Mike Miller & Michael Ma:
Think Seed Like Liquid 2 Ventures

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This week we’re having tea with Mike Miller and Michael Ma, Partners at Liquid 2 Ventures. Before joining Liquid 2, Mike founded Cloudant (now IBM’s Cloud Data Services) and raised $18MM before getting acquired by IBM. Michael Ma was the COO & Founder of TalkBin, acquired by Google, and then served as a Product Manager for Google.

Highlights from Series Tea with Mike Miller & Michael Ma

This interview has been lightly edited for length and clarity.

What's your total portfolio? How big is the fund and what's your average check size?

MICHAEL: Our portfolio is over 300 now. We're in the midst of our third fund, which will be $75 million. Check sizes vary; anything from $100-500k.

What types of startups do you invest in?

MIKE: I started with enterprise SaaS. Since then, I've gone back to my roots as a physicist. I invest in hard tech companies, with a hardware component, particularly in space decarbonization. Overall, the things that we know best are enterprise, SaaS, and B2B companies.

Do you invest in international startups?

MICHAEL: If you do a good job for founders, they'll send you other great founders. If we back great founders, they make magic happen. We’ve become more international because of that. That's where our founders have led us, but it wasn't the original thesis of the fund.

What percentage of your investments have gone outside the US in the last few months let's say?

MIKE: Around 15%.

What percentage of investments are in hard tech?

MIKE: It's our second largest component after B2B SaaS, 25% to 35%. There've been changes in how easy it is to get a hardware startup off the ground. It's not us pushing our values on the market. It's a reaction to what the best founders are doing.

Do you have an idea of where the world is going and what to invest in, or do you just back the best founders with the strongest pitches?

MICHAEL: We were early believers in direct-to-consumer healthcare. We invested in Nurx, Truepill, & HeyDoctor. We have opinions around spaces we think will do well, but we're open to flexibility. You have to leave room for serendipity, especially when it comes to great founders.

What spaces are you most excited about?

MICHAEL: We had a point of view around Latin America’s fintech opportunities. But it’s more of a guide rather than the main position of our fund. Especially in seed, founders pivot a lot.

MIKE: Being YC alumni, we accept that it's not just about picking a company or a market. You're investing in humans, with faith that those humans will choose a good market.

We're on the precipice of industrial transformation as we decarbonize the economy. That means a huge market opportunity. If you look at Union Square Ventures, they're leaders in early-stage capital. They helped initiate a second boom in cleantech with a dedicated fund.

I have a thesis that these changes to decarbonize our economy will happen quickly, and some people will get wealthy. Whether that's going to happen in the next five years, which would be relevant for a 10-year venture fund, or whether it's going to happen by 2050 is a more complicated question.

It sounds like founders introduce you to more founders. Is that your main strategy for finding new companies? Do you take cold inbounds?

MIKE: We both consider ourselves founders that ended up on the other side of the table. Founders are part of a rapidly growing company. You're delivering a great product. You've got a ton of great customers. And through that, you build this network, you associate with better and better founders. That's going to introduce you to some of the best companies before they're even formed. Trying to surround yourself with the best people is what early stage seed capital has historically been about.

You invest in a small group of great founders, meet the teams, nurture those companies, and meet the early employees that go off to do great things. That's how you get polynomial growth in a network.

You guys invest a lot, whereas other investors take on only four companies a year. And you have a small team. How do you pitch that to LPs given how prolific you are?

MIKE: We focus on what we're good at. We're good at helping people capitalize in the beginning. Our checks don't fill up an entire round. For a company to be successful, they eternally need a few different investors: a mix of angels, operators that write small angel checks, and firms that can backstop and deal with growth as things go.

I have yet to meet anybody that can make rounds come together or give founders better advice than Michael Ma. I focus on getting quantitative about product-market fit. A lot of founders look at product-market fit as a hurdle to unlock the next stage of venture funding, but it's not that. It's the experiment you run to see if you built the right product. Afterwards, you can shake money on this company and grow. It goes through a phase change once you pass product-market fit.

We help founders achieve the potential of their company in the earliest stages. We get them to that phase change where you have a product in the market, it is growing 10% to 15% monthly, and it's been sustained for 18 months. Once you do that, those teams are in the driver's seat. Anybody will invest in those companies. They will be able to hire teams.

We invest in a larger number of companies, but we're not the best people to be on your board when you IPO at year 10. Our strengths are focused in the earliest stages. Because of that, we have a rolling cohort model. We're not proud to admit that there are better people for the growth stage of going from $50 to $250 million in AR.

MICHAEL: When we started, we saw a gap in the market to be a strong brand that’s not as ownership driven. The markets adapted. Every startup wants customers, and that's what we can deliver. Having a big portfolio has helped us do that. For multiple companies, we end up being one of their biggest sources of customer referrals.

A normal fund would invest in 20 companies. If there is a 10-20x hit, it pays off the fund. You guys are doing 40-80 companies in a fund. How are you viewing the maths?

MIKE: None of it matters if you're not meeting the best founders. We saw an opportunity gap in the market. We're not necessarily alone. Many funds are adapting a similar strategy, where every check doesn't have to be the same size. You don't have to own 20% of every company right away to drive your target returns.

MICHAEL: If you do around 30 advancements, a single unicorn can get you the 3x. When we did the model, we needed at least three unicorns to make the model work.

It's tough to convince LPs that you're going to have three unicorns out of a single fund. That fund today, that those LPs stocked, has six, and is on track to have 10. The math works, but you need more unicorns than what's typical. It's a tough pill to swallow because finding a single unicorn is not easy and now you have to find multiple ones.

When you're looking at companies to invest in, what do you look for?

MICHAEL: Team trumps a lot of things, but to get billion dollar outcomes, you need a great team in a great market. You actually need both. If you had to pick one, a good team can at least pivot and find a good market.

I've seen great teams in tough markets, and they'll get a $100 million outcome. The same team, if you put them in a great market, will do much better. Great team plus great market is where you get outliers.

What is a great team? How do you define that?

MIKE: How long have they known each other? They have to convince us that they're going to stay together on a decade long scale. The majority of company failures boil down to founder issues. Founding teams that are in an established working relationship, for many years, are the best. When people are personal friends, and then professional colleagues, they form exceptional teams.

There's trust that everybody's going to fulfill their responsibilities and grow into roles that are changing. When real money is on the line, you require trust that everybody's going to be acting in best faith for the entire company.

We also look for some diversity of roles. Everybody has to be reasonably technical, but you need someone who is excited to grow the business side.

There are more questions to ask: are they going to iterate until they understand the market? Will their product capture enough of the market for this company to be an interesting venture return?

It sounds like you’re focused on the co-founder relationship. Do you look for any attributes in founders themselves?

MICHAEL: Great founders have a unique story about why they're going to win in their specific market. Larry and Sergey were the perfect people to run Google, versus Mark Zuckerberg who is perfect for Facebook. If you switch those founders, Larry and Sergey would not be great founders for Facebook.

You need to be smart enough. You need to work hard. But what's important is somebody who's uniquely poised to win. Maybe they have that point of view around their space. Maybe they worked in the industry for a long time. Maybe they grew up in the right mix of things that would make them perfect for a founder.

MIKE: We don’t ask people what their educational background is. That's not a hoop to jump through. We're more interested in what network they come from. A lot of the founders are coming out of companies that are good news companies, like Facebook, Dropbox, Twitter, Airbnb, or Google. These are growth-stage companies that attract the best talent, and that talent goes off to do the most exciting next things. We're trying to follow that talent. How they're connected in the network graph of tech is important.

MICHAEL: Good founders convince other people to buy into their vision. Half their job is recruiting talent. You don't see it as much as seed because in seed you're building.

When people are pitching you, what do you feel works well vs. doesn't work well?

MIKE: Michael has converted me to the deck – a very short deck to make sure that the things you want to get across in 30 minutes get across. But mostly, it's team, market, and product.

I like people that are intentional about what they get across and do it succinctly. Walking through it with honesty and the right level of exuberance and excitement is important.

What are the most common mistakes founders make when pitching, especially during pre-seed?

MICHAEL: It's bad when a founder knows less about a space than a VC.

MIKE: Whether you're a founder, an investor, or an LP, you're all part of the same peer group. The thing you have in this whole game is your reputation. That's the most important thing. Being honest is huge. Understand that the power relationship may be inverted at any time in the future.

How are you thinking about international startup opportunities, like in Southeast Asia, Latin America, and Africa?

MICHAEL: We started off with a network of founders that we trusted. When we started off with Rappi, we got to meet a great group of Latin founders who started another company. They were able to introduce me to other founders.

In Africa, we started off with somebody I knew from Harvard Business School. He started a trucking company, was somebody who I knew for years at HBS, and happened to be from Nigeria. It was that perfect combination. As we built comfort, he was able to refer other companies. It helps to have one or two anchor investments in that country or region.

How many consumer app pitches do you see and what percentage of those do you invest in?

MIKE: Less than other stuff. I don't have quantitative numbers.

MICHAEL: Our consumer conversion rate is lower than enterprise. But even this week, I've seen five consumer ones. Maybe we'll do one, maybe zero. It depends.

Has the percentage gone up over the pandemic?

MIKE: People are pitching new social networks. The social networks we're a part of are pretty old, a decade plus. Things like Clubhouse are a real opportunity.

People are pitching at it about the same rate, but the big change we've seen during the pandemic is in ecommerce. It went from dead on arrival to something everybody's excited about. The mix of COVID-19, Amazon not being able to meet demand, and the rise of the Shopify ecosystem, means companies are pitching one degree away from consumer.

What industries are you looking to invest in right now?

MIKE: We're almost categorically against sports. Our managing director and founder, Joe Montana, doesn't want to be typecast. Most of the market is wide open. Most founders are moving towards the same things. Enterprise SaaS is huge. We'd love to hear about that. If you're in hard tech, we'd love to hear about that. Consumer, none of us have big consumer wins in our backgrounds, that's where we're the least experienced.

If you're pitching us a sports startup, that's the hardest one to get in the door, but everything else is fair game.

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Thanks,

The Mercury Team