and I was like okay well maybe maybe I can dig into this but now the minute I sniff that someone doesn't understand the game I don't even have time to like answer the email anymore I used to be like I need to answer every email and be super professional but now I'm like I'm a oneperson shop I'm working for my LPS and my Founders if it's not hitting the top 5% or 2% then I I don't even have time to respond I it's incredibly valuable to respect your time that way but also kind of set the bar for Founders and you mentioned something that I want to unpack with more if you don't understand the game I want to understand how you identify that in an email as you getting through your your emails how do you identify whether someone knows the game or doesn't know the game well any email that's more than like 250 words don't understand the game anyone that uses my first and last name doesn't understand the game you know anyone that's sending me something that's like Medtech egg Tech you know like doesn't understand the game you know asking for a call not sending a deck doesn't understand the game you know doesn't lead with like track like if if someone sends me something and it doesn't have like clear traction or like why I should care like front and center doesn't understand the game well that is some great advice that I hope people actually listen to cuz I very much agree and it's there there's a this as Founders are in their own little world of like this is the best thing in the world it matters so much everyone's G to love it but the reality is you as an investor are getting a hundred of those a day and it's just like you have to find a way to stand out and speak the language to kind of earn those 15 seconds to buy another 30 seconds not a one hour call I think the other thing is like we bootstrapped delivery Associates I believe that you should be able to especially if you're in a sector like education or government cell before you ra raise money and find ways of drisking and showing why people are going to Care like what the traction is I think that's the other thing one of the biggest flags is when founders focus on raising money from investors before they focus on customers and users completely agree with that when it comes to deals that do get across the Finish Line what's been something that has stuck out to you there's one example you mentioned earlier that you actually ended up writing a check in but what what do you've kind of seen where it's like oh I want to take a meeting for that one what what's been an example well every early investor you're under you're underwriting like fantastic Founders and so I want to understand we also underwrite Founders who are building their life's work if you're building your life's work then your previous work better be really impressive part of it is like do I want to meet this person anyway are they interesting do they have a unique point of view would I want them in my network and my friend would I want to track what they're doing because I think it's going to be really big and impactful whether I invest or not it's a hard truth that a lot of Founders have to realize haven't done anything previously and this is your first company it's going to be a grind most Founders never pass and therefore you know don't deliver you know return or you don't deliver an outcome if they fight through that and take another swing at it then there's maybe something there they just want to make sure that people get the point is like you don't have to be old right like there's so many young people that are like incredibly impressive like 15 17 has an incredible track record for investing in theal fellows and college dropouts and so you can have have very impressive credentials at a young age in fact sometimes I think that can be easier because you can give them like the younger person discount or whatever and be like wow you're 18 and you built all this stuff but you have to have something like that and you have to put yourself out there you have to try to build something you need test something have a cool side project or have demonstrated the ability to build in some capacity Switching gears here looking at Venture Market overall you this is something we were talking about before we got on you're based in Austin right now that's a Community that's developing and growing in the startup Adventure ecosystem what are you seeing in in Austin in particular in terms of the startup Adventure ecosystem as opposed to San Francisco or New York or some of the other more common networks yeah well one of the great things that I like about Austin is it has sort of a cowboy mentality which I think is better suited to the entrepreneurial experience or entrepreneurs will be successful in the next 10 years the reality is San Francisco's been and maybe always was a very Clubby place like you need to be in The In Crowd you need to come from certain schools like all this sort of stuff and I think Austin is like it's for Cowboys and there's a lot of solo GP like in in terms of the Venture ecosystem like there's a lot of solo GPS here but there's with small funds like me but there's also a lot of capital here from family offices and larger funds that are looking to make a dent in the world and in real sectors you have Capital Factory and lots of people doing like defense Tech and then you know SpaceX and like Tesla all the Elon companies are in Austin you have quite a few American dynamism type firms Austin also has a bunch of consumer too like night Ventures like mocker Capital like a lot of people a lot of firms that you might think of in terms of being like La Coastal firms have a Austin based partner it's interesting how are you thinking about Venture as an asset class from your perspective over 60% of the capital has gone to five firms this year the reality is that is a different asset class than early stage Venture like ser be and beyond that 20 years ago would have been public markets and now is like solidly growth Equity not really venture capital and so there's like before product Market fit and after product Market fit and venture capital is really like before a product Market fit it used to be called Adventure Capital you know like way back in the day and you're also potentially looking for markets that don't have a category definition yet like people haven't heard of they seem really scary you know like the those are pre- Avalanches so like some like a generalist investor was asking me last week like what I thought about crypto from a preed seed perspective I think crypto's kind of done from a preed seed perspective those big gains on those projects like either like the crypto projects are rate are coming out of the gate with like 10 to 20 million already in the bank because they're large Enterprise software infrastructure projects or they're kind of like scammy mean coins consumer gaming things as like to the extent that crypto like crypto as an asset class is kind of established like it's not going to have the same return profile that it did in the last 10 years this is something I see all the time various different funds or their allocation strategies but Venture is like to really bet on the things that haven't been proven yet and I feel like there's so much Capital to be deployed that's it's not really feasible that probably explains why as an asset class it's underperformed in terms of like I think it'll be like they even actually return money or make money and so I think it's very interesting Outlook to call that out in terms of what are the real markets actually worth betting on and then it comes down to how do you pick winners and get allocation so when you think about the early stage and just how competitive the space is in terms of money coming in how do you think Founders should go about picking the right investor approaching the right investors that are going to be the right partners for them over in the long run well one of the mantras that I think's really right both for fun fund managers and for entrepreneurs is that Capital raising is a matching process not a convincing process so you have to find the investor that's right for you it's very hard to give generalized advice because every company and founder is totally different what you say matching and not convincing you need to find like Believers like people who believe in you and what you're building you're not going to convince Skeptics you have to find those people who believe and develop relationships the reality is you have to be honest with yourself about where you are in the Venture ecosystem like if you were not at a high growth startup before that has made a lot of money for investors you're walking up a very steep slope in general technology there's always these Mafia like the PayPal Mafia was very Venture back B the Uber Mafia was very back one of the hottest seed managers right now is Dylan field from figma ecosystems are like are very that that have shown to be very valuable are one that people continue to invest Venture dollars in if you've never been part of one of those big stories before you're walking up a steep mountain and so like you're going going to have like potentially raise your first round at a lower valuation cap you might start more with angels and first Believers and then you might need to show traction numbers and product Market fit before you get into the big dollars or get the attention of large BCS no I think I think it's valid I also want to point out when it comes to investing there's so many Founders that feel they have to convince investors you don't understand here's 40 more pages on why should and when you see that kind of behavior you've mentioned before a cold email response what would be your advice of those Founders to maybe reconsider their time allocation towards the convincing versus matching go back to your customers and your users and keep building and post some big growth numbers right Venture is about finding fast growing companies the minute you prove that you're really fast growing things can change very quickly I've seen Founders and companies go from cold to hot super quickly once they proved that there was strong customer demand and the market was big before that it's tough and why should someone bet on you with those Founders that don't have the the breakouts and are in that stage of developing and growing venture capital is not for everyone there's a lot of startup Founders out there that should not raise Venture money and should bootstrap or maybe have some sort of debt Arrangement venture capital is a small asset class meant for very fast growing big Market companies sometimes with a real technological Edge if that's not you that's fine don't expect to raise Venture delivery Associates the company I built never raised any money and we had a fantastic economic outcome to private Equity it's so I don't think that I think one of the things that people have been confused about is that it was prestigious to raise VC it's like Oh I'm a venture-backed Founder even see this in some people's bios for me it's a bit of a flag they're like oh he raised $50 million from VC's from his last startup and you're like right and how many dollars came back did that person make real money for themselves did they make money for their investors maybe maybe not but I think as an ecosystem we've given too much Prestige to the ability to raise money versus produce I think the point I was trying to get to is you know are you in a market that's worth backing like an avalanche Market that maybe hasn't been established yet that's maybe worth gambling on or a shiny Market that's already been PR AI everything AI but yeah there's just a lot of good markets out there you build a good business but that's not necessarily Venture packable I have underwritten investments in our portfolio that are more in that category but they were at lower valuations and I underwrote them to like I'm like okay I think this is a lower risk 10x and it has the potential to be 100x like potentially capped for a ward I was okay with that because a lot of the Venture back Founders are now at such high prices or they come out of the gate with such big rounds that that that doesn't necessarily make sense for my fund either well yeah you have the obligation to return the fund on each bet you make or come close to it a lot of Founders don't realize that they're like well everyone else is Raising on a 15 million pre why don't we well are you going to sell for at least a billion probably not but if you sold for 50 to 100 that could be a great outcome if everyone invested out a three million what I think Founders don't realize is the pressure it takes off them by coming in at a lower valuation and treating your investors right by giving them an appropriate valuation it's a conversation that just doesn't happen enough it's seen as like oh you're a failure you didn't raise it a super high valuation but it's like building a company that should be on a doing something other than just validating that you can raise money yeah I think also some found a lot of Founders don't because they're technologists or they a market they don't understand what the expectations are in terms of what investors need to really make a commercial case for giving them money they don't they just like give me money got a great way to start a conversation with investors when it comes to the next 12 months or next year or two with the current you know Administration coming in completely changing things and going to have a massive impact across multiple Industries what are you paying attention to in terms of markets or sectors or movement the latest election has been a great inflection point for a lot of our Avalanches we saw the in influx into blue sky of people wanting to own their own instance on the internet also like I mean govtech government efficiency Cur Tech like private sector delivery of public goods those are all big Mega Trends everyone being an entrepreneur or having to think like one you can see there's this push at the federal government to ask people what did you do this week maybe you like the job you thought have for life if you don't want to work in an office you're going to have to find a different arrangement with more flexibility because the demands of employers on their like full-time employees are going up and they'll probably have less of them so I think that what the this new Administration has done is it's opened up people's eyes to Avalanche trends that obviously the future but people were really fighting because they you know cuz they're scary cuz change is scary and they want to hang on to the way things were structurally things have changed a lot your Avalanche metaphor has so many ways to be interpreted in terms alvan is scary they kill people they get like they create a lot of momentum but you got to be a complete expert to navigate them so you know that's something that really appealed to me about your thesis and what you guys do it has so many ways to be interpreted that are appropriate for Venture in particular once that Avalanche comes if you're still crawling up the mountain that's going to be a painful experience so you got to move quick got to be there at the right time sometimes might be a lot of waiting I appreciate you coming on here and sharing your insights with the the community before we go what would be the the best way for Founders or investors to to learn more about you and what you're doing at Avalanche yeah you should just go to our website avalanche.org someday will all be in one packet today I I'm a solo GP and part of the exciting things about what we do is that the future is unpredictable but we're in the mix and you got to be adaptable and flexible to go where the Avalanche is pushing you it's very valid well kin it's been an absolute pleasure having you on the show we'll make sure to include all those links down in the description below thank you thanks for having me thank you for watching today's episode as a reminder I'm your host Jason Kirby I have built and sold multiple companies with with over 135 million in transactions as either a Founder operator investor across multiple Industries I'm currently the managing director and founder of thunder. BC where we help companies and Founders at all stages navigate what capital to raise and who to raise it from and help improve company's odds of raising Capital if you need help reach out to us at help. under. BC if you like Today's Show please share with your friends give us a like or a comment down below and as a reminder this show is published weekly and to get notified new episodes and our newsletter be sure to go to our website at join. thunder. BC and if you sign up today I'll send you a few freebies on how to negotiate a term sheet how to get a free list of relevant VCS and much more that's it no more Shameless plugs thank you and see you next week