Mining Teenagers’ Minds For An Edge In Venture Capital: A Conversation With Arielle Zuckerberg

Many people have tried to make a science out of spotting the next social app that will accelerate from zero users to 10 million in a few months. Almost all of those people have failed.

Picking winners from the social media bin has always been a mostly inscrutable process. By the time success starts to show, when traction accelerates, it’s a condition that’s patently obvious to all observers.

So how is a VC supposed to find these companies before others—how can an investor sort the social apps with promise from those without?

It will always be hard, but one of the best methods is getting close with the base users of a product, and a wide swath of them. In the case of social applications, it’s usually teenagers that comprise the first wave of adopters. Venture capitalists aren’t teenagers; many of the VCs at the best known firms might be the parents of teenagers, but their teen years are far behind them.

Arielle Zuckerberg, a partner at Kleiner Perkins, isn’t a teenager either, but she makes a point of hanging out with groups of them on a regular basis. She notes their habits, their lexicon, the way in which they leverage the software on their phones from minute to minute.

It’s this kind of hands-on approach that Zuckerberg has developed after spending time as a product manager at Wildfire, an enterprise platform for managing social media accounts, which, during her time, was acquired by Google, and then at Humin, an application that organized contacts according to how users interacted with them. Humin was later acquired by Tinder.

Zuckerberg sat down for a Facebook Live chat with FundersClub CEO Alex Mittal to talk about some of the insights that she’s acquired as a product-person turned VC.

Some of the key takeaways from her talk:

• Transparency within a company, with information flowing freely from founders all the way down to interns, should be taken as a positive sign to investors. This core value, something that’s instilled by the founders, encourages different teams within the startup to work together and share information and tactics. This ultimately leads to better performance of individuals within the company, and better performance for the company overall.
• Being a good investor or venture capitalist is like being a good reporter. The best connections and leads don’t come when hanging out amongst your peers. A VC won’t find the next big social application by observing what other investors are using. That’s something of a negative signal, if anything, Zuckerberg says. Instead, investors should be spending time with the crowds who actually decide what the next big app is. In the case of social, it’s usually teenagers, with whom Zuckerberg makes a point to hang out with on a regular basis.
• Some of the most important due diligence work is on the founding team that  you’re investing in. Yes, they might be passionate; yes, they might be experts in their domain—but can they execute, and have they shown a capacity to execute in the past? The best input for this question comes from employees, former employees, friends and coworkers. Some of the best diligence work is done in the trenches, on the phone, and in coffee shops, rather than reading over an industry report.
• The best way to get in contact with a VC is with a warm intro. Other methods, especially cold emails and calls, rarely work. More than 90% of the meetings Zuckerberg takes are from warm intros. The rest are cases where she’s the one who has done the outreach.
• Founders and product people should integrate user feedback into their iteration loops early on, and it should be one of the things that development and feature building is based upon. Getting direct feedback from users saves product teams immense amounts of time. Doing things this way allows product leads to avoid headaches that come from developing the wrong thing for the wrong audience.

Below, readers will find an edited version of the conversation between Zuckerberg and Mittal. While this conversation has been edited for clarity and, in some cases, brevity, it should be noted that this was a live exchange with questions from an international audience arriving in real-time. Many of the questions come directly from viewers. Mittal’s words in bold:

What did investors see in Wildfire early on, what made the company such a success?

Transparency, for one.

Wildfire was started by a husband and wife team who had both gone to Harvard Business School. I joined when it was about 40 or 50 people and to me, as an employee, there was such a special energy thereLooking back, they did so many things right.

For example, every Friday there was an all-hands meeting and the head of customer service would cover our approval rates and some keystone quotes from customers.

They would highlight top-performers on the customer service side and the sales side, and then there would be a demo day when everyone in the company could see what the product teams were working on.

What I saw as an employee, and I think what investors saw when they visited us, was an extremely special energy, a company that was growing quickly, celebrating successes across all teams, and doing really well on the sales side, as well.

 

I see you using and mentioning a lot of the social apps very soon after they come out, and so I imagine you're covering like the social space pretty closely.

Do you think it's possible to predict what will make a great social app, or is it the kind of space where you have to just put something out there, rapidly iterate, and see what happens?

Are there certain features of social apps that you've realized predictably matter?

I would say that if you download a social app and then immediately see that a bunch of VCs are on that app, and very few users are non-techies, that's actually a pretty negative signal.

It’s a much stronger signal when I learn about something firsthand from a teenager. I have dinner with a group of high school girls every so often and they tell me about new apps from time to time, just in the course of conversation. That’s a strong signal.

One warning sign, to me, with social applications, is when the user gets kind of tricked into inviting people.

 

So the user clicks a button and accidentally spams her contact list?

Yeah, exactly. I think that's usually a bad sign. The best case scenario is that people want to share it because it's valuable to them, and they think it'll be valuable to their friends as well, and the experience improves with more friends on the app.

 

Question from the audience: It looks like we're living in a time when anything that could be built, has been built. What's the one thing you wish we could build right now? What's one thing that you wish existed right now, that doesn't?

I joke about this, but I do want it to exist–you know those car washes when you were a kid?

 

The automatic ones?

Yeah, you drive the car through it and scrubs the car. I wish that existed for humans.

I do want that to exist, but let me give you a  more serious answer: I’d like to see more integration between popular applications.  Sometimes I get really frustrated by how closed off certain platforms are, and how things don't interact with each other seamlessly.

There's so many things I wish I could ask Siri or Alexa to do that they just won't do because they don't play well with other applications. And I don't know if this is a product opportunity, or if t all these companies have yet to open up their API. But we have these capabilities now, we have the technology, it’s just a question of incentives for each company: why should they open their APIs up?

I’d like to see somebody crack that–be the great connector, so to speak.

 

Yes, that would be cool. By the way, I would also love to see the human car wash thing. I think that sounds like a great idea.

You're dwelling on it too, right?

 

Another audience question: What's the number one lesson that you've learned since joining Kleiner, a little more than a year ago?

The importance of back channeling.

When you're trying to de-risk an investment and you're trying to dig in and learn more about a potential founder who you're going to work with, or a sector in general, there's so many people out there that probably know the answers to the key questions that will dictate whether or not the investment will be successful.

These are the people who can quickly help you identify the risks and understand whether or not that company is positioned well to overcome those risks. For example, if you think the founder is a visionary, but you're not sure of her ability to execute, there are many people who probably work with that person who you can easily talk to, and who can give you a clear answer.

And this goes for every opportunity in life. I don't think this just applies to VC.  Before you make any decision that's really hard to reverse, you should talk to people who can help you understand the risks of that decision and why it’s so important. That's the biggest thing I've learned.

 

Another question from the audience: What specific metrics, if any, do you first seek to learn from a startup that you’re getting to know?

If it's a consumer company, an e-commerce company, for example, there are well-known figures that give us a lot of information about the company: the cost to acquire a customer, a customer’s lifetime value.

Another go-to: we always ask about the ratio of paid customers to organic.

So there’s that list of metrics we ask about and then I also like to ask about what motivates a founder, I want them to tell me about their backgrounds. I want to understand if someone is uniquely qualified to be building something versus having found this problem and gotten very passionate about it. I want to understand their motivation.

 

Do you focus on a specific industry or is it more opportunistic, kind of like ‘anything is possible?’

My mandate within the firm is to focus on tech differentiated consumer versus brand differentiated, but if I get a really high quality inbound from someone I trust then I will, of course, meet with them.

 

You were on the product side as like a builder or operator previous to Kleiner. What's been the biggest difference in your schedule now that you're a VC?

It's so different. It honestly could not be more different. It's completely variable. I spend two days a week in Menlo Park and the rest of the week in San Francisco.

When you're a product manager, scrum is usually a certain time every day, or there’s a daily stand up meeting first thing.. Say it's at 9:30 a.m. or so. And then you’re at work another 10 to 12 hours, depending on what kind of mode the startup is in. As a VC, we have a lot of meetings, too, but they’re mostly external. When you’re focused on product, most of your meetings are internal.

I also heard this metaphor from someone recently: being a product manager is like being on a soccer team, whereas being a VC is more akin to being on a swim team. You're not really seeing your partners every day, but you're on the same team. You're doing your own thing, heads down.

 

Another audience question: What are your thoughts on funding projects that have a social impact or a social mission component, as well as being focused on profitability? Do you see a lot of companies in that space?

We're focused on returning money to our LPs, but it's important to us that founders are doing things for the right reasons and trying to make the world better.

I would say that, at Kleiner we’re looking first and foremost for good, solid businesses that have the opportunity to capture a large portion of a large marketIf social impact is integrated into the company's mission, that's definitely a plus for us.

Going back to Wildfire, it kind of helps give your company that special energy if your employees are motivated by some social mission. Investors see that, they can see when something unique, wonderful and hard to explain is going on at a company.

It helps with employee retention, and it helps build trust with customers. And in tangential ways, it can have a really positive effect on your relationship with investors.

 

Another audience question: How much due diligence is enough when you're evaluating a company? When can you call it done?

This is a good question. I try to turn over every stone. I think when you feel confident that you've talked to everyone that could help you uncover the key risks, you’re nearing the end of a process. If two days in a row you wake up with the same feeling about a decision, that yes, this is the right thing—that’s a good sign.

Due diligence cycle is like a roller coaster. You find your emotions changing hour-by-hour sometimes.

One second you’re saying, “Ah, this is amazing, it's definitely going to work," and then like the next second you're like, "Holy shit, this is definitely not going to work."

 

So if it passes the two-day test for you, it's done?

Figuratively. If you've talked to three experts or more—hopefully more—but if you've talked to three people in a row that strengthen and validate the conclusion you're arriving at, then I think it's a good sign that you're close to completion..

 

Audience question: How do you learn about new investment opportunities?  Do you take cold calls or cold emails from founders, or are they all warm introductions from people that you know?

Expanding on this: if a founder wants to get your attention, how would they do that?

I think a warm intro is the best way, especially from someone with whom I'm close and trust. I'd say about 95% of the people I meet with get warm intros, and the others are people I’ve reached out to. I’ll do that when I’m interested in pursuing a certain market or thesis. In those cases, I will try to get a warm intro myself. In rare cases I'll just reach out, no intro,if I’m really curious about a company and think they're doing something really awesome.

 

Is there an area or two that you are currently looking at and trying to find a great team and founder in?

Yeah, definitely a couple of areas. We're looking at AI, robotics and retail products in areas that haven’t seen a lot of innovation in the past such as women's health products, birth control–things like that.

 

Another audience question here: What lessons have you learned from Humin that are helpful in your role now as a VC?

If you have a plan to monetize your product, I think you should set expectations with your users around that from the beginning—people want to know how you plan to make money, and whether it’s coming from them, or from another source.

Also, during my last 18 months at Humin, I was very focused on user research. I read all about it and started integrating user surveys and interviews into the product cycle. I wish we had done that sooner. And I do a version of this now as a VC.

 

That explains why you have dinner with high school girls.

Yeah, I love meeting users where they are and understanding them every step of the way. I think that is really important, especially when you're building new features. It saves you so much time and helps you understand which option is going perform the best.