Welcome back to Inside the Mind of an NYC VC, a highly acclaimed series at AlleyWatch in which we speak with leading New York City-based Venture Capitalists. In the hot seat this time is Lylan Masterman, General Partner at White Star Capital, a Series A-B stage firm (with some seed mixed in) investing out of a $180M Fund 2. A global firm, the White Star portfolio includes investments in startups like Dollar Shave Club, KeyMe and Freshly in the US, Dialogue, Mnubo and Drop Technology in Canada, Meero and Klaxoon in France, Clark and Tier Mobility in Germany, and Butternut Box and Echo in the UK.
If you are a NYC-based VC interested in participating in this series, please send us an email. We’d love to chat. If you are interested in sponsoring this series that showcases the leading minds in venture in NYC, we’d also love to chat. Send us a note.
Bart Clareman, AlleyWatch: Tell us about your journey into the venture business and how you came to join White Star Capital?
Lylan Masterman, White Star Capital: I first got into venture capital after a successful career in product management and engineering at Microsoft and aQuantive, a company that got acquired by Microsoft for $6.3bn. I was at Kellogg getting my MBA and I wanted to see if venture would be an interesting career for me.
Back then there were no lists of venture capital firms like there are today. The web was very different in 2009 – so I would resort to scouring Google and LinkedIn. Every time I discovered a new firm, I read the bios of all the partners and reach out to one partner who had the most affinity to me, such as a background in math or having Canadian roots, and try to set up a time to chat.
One of the people I reached out to was Geoff Judge, here in New York, who was at iNovia Capital. I chose Geoff for two reasons: one, he is a Northwestern alum, and Kellogg is a part of Northwestern, and two, he was the cofounder of 24/7 Real Media, which was a competitor of aQuantive. My initial outreach to Geoff resulted in a series of connections which landed me an internship with Sierra Ventures in 2009.
After graduating from Kellogg in 2010, I went back to what I was doing before with Head of Product and Engineering roles. In 2014, the founder of White Star Capital, Eric Martineau-Fortin, was having lunch with Geoff and was looking to hire someone with a complementary skillset to himself. Eric, who was an ex-M&A investment banker turned entrepreneur and serial business angel – was looking for someone who was in product, who was in engineering with a strong technical background, who loves KPIs and can dig into a business with a different lens than his own. Geoff said, “I have just the right person for you.” So that’s how I got into venture. I was one of the original six members of the White Star team, and now I’m one of the partners of the firm.
White Star has grown its New York City presence. Tell us about that evolution?
Today, we have a great New York leadership team from various backgrounds including Eric, who has actually led investments in the area since 2008 with Betaworks and Science in 2011, myself as General Partner and Venture Partner Sep Alavi, who specializes in fintech and digital assets. We believe it’s ideal to strike a balance between entrepreneurial and operational experience with financial and M&A expertise.
Looking at our US track record, we were very fortunate to be early investors in Dollar Shave Club, which was acquired for $1bn by Unilever in 2016. It was great to see a quality exit like this to a European company, since the concept of international markets is such a big part of our thesis and differentiation.
As White Star continues to progress, so do our portfolio companies. We’ve seen tremendous growth in companies like Freshly – which is fast becoming one of New York’s darling startup companies. Other local portfolio companies that are showing significant promise and scale include KeyMe, TheGuarantors, Unacast, and a couple more recent investments we haven’t announced yet. Altogether, we’ve created a portfolio that really helps build our brand in New York and the US.
In addition, we make an effort to be an active member and resource to the New York entrepreneurial community. Most recently, we published an article specifically educating founders on the best way to find a lead investor in the city.
“I have all the capital I need for my next round – all I need is a lead investor.” We hear this every single day, and yet finding a lead investor is the single most important thing for an entrepreneur raising a round. We published what I hope is an authoritative list of all the venture capital firms that have a strong New York office that lead rounds at the pre-seed, seed, A, B, C and D rounds. The article wasn’t written with a White Star bias. It’s meant to be a resource for New York City entrepreneurs, so they know they don’t necessarily need to head West but can find great lead investors right here in the city.
Does White Star still invest from Seed to Series B?
Out of Fund 2 we primarily lead and co-lead Series A and Series B; we occasionally invest in Seeds, but our sweet spot is A’s and B’s. We really like partnering with other firms, too. We’re not one of those partnerships who insist on 20-25% ownership, kicking everyone else out. We feel partnering with other firms can add significant value.
What do you need to see out of companies in order to invest at each stage?
We are post-traction investors. For Series A and Series B we are normally post-inflection point investors.
What do you mean by post-inflection point?
If you graph the traction – it’s often revenue but if you track the early days of WhatsApp it would have been the number of logins per day or week, length of session, etc. – if you were to graph that data you would see the beginning signs of a hockey stick. If you think about high school math and what an inflection point is, it’s where the slope of the graph really starts to accelerate. We like to see those early signals of an inflection point.
If a company is simply doubling year over year, that’s often not the rate of growth that gets us excited, especially in these early stages for a startup. If you think of the early numbers of any unicorn while they were raising their Series A or Series B, many of them were growing those key performance metrics by 4x, 5x, 6x. It’s understood that company growth will slow down over time, so if you’re only doing 2x at the moment and expectations are that the startup’s growth will slow down over time, that’s not a great venture scale investment.
If a company is simply doubling year over year, that’s often not the rate of growth that gets us excited, especially in these early stages for a startup. If you think of the early numbers of any unicorn while they were raising their Series A or Series B, many of them were growing those key performance metrics by 4x, 5x, 6x. It’s understood that company growth will slow down over time, so if you’re only doing 2x at the moment and expectations are that the startup’s growth will slow down over time, that’s not a great venture scale investment.
White Star raised a $70m first fund in 2015, and a $180m second fund in 2018. How has the increasing fund size changed your dealings with portfolio companies or potential investments and what White Star is able to provide to them?
It’s interesting to note here that most VC firms announce their funds after a 12-month fundraising process when they’ve already been investing out of that fund for a while. So with Fund 1, the first close was in 2014 and Fund 2’s first close was in 2017 – funds tend to be a year older than most people realize.
One significant change goes back to what we discussed earlier. With Fund 1, we were primarily Seed and Series A investors. With Fund 2 we’re primarily A and B with some Seed investments.
We’re a firm with a very concentrated portfolio, with 15-20 material investments per fund. If you do some quick math, $70m divided by 15, that’s a much smaller number than $180m divided by 15. The check sizes change appropriately, and the stages change accordingly.
With Fund 2, we also opened offices in new geographies. Our name, White Star Capital, was inspired by the name of the first cruise liner that achieved large-scale commercial traveling across the Atlantic from the south of London to New York in the 19th century.
We initially started with offices in New York City, London, and Montreal. With Fund 2, we opened an office in Tokyo in early 2018, and recruited a Paris-based team in September 2018. This month, we’ll be opening an office in Hong Kong and welcoming a new venture partner to build our presence in the region. The partnership is now led internationally by Eric Martineau-Fortin, Jean-Francois Marcoux in Canada, Nick Stocks in London, Matthieu Lattes in Paris, and me in New York, as well as our Venture Partners Sep Alavi in New York, Shun Nagao in Tokyo, and Joe Wei in Hong Kong. A firm like ours is likely to continue scaling internationally over time, with a team composed of investors from more than 12 different countries.
Are there specific milestones a company needs to have hit in order to be interesting to White Star?
We’re not dogmatic about certain metrics like some other firms are. I have friends in the industry who say, “I won’t invest in a company whose MRR is less than $100k.” Great! They have those very strict rules – but we’re not as strict about those kinds of things. Yes, as a best practice, it’s uncommon for a B2B company to raise a Series A with less than a $100k MRR – it’s rare, but we’ll still consider it.
As someone with significant operating experience, do you need to regulate an impulse to tell founders how to run their companies, or is that not a compulsion you feel?
I have mentors who have been in the industry for over 20 years. A decade ago they taught me the importance of understanding that there’s a separation between investor and entrepreneur. It’s been impressed upon me very strongly to not be that investor.
I love what I do here. The intellectual diversification of being a venture capitalist, of learning about different verticals every single day, from GDPR to agriculture tech to the future of beauty to you name it – every single day I’m learning about a new vertical, and sometimes learning very deeply. For me that’s more intellectually stimulating and more of a joy than being in the same set of weeds day in and day out.
You spoke earlier about White Star’s international footprint with offices in New York, Montreal, London, Paris, Tokyo and Hong Kong. What advantages does that give the firm, and what challenges does it create?
I’ll start with the challenges. It’s the typical answer for a distributed team regardless of the industry – as much as venture capitalists tend to do email, at White Star we have to do even more because we’re not just in different offices but also different time zones.
The reason we believe in this model is because that it allows us to choose investments who have the potential to be a global winner.
For us, being international helps us broaden our investments and allows us to help our companies scale internationally. It doesn’t matter where the company is headquartered, since we know at some point they’ll either want to expand globally or seek counsel on global expansion or raise capital from international sources. We have the network and the experience to help with this, compared to many firms, who only operate in one single country. Our international investments in startups including Drop Technology, Butternut Box, Meero, Tier Mobility, Clark, Klaxoon, Mnubo, Borrowell, Unacast and Dialogue are examples of our international reach.
For us, being international helps us broaden our investments and allows us to help our companies scale internationally. It doesn’t matter where the company is headquartered, since we know at some point they’ll either want to expand globally or seek counsel on global expansion or raise capital from international sources. We have the network and the experience to help with this, compared to many firms, who only operate in one single country.
It’s great to start in America, or whatever home country you’re from, but international markets are how you become the next Microsoft, Google, Apple, or Facebook.
What are the common traps companies fall into as they expand globally?
Sometimes, we feel entrepreneurs want to go too quickly abroad without having set up the right platform to scale in their own market, sometimes they recruit too fast abroad or forget to send a founder, or a senior executive, with the memory of the company’s DNA internationally. It’s all very situational.
Members of our team have shipped software internationally, sold software internationally or built software internationally. We’ve also helped recruit international c-level executives to fast-growing companies, structured international funding rounds, and helped companies acquire or get acquired internationally. We believe that the White Star team is really skilled in advising our companies on when and how to scale.
We have no problems being a Series A investor or Series B investor and a US company says they have no plans to scale internationally. Dollar Shave Club took many, many years before it scaled internationally. Freshly is still focused on the US, KeyMe is still focused on the US, TheGuarantors too – and that’s great, but we also have investments that chose to scale internationally, such as Unacast in New York. It’s not a requirement for us, but we’re there when our portfolio companies need us.
What themes or trends are you watching closely?
Seems like it changes weekly, but that is what makes Venture Capital exciting. We’re currently looking into several verticals – one is B2B marketplaces, especially within the industrial world.
We are looking into data privacy compliance – a lot of people will refer to that as GDPR, but California has its own version of data privacy, as do over 50 jurisdictions around the world that have their own GDPR-like system.
Digital manufacturing is another space. The future of health and consumer health, insurance tech and augmented reality are all segments we’re digging into quite a bit.
What’s one thing you wish you’d known before you got into the venture business?
A lot of entrepreneurs and people who are not venture capitalists are not aware of the fact that venture capitalists also need to raise capital. I was naïve to this and is something I learned on the job.
Say more about that – what’s been the most challenging part of building out these funds, managing LPs, etc.
Some LP 101 I’ve learned over the years is that It’s important to continuously maintain a strong relationship with your limited partners and be proactive when there’s a challenging situation. Most importantly, you have to communicate the challenging situations, not hide them. You need to foster relationships with potential future LPs and speak with them before fundraising. We are grateful to our LPs, including sovereign states, institutional investors, large corporations and family offices who have all contributed to our fundraising journey.
What’s your superpower, and what makes you a great investor?
It’s so important to build a great relationship with the entrepreneur. There are some fly-in investors who don’t build great relationships with their companies post-investment. They read the board decks on the way to the board meeting, and who put a lot of focus on the board meeting as a time to catch up. At White Star, we prefer board meetings to be a time to explore new opportunities or difficult decisions as a group, and do most of the reporting and communication in between the meetings. If the entrepreneur sends the board deck a week in advance, we send our questions 4-5 days in advance so that they’re answered beforehand. This way, we can save valuable time by eliminating simple reporting questions from the discussion or agenda
It’s important to understand the entrepreneur and the management team are in the weeds seven days a week. We firmly believe that in the growth of successful companies, there will be one or two seminal moments and it’s important that the investor, who is not in the weeds 365 days a year, is able to see things that the CEO might not. It’s the investor who cares, who understands the business thoroughly, who will make the impactful recommendation in that seminal moment.
It’s important to understand the entrepreneur and the management team are in the weeds seven days a week. We firmly believe that in the growth of successful companies, there will be one or two seminal moments and it’s important that the investor, who is not in the weeds 365 days a year, is able to see things that the CEO might not. It’s the investor who cares, who understands the business thoroughly, who will make the impactful recommendation in that seminal moment.
2030 Vision: Give us one wild prediction for how the world will be different in the year 2030?
Despite the disruptions occurring related to job loss, such as people losing their jobs as truck drivers or cashiers – I think by 2030 the world will have rebounded and there will be even more jobs created through digital transformation.
Favorite book and why?
I’ll give you a business book that you may not have heard of — it’s called The Trusted Advisor. One of the key lessons in the book is, how is trust formed? The formula for trust is credibility, reliability, intimacy and then a level of self-interest that isn’t too high. We all know there is some self-interest in any relationship, but it needs to be reasonable.
To this day I’ll challenge myself on things like, am I being the right kind of board member or colleague or friend, and all of those revolve around trust. When I challenge the man in the mirror during a challenging situation, I come back to that rubric.
What does the future hold for you and for White Star?
Just as entrepreneurs scale their businesses, venture capital firms scale theirs. Some firms choose to grow their fund size, some don’t. Some firms choose to add offices, some don’t. But at the end of the day, the maturity of a firm has to scale.
It’s been a joy for the last five years to have been part of White Star’s growth, and we are excited for what’s next.
We are also looking forward to seeing how the New York startup ecosystem evolves. New York City is a special place and when I first moved here in early 2011, I could sense an inflection. It wasn’t just DoubleClick and Meetup.com anymore. Even though New York’s startup and venture ecosystem is quite large now, it will only increase in the next 5-10 years and we are honored to be a part of that growth.
We are also looking forward to seeing how the New York startup ecosystem evolves. New York City is a special place and when I first moved here in early 2011, I could sense an inflection. It wasn’t just DoubleClick and Meetup.com anymore. Even though New York’s startup and venture ecosystem is quite large now, it will only increase in the next 5-10 years and we are honored to be a part of that growth.
What did you see in 2011 that signaled that inflection point for New York’s ecosystem?
I saw that large companies were opening offices here such as eBay, Google, Microsoft, etc. But even more, the number of seed and Series A startups were starting to grow along with the venture capital firms there as well. Our friends at USV, Greycroft, RRE, Venrock and Lerer Ventures were getting some great traction and the list goes on.
The rate of growth compared to three or four years earlier was such a loud signal that it was unmissable so long as you looked at it. It was really impressive.
Most importantly, startups were finally starting to focus on areas outside of adtech and fintech, and that was a critical signal. Now, New York is an all-vertical city, which most of the world recognizes.
I was at a conference 5-6 years ago where a West Coast VC observed about the New York City ecosystem that, unlike the Bay Area, New York would never be a company town when it came to tech. As he put it, technology would always be the fifth or sixth most interesting game in town – and that was a problem for the ecosystem here. How do you respond to that?
If I were on stage with that individual, the part that I would debate is the premise that it’s a problem that tech is the number five sector in New York.
I think it’s a beautiful thing. I love the diversity of interests and expertise the city has to offer — instead of tech dominating all conversations, you’ll hear people vehemently discussing hospitality or pharmaceuticals, to finance or entertainment and media – that’s what makes New York so special, and that’s what draws so many startups to New York.
What that means for the ecosystem here is that startups have access to talent from all of these spaces. If everyone you hire is a technologist, that becomes limiting over time.
