Seed Investing in a Bear Market with 186 Ventures

Giuseppe Stuto is Managing Partner of 186 Ventures, a $37m seed fund launched in late-2021. 186 has made 10 investments since inception, following on from over two dozen angel investments Giuseppe and his partner Julian made over the past few years. Across angel and seed investments, Giuseppe and 186 have invested in UiPath, Chainalysis, Ponto and dozens more.

Prior to starting 186 Ventures, Giuseppe founded Fam, a group video app that was acquired by DraftKings.

In this conversation, Giuseppe and I discuss seed investing in a bear market, differentiating as a seed investor in a competitive space and themes 186 is currently focused on.

Full Transcript:

Will Beeson:
Giuseppe, welcome to Rebank.

Giuseppe Stuto:
Thank you for having me, Will,

Will Beeson:
Yeah, it's great to connect. All right, so let's dive right in. You and 186 have been writing checks in early stage companies formally since about what September of 2021, so you're, I don't know, less than nine months into all this, and the world feels like it's kind of melting around us. How are you responding to this right now? Like what is running through your head as a new, early stage fund?

Giuseppe Stuto:
A lot, there are many things running, running through my head and my partner Julian's head. And also another team member of ours Sophie's head. You know, as a, as a first time fund manager, you know, we, we went to, who knows how many experienced GPs before we, we started the fund and firm, and there were many, you know, varying degrees of, of inputs and advice that we got over the course of three months going into it. And then we still get the most universal one is you can't screw up fund one. <Laugh>. So, you know, with that said, we're, we're coming out of the, the world's largest financial and economic rally that we've ever seen, right. Where the markets pretty much just went up and up and up in perpetuity. And now we have our first material setback, which, you know, may really, you know, kind of segue into a recession, full blown recession.

Giuseppe Stuto:
And it's certainly the, there are many indicators that suggest that, and there are arguments for, you know, against that as well. But one can certainly say that we might be headed in one, if not already in one. And, you know, as you know, we've invested in 10 companies so far, the majority of them are in good shape as it relates to runway, as it relates to unit economics. You know, a lot of this does bake into our diligence, but ultimately though, if you're a true seed stage or pre-seed and seed stage investor, there are some investments that are going to be made where, you know, the risk is incredibly high relative to some of the other ones, and we're no different than others, right? We have some of those ourselves. So so with that preface in mind, as we move into Q2 of this year, and the writing is on the wall that you know, the markets are not being forgiving even for, for cash flush businesses with good economics and good fundamentals, they're not being forgiving.

Giuseppe Stuto:
Some of the things that we have top of mind is how do we, as a reasonably sized seed investor, you know, we're only a 37 million fund. Not that that's not a large fund, but at the same time, we can't bail out every single company that we invest in. So what we're thinking of is what can we be doing right now to help our portfolio founders ensure that they're, they're built to endure however much of a difficult fundraising climate we may be in. And there are many ways that you can approach that and, and achieve that really depends on the type of business you are. It depends on the sector. It depends on if you're enterprise focused or consumer focused. But it really, you know, it's just trying to do as much as we can across the board, helping our founders, making sure that we redouble efforts to only invest in companies that we know we can be helpful to, and that we can help endure.

Giuseppe Stuto:
And also just recognizing that over the span of the fund life cycle, there are going to be several losses, right. And that's just the nature of the beast. But all these things are going through our minds right now. And one thing's for certain you know, the party is over on being able to raise money at the snap of your fingers. And in a way that's healthy for sure. And we kind of like that, you know, because at the end of the day, we've only deployed so much of the fund we're still early on. So for us, you know, one can argue it's, we're kind of headed into a good period of time where now you don't only get a week to diligence a company. You may even have several weeks, which is nice.

Giuseppe Stuto:
Right. but yeah, I'm not sure if that answers your question completely Will, but those are some of the things going through our minds right now. And, and the last point I'll make, we sent out an email this morning, actually to all of our portfolio founders, just reminding them that, Hey, you know, take some time, you know, to take care of yourselves, take care of your mental health. Take some time to just breathe because, you know, we are in for some turbulent times and ultimately you're gonna come out better than you were before now, will you come out completely unscathed? That's, you know, that's, you can't say for sure, some of you will, but ultimately you'll come out smarter wiser and, and stronger in some ways.

Will Beeson:
Yeah. So when you were raising your fund last year, I guess what was the, what was the pitch to capital providers? It was this is the stage. This is the segment, and this is the, you know, the timeframe over which we're planning to deploy capital. What was that pitch? And then how has that evolved if we're, you know, truly entering a more of an extended bear phase?

Giuseppe Stuto:
Sure. There are some adjustments on a low level that we've made and I can get into some of those, but on a high level, not much past changed. I, I do think that seed investors in the early stage seed climate relative to more downstream stages is pretty I would say alienated from some of the stuff going on because ultimately whether you're investing in a bear market or in a bull market, so to speak, you're still investing in sometimes pre-product, many times pre-revenue companies, where the only difference between a bull and a, a bear is you're investing at maybe an 8 million post money valuation versus a 20 million post money valuation. But ultimately, you know, you're still optimizing for those 100x's, right. And you're either gonna be a north of a billion dollar company or you're not, but I would say going back to your question, just to answer it directly, the narrative that we pitch and the way that we think about ourselves is, you know, the, the VC market is, is undeniably super crowded.

Giuseppe Stuto:
But unfortunately what that means, you know, given that there is an abundance of capital out there, which is good for founders, right. You know, and even now that we're heading sideways and things are, are turbulent, there still is a lot of dry powder on the side relative to any prior time period. And, and this is a good thing for founders, but at the same time, it's a bit bitter sweet because there's an inherent, in our opinion, lack of dedicated institutional support that have been there, done that as founders and operators. And we think that that's incredibly important specifically for times like this, there's never been more of an important time as a founder to align yourself with a set of institutional investors that offer a high touch, precise, impactful, and authentic support product. Because, you know, when the timing gets tough, you're gonna need to rely on that.

Giuseppe Stuto:
And now, by no means, am I trying to pitch your investors build the company. Investors don't really do much in a grand scheme of things, but there are those one or two times per year where their support and their help, depending on how effective it is and how timely of a manner it can really impact a trajectory at which you recover from tough times or the trajectory at which you continue to grow at higher clips. And we truly believe that at 186, and it's really a range of our networks having been founders and operators across the entire US, and in some ways, globe, and also many of our kind of LPs being more downstream investors and being able to package up benchmarks on a quarterly basis to inform strategy and goal setting of our portfolio companies and doing a lot of these things that are very mechanical in nature in saving our founders a ton of time.

Will Beeson:
Yeah. Do you characterize yourself as a web3 fund?

Giuseppe Stuto:
No, I, we do not characterize ourselves as a web three fund. I'm, I'm smirking right now because I, I have various viewpoints on this topic, but ultimately we see web three as a paradigm, as an approach to kind of building business models in a different way, building data structures in a different way. Right. You know, at, at its simplest form, web3 is really taking an approach to building a business or a technology on, on a set of data that's not really owned by anyone, right. To a certain degree, right? Obviously there are many layers of data that are owned by this, by your business or your technology that you're building, but at its core, there's some data layer that's not owned by anyone. And that's what we consider web3 in many cases, but we think it's an effective tool to disrupting many industries such as FinTech.

Giuseppe Stuto:
And the way that we divide up I guess the web3 world or crypto world have you, is one kind of access to new liquidity and access to these new digital assets that are being born in front of our eyes. Then there's the immediate use cases of decentralized finance, whether they be consumer or enterprise driven, then there are the picks and shovels. So the developer tools and infrastructure that's required to make these new sets of technologies useful. So think of the cloud, the Alchemys of the world, for example, and then lastly, the fractionalization of data in the form of non fungible tokens or NFTs. So where you can really kind of super fractionalize ownership of data and use that as a way to create better tools or experiences and products for people like creators, for example.

Will Beeson:
So I guess picking up on that with, within those broader categories, are there specific opportunities that you see and that you're particularly excited about?

Giuseppe Stuto:
Many parts of the world still don't have high performing, scalable exchanges like we have here in the US, with the Coinbases and Geminis of the world. So there's certainly opportunities there depending on whether or not you're regionally agnostic and where you invest on the decentralized finance world. There, we think there's immense opportunity for both on the enterprise and consumer side, the enterprise side. And this is where we would bucket a company like Ponto really touches on two of those four themes. One is on the DeFi side, and one is on the infrastructure side, depending on how you look at it, but there's an immense need for bridging the access and sheer scale in financial wherewithal from the web2 world, think traditional financial institutions, the bulge bracket banks of the world, whatever else, the telecoms of the world.

Giuseppe Stuto:
And so on in, in bridging them with some of the decentralized or some of the value that comes with decentralized structures. So think stablecoins, transferring money over stablecoins or transferring value over stablecoins is a super effective way. It's cost effective. It's higher performing, it's faster. And if you take that premise and apply it to the different vectors within the traditional finance world, there's a lot of disruption to be had on the consumer side, democratizing access to these more cost effective financial vehicles obviously is pretty self explanatory in what it can do. And then and then just infrastructure. There's a lot of need for infrastructure in, in making a lot of the things that are gaining a lot of interest in traction making them endure. So for example, NFTs and NFT communities, they're clearly here to stay and they serve a really interesting value where you can be, you can own a part of the community that you spend your time in.

Giuseppe Stuto:
Now. I, what I think is, and there are a few companies solving this, but for example, you know, giving, making NFTs I guess and transforming NFTs into tools that can then be used as forms of identity on various platforms, right? So logging in with your Bored Ape, for example, it's not really, there are no tools today, at least in a polished scaled manner that allow you to be able to do that or give you the ability to be able to do that. And we think that is a big missing piece of infrastructure in the web3 world today that is gonna definitely be needed if we are to scale beyond the millions or tens of millions that currently enjoy NFTs today. And so on

Will Beeson:
Your day to day, looking at pitches from a whole bunch of different companies operating in the spaces that you see, you know, more or less as attractive, right? So let's say whatever, three quarters of 'em are, are pitching you, you know, and, and they broadly fall within those categories that you described. How do you differentiate, you know, say it, say it is a an NFT related company or say it is a stablecoin related company, or some sort of like blockchain infrastructure related company. How do you differentiate between a, an enduring value proposition and something that feels timely given the, the, the stage of the hype cycle that we're currently at, so to speak, you know, like if, if you look around the, the market, you know, if you do it today, if you did it, you know, two weeks ago, you would say, NFTs are eating the world.

Will Beeson:
Every brand is getting into NFTs. Every artist is getting into NFTs, we're at an inflection point. And I think if you make a bunch of investments that are, that are purely and to an extent naively, you know, based on that premise, you would be surprised in, you know, four months when NFTs are heading in a different direction, you know, and that direction could be, people have lost interest. The direction could be actually it's consolidated around gaming use cases. You know, like I think we're, we're, we're so early and there's so much enthusiasm and there's so many opportunistic would be builders that are, that are, you know, getting into the space that you have to be extremely thoughtful and nuanced as you, as you, you know, as you evaluate opportunities in and even within those, those spaces, those verticals that you mentioned.

Giuseppe Stuto:
So take a step back. I, I think the four main pillars of assessment that we use today, one is the team you know, the, the kind of, what is the founder market fit? How do they see the world? Why are they choosing to focus on this problem? Why are they uniquely positioned to solve this problem? And many other things, have they demonstrated an ability to attract talent, to build a team and so on. The second pillar is just TAM, total addressable market size. So is this truly a large enough market where one can believe, you know, this asset can appreciate 100x or more, right? The asset being the business, or is there some reasonable enough hypothesis that the market is gonna grow into? You know, whatever behemoth of a market is needed to be able to answer that question.

Giuseppe Stuto:
As a, yes, the third pillar is unit economics and the kind of the business model, the sustainability of the business model, you know, is this something, are there indicators today, or is there a credible enough hypothesis where this is something that will be profitable at some point, obviously not today, but down the line, are they, is the team thinking about the unit economics in a way such that the business will be able to reinvest in the right areas as it scales and are customers willing to pay what they say they are? And, and another, I guess, indicator here is customer longevity. So is this solving a short term pain point where you might be able to get a customer or a user to sign on for a few months or a year, and then they drop off? Or is this something where if they're right, not only are users and customers not going to drop off, but they're just gonna use it more and more, they're gonna spend more and more.

Giuseppe Stuto:
So some of those KPIs being net revenue, retention, and so on, and then the fourth pillar being moat and differentiation and that one's self explanatory. Now, all regardless of the industry, we look at, we still think about these four pillars and there needs to be a credible case for each of these. Now, obviously every startup isn't gonna be as strong in every single one of these. And you have to be okay with foregoing moat and differentiation in some cases so long as you believe they're growing fast enough, where first mover advantage is enough of a differentiating point, right? So it, it, it depends on a case by case basis. But I guess, so that's kind of how we think about every investment that we make in, in every business case that we make. And I guess a, a recent investment that we made is in a company called Moni Africa.

Giuseppe Stuto:
They're actually based in Western Africa. So they were in the last Y Combinator class. They're building community based, they're really a community based lending platform. And they've, you know, we, we came across them through one of our portfolio CEOs and they you know, and when we met them, we quickly realized that they, they weren't the first to, to try what they're doing, which is taking a more kind of community based lending approach to solving the problem of lack of small business lending in Africa. And many have actually tried many bulge bracket banks have actually tried to solve this before. And then they all kind of walk away and say, well, lending to small businesses is, is just not possible. It's not going to work. But you know, so one would think, okay, well, you know, why would you kind of trust that this model would work today?

Giuseppe Stuto:
Why, what's different with this team? And if we think about it from a TAM standpoint, I mean, there's hundreds of billions of dollars in credit gap for merchants in Africa, number one. And then if you kind of can, if you unravel that onion, tens of millions of merchants are distributed across Africa today. And I think like 80% plus, or even 90% of them don't have access to credit. And what we ultimately realized in diving in there was that credit across the African region is tough because most of the merchants, even well-established businesses don't qualify for credit because they don't have a digital footprint. So what's happening is as a, as a world, we've tried to take a Western approach to credit underwriting and just slap it on a, a community in a region where financial digital footprints just don't exist. Even for those that have built businesses that generate a meaningful amount of revenue.

Giuseppe Stuto:
So even with all the fintechs of the world, and so on, you still have this massive gap. And, you know, in, in a company like Moni, we quickly realized that, you know, you kind of look down the line with even all the hype around FinTech and lending one would just think, oh, invest in everything FinTech related. But you know, what we did in this case was we just looked at what are they doing differently? And we think about that question a lot. And when you look at like whether or not something is hyped up or not like NFTs and so on, think about what is inevitable, but also align it with why is there a difference in, in application here? What is being done differently? And with, with Moni, what we found was that they were bringing the perfect combination of a kind of Western approach to credit underwriting with the cultural nuances of how commerce in, in relation to banks and so on is brokered and, and conducted in Western African regions.

Giuseppe Stuto:
And that's kind of how we think about all these things. We really don't let hype, at least we, we think we don't let hype impact our judgment in how we objectively dissect an investment. And we just stick to our fundamentals and our pillars, and we don't make an investment if we don't have a solid thesis in how that space develops. Right. and with a lot of these, you know, like for going back to the example you gave with NFTs, a lot of the consumer facing NFT applications, it's just hard to formulate a long term thesis. It really is because who knows what the breakout use cases will be and how NFT communities make your offering more effective. However, what we do know is that the technology is real, that there are enough use cases where if you could be the developer or infrastructure layer to supporting them, you're gonna build a big business. And that's inevitable. And that's what the Alchemys of the world are doing. We, we're not investors in Alchemy to be clear, but there are an example. And that's what the example that I gave. And there are a few companies doing this already of being the identity layer of making NFTs a, a verifiable identity or login for an application, right. Like that's inevitable. So we, we kind of, I'm not sure if that answered your question completely, but those are some of the perspectives and dimensions we bring.

Will Beeson:
Yeah. Yeah. How do you, how have you built deal flow and where do you, where do you find the most interesting deals coming from?

Giuseppe Stuto:
Sure. So we think about our sourcing framework as one of three or four I guess, pillars to use that word again. The first is we had built up already, or we have built up a, an angel portfolio of 31 founding teams, and now 10 additional, you know, teams from our institutional portfolio. And all those founders represent eclectic networks, whether they be within Boston, New York, San Francisco, LA, or even worldwide. And we spend a lot of time with our founders, not just helping them, but also organizing networking events with them as well. So we do a lot, we travel a ton, we do a lot of boots on the ground programming with our founding teams and their respective networks. Then number two, our co-investor networks. So we spend a lot of time, not just with other seed investors, but with more downstream investors at the A the B and so on.

Giuseppe Stuto:
And they're a tremendous, you know, source of deal flow as well. Because most of the stuff that, especially the downstream investors see, and especially in today's world is just too early for them. So where we just let it be known that we like to look at everything no matter how early it is. And one thing that has worked out well is, and we pride ourselves on this is that we are very helpful to every founder we speak to, or we, we try to be helpful to every founder, every founder we speak to. Now, obviously if you look at it on, you know, a spreadsheet, the majority of the founders you speak to as a VC, you just don't invest it. You cannot. But, so if you think about it, those are the people that end up building your brand. It's not just the ones that you invest in.

Giuseppe Stuto:
It's the ones that you don't invest in. And we actually see, and I'm, I'm deviating from the second pillar in that being, you know, co investors. We actually see a tremendous amount of deal flow come from founders we've passed on. The third leg of, of our sourcing framework is just these kind of quarterly travels that we do to New York SF and LA specifically. And in further building inroads in relationships with middle manager or executive operators at high growth tech companies within, within the industries that we focus on. So a lot of these VPs of engineering, VPs of products, or even founders of high growth tech companies, they have a side fund already, whether it's a two or a five or a 10 million angel fund, and, or they have a ton of aspiring entrepreneurs go to them for advice. So we spend a lot of time chatting with these execs and operators to see what they're seeing on the ground.

Giuseppe Stuto:
And then also to just kind of show them that we could be a co-investor with them if they find a great entrepreneur. So focusing on those three things, either the majority of our deal flow comes from, and, and I guess the fourth one is content. So just putting our names out there, whether it be into forms of blog articles, podcasts, and so on, that leads to some inbound. And I would say right now, 99.9% of our deal flow, if not 100% of it is organic inbound, we probably should be spending more time on opportunistic, outbound. We just don't have the bandwidth to given that we're a three person team today, but every single deal we look at today is organic inbound.

Will Beeson:
Yeah. Well, opportunistic outbound has to be hard for an early stage fund, right? Pre-seed, seed. I mean, how, how do you even, how did it even come across your radar?

Giuseppe Stuto:
It, it depends on what type of VC you are and your background and so on. But, but what it looks like is, you know, and this is, there's a recent example of this and we didn't go too hard on it, but kind of you, you're reading an article and you see a company that is in a particular space within an industry that you've been thinking a lot about. And you're like, wow, that is exactly what I've been thinking about. That could work in this world. Wow. That's a great founding team. And they just closed the round of, of pre-seed or seed financing, but it doesn't mean you can't go after them right now. You have to be ready to show these founders who don't wanna talk to you rightfully so, cuz they're, they're back to

Will Beeson:
Building, they're sick of fundraising, right? They feel like they've wasted the past six months of their lives. Trying to get money.

Giuseppe Stuto:
Exactly. So you have to bring some value to the table. Right. And that's one thing that we haven't institutionalized, the outbound component, but the underlying I guess, tool that we use with companies that we try to make commitments to, and that we do commit to and invest in, we, before we invest, will on average deliver one or two tangible points of value to the company. And that's just A, it's our DNA, and B, it's something that we're institutionalizing because that's the new status quo. If you want to get into a competitive round, a founder rightfully so should expect some value from the VC before they've earned their right to invest. So we already do this today. Now it's just a question of matching that with some form of cadence, outbound, you know, outreach. And so that we just haven't gotten to yet. Yeah.

Will Beeson:
And so what does that tangible value look like at that point? Is it, it's an, it's an intro email or something, or it's, it's more tangible, it's a partnership introduction.

Giuseppe Stuto:
All the above, I mean, one of our LPs is, are the founders of, of a very well known blockchain company. They, they are strategic investors in, in a venture fund that their company spun up. And in one company that we were courting and, and ended up investing in, they, you know, we basically brought them on board as a co-investor and it ended up really being tremendously valuable to those founders. And this was before we even finalized our allocation. Right. So there's things like that, that we've done. We've connected founders with potential hires, with potential advisors, with potential customers that ended up converting. So all of the above, I would say it really depends on what, who, what the profile of the founding team is, the stage of the company, and so on.

Will Beeson:
Giuseppe, this has been a really fascinating conversation. Where can people connect with you and find out more about 186?

Giuseppe Stuto:
Thanks Will, it's definitely, it's been a fascinating conversation as well. And I really appreciate, you know, you giving me the time here to, to tell, share our story at 186, I'd say Twitter @gstuto. DMs are open. Always open to, to hearing from anyone really in, in the tech community, doesn't have to just be a builder or an operator or an entrepreneur. It could be another investor. It could be someone who's thinking about breaking into tech. You know, I always think of the world as a series of olive branches. You know, I wouldn't be where I am and, and 186 wouldn't be where it is today. And nor would my partner be where he is today. If it were not for a series of olive branches that we were given. So we're always open to helping folks. And then on Telegram, which is @gstuto.

Will Beeson:
Amazing. Giuseppe Stuto, thank you very much for joining us today.