To be a Rule Breaker investor, you need to think like a venture capitalist. But what's a venture capitalist? Glad you asked! In this episode of Rule Breaker Investing, Motley Fool Ventures' own Ollen Douglass is here to explain what it is, what it does, and how you can dip your toes in the VC pool.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

10 stocks we like better than Walmart
When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

Stock Advisor returns as of 6/15/21

This video was recorded on July 21, 2021.

David Gardner: Venture capital. On the one hand, the phrase has an allure. Capital that you are venturing, not just investing. It sure can end well or badly because it's an adventure. On the other hand the phrase and what it represents is pretty opaque to many of us. Have you ever invested yourself in venture capital, are you a VC? Do you want to be one? How does that work? Is it really possible to buy shares of a stock like Zoom, not just before the IPO, but years earlier, along with other so-called venture capitalists? My guest today is not only one of my favorite people, he is also a true-blue venture capitalist and he made me one too. But it didn't start out that way for Ollen Douglass, the long time Chief Financial Officer of The Motley Fool, nope. He has evolved into that and he'll share a bit of his journey with you today but he'll take you along for the ride. Not just on his journey but on our journey together aiming to make you by the end of this hour smarter, happier, richer. As you obtain a big picture understanding of how venture capital works and to what extent you can or should or should not participate and a lot of other Foolish insights besides. Wisdom from a Fool, only on this week's Rule Breaker Investing.

Welcome back to Rule Breaker Investing, which in some senses is what venture capital investing is. Venture capitalists intentionally take on risk. They know they're taking a lot of risks. They're looking some often young person or team in the eyes and saying, could this all end well? Should I put not just my but the money of my limited partners in this or that stage? That to me is very Rule Breaker-y. There's a lot of overlap between Rule Breaker Investing, I think, and venture capital investing, but with my friend Ollen Douglass joining me shortly, that will be one of my questions. I'm curious, for example, our six traits of a Rule Breakers stock, do those work in venture capital when and when not? We're really going to be covering this topic, which I was saying to Ollen before we started recording today, I can't believe we haven't talked about this before. We've now ended the seventh year of this podcast, this week our last.

I guess lucky seven finally, I thought to have one of my best friends of The Fool and somebody who is a venture capitalist, to share with you insights on thoughts about venture capital investing. Now, before I have Ollen on, I want to mention two things upfront. The first is next week's mailbag, and it's been quite a month. This month of July, 2021 for this podcast last week. I hope pretty sure a lot of you did really enjoy Indianapolis Colts Head Coach Frank Reich, all of his life lessons and insights, not just as a fellow liver of life for a very successful professional in sports, but as a Foolish investor as well, and what delight it was to share Frank with you. I've seen so many great things on social media, specifically Twitter, where I hang out, @DavidGFool, this podcast, of course, @RBIPodcast, and if you had any thoughts for us about what some of the things Frank said or how you changed as a result of last week's podcast. Love to hear them again. Our email address is [email protected] and in the mailbag next week we'll be featuring some of the best things we hear. But not just about Frank, but about the Review-a-palooza. We reviewed three five stock samplers, Five Stocks For America, Five Stocks Passing The Snap Test, and Five Stocks Celebrating The 2018 World Cup. We did that just a couple of weeks ago. It's been fascinating to see how those companies have done. Then of course, today's podcast and our discussions, venture capital investing may occasion some questions are reflections from you. If you want to share those with us, [email protected] is the email address.

Then one other forward-looking comment has nothing to do with investing in this case, but it does have to do with next month, which each year for this podcast in recent years has been authors in August and I'm really happy to say our first author and the first book you should read in advance of August. We do this in August because people often go to the beach, at least in the Northern Hemisphere around the world. If you do go to the beach, maybe you like some good beach reading. Positive Intelligence will be our first book on August 3rd. The author has appeared once before he made a spectacular entrance on the stage for Rule Breaker investors when he joined Shirzad Chamine, to talk about Positive Intelligence. This time, I've actually fully read his book and we'll be discussing Positive Intelligence. I highly recommend you read that book and next week I'll be mentioning the two other books coming later in August. All right, sweep all of that off the stage and now let me shine the spotlight on my friend and co-conspirator here at The Motley Fool, Ollen Douglass. Ollen, great to be with you this week.

Ollen Douglass: David, thank you very much for having me on the call. I'm pleased to let you know that I won the bet with Tom Gardner. We had a seven-year over and under bet on when I will get on this program. Maybe a push since it just happened at seven years.

Gardner: I hope you won a lot of money off our good friend Tom on that. Ollen, I'm delighted to have you and truly, I think Motley Fool Ventures, which is The Motley Fool's first foray into venture capital investing -- we're going to talk about that in a little bit -- but I think that fun started, Ollen, was it about three years ago? We couldn't have even been talking about this. I don't think it was seven years ago. But part of the fun story is that on our behalf, we're investing just the Motley Fool's bank account into private companies prior to ever starting a fund.

Douglass: That is true. The fund officially launched in July. Our anniversary was two days ago on July 18th. In 2018, three years ago, is when we launched the Venture Fund but I believe we made our first private company investment as a company it was in 2012 or 2013. We were doing a little bit of experimenting and testing inside of the house with our own money, which I think a lot of Fool readers would not be surprised to hear that we just didn't make something up and foist it on them.

Gardner: It is really a great approach and we often talk about it just for investors, especially people starting investing in this case, not venture capital investing, but just stock market investing. You don't have to put all your money in at once. You shouldn't put it all in one stock. You should toe dip, test and learn, buy in thirds, we have all kinds of approaches. But Ollen, one thing's for sure, this is all if you're playing the long game. If you're playing the long game, it makes a lot of sense to learn it over time and get better at it. One of the interesting things about venture capital is the structure of funds is traditionally set up so that they have an end date. I think we have that for our first fund at Motley Fool Ventures. But I'm going to park that. I think we're a 10-year fund, but we're going to come back to that later because if I ask you all the questions that I would want to, we'll go for well more than an hour this time. But Ollen, I wanted to get back into the year 2001. You were coming to the Motley Fool and you had an amazing first 10 days or so. Maybe you could just let our audience know how things started for you in 2001 at The Motley Fool.

Douglass: Thanks, David. I'll start my Motley Fool story. When I first met you and Tom, I had applied for a job at The Motley Fool and wanted to get a look at you guys up close in person. It is funny that we're on a podcast because back in the days in 2000, you were doing the radio show, doing it live and I came to an event that you guys were hosting in Baltimore. You were doing the last session on the last day at the conference.

Gardner: That means we were really important or really not important.

Douglass: I don't know which one it is, but I do know that I showed up just for this. By the time I arrived, they were packing things up. So I was even walking without paying, walked in and Rick was there. I believe he was there along with Steve Broido or maybe you can [...].

Gardner: My talented producer Rick Engdahl and yes, Steve Broido, probably Mac Greer, and many people who brought out Motley Fool video and audio to our members for years.

Douglass: I got to meet The Fool there and what's interesting about this story really is, that was probably in September or October and we had a discussion and I remember talking to the woman that was going to be my boss. Yes, she offered me a job. I'm excited to join, but I have a little bit of a problem. We have a year in bonus, at my company that I am right now. I'd be happy to come now, but that would affect my year in bonus, which I certainly told them but they knew what was going on.

Gardner: This is the year 2000. This is the fall of 2000 which was an interesting time, but keep going.

Douglass: An interesting time, it certainly was and I said, "I can come in October, if you guys will be willing to pick up some of the bonus or I can start in January," and my boss took about one second and said, "I'll see you in January." Then I show up. Even though I wasn't an official employee, the company had a lot to bring me up to speed on what was going on and talking to us and really got me grounded in the company. So on the second day after being there we had an all-company meeting and I had to go in and introduce myself, "Hi, I'm Ollen Douglass and in short we have too many people."

Gardner: I remember. I don't think we were trying to set you up for anything like that, Ollen. I think we would have taken a few months before, you would've been a little bit ready for this. But unfortunately, at that stage of our company and the market was selling off and things were about to get really ugly, we had to do a round of layoffs. On the second day of your Motley Fool journey, you were the guy standing up saying that, oh my golly.

Douglass: Yeah. But it was interesting. But in all honesty, I think the way the company reacted, the way the employees reacted, the way that everyone responded to get us through that period. That probably formed the foundation and why I'm still here 20+ years later. I've just never seen that kind of activity. I'm going to put Rick on the spot. His wife actually approached me about the health of the company at a holiday party and insisted that I tell her the truth of what was going on.

Gardner: Wow. Love it. Rick married well, but we would have expected that.

Rick Engdahl: I'm pretty sure that I saw Ollen cross my name off of one list and write it into another that day. I give Audrey credit for me still being here.

Douglass: Yeah, she was quite persuasive. There was clearly an answer she wanted to hear, so.

Gardner: Well, and just to fill out the story there, we were venture backed talking about venture capital. We were venture backed to the time, which means we were overspending our means quite by plan. The problem was the stock market was about to dramatically sell-off. A lot of our advertisers that were floating our business back then, Ollen knows better than almost anybody, all of a sudden said, "We're not advertising on your site this quarter or this year. Do you know how bad things are? People aren't even opening up their 401(k) statements guys. We're not advertising our brokerage firm on your site this quarter. We don't have the money ourselves." Boy, did that put us in a hard place.

Douglass: Yeah.

Gardner: That's in part what was happening. Ollen, you moved on from a hard 2001, you weathered the storm. We laid off 1.3 quarters of our employees. We went from 435 people to 85 people in nine months. 2001, the only bad year in Motley Fool history, and it was a horrible year. But some years later, some wise person in Fools said, "Hey, you know what, I think Ollen really knows this stuff, he knows this business, let's make them Chief Financial Officer." Ollen, you've held that, I think you held that position for 14 years.

Douglass: Yes, I did. I did that from roughly 2004-2018 in that CFO's position and learned a lot. I learned a lot from the perspective of being a venture backed company. These stories we're telling are all relevant to you. Some of the things you need to be prepared for, if you're going to be a venture capital investor. As David said in his preview, it really is about trying to find that Rule Breaker before they're Rule Breaker. It is a high-risk venture.

Gardner: We're going to talk more about that later, but let's just bring us up to snuff. In fact, I just don't think I know the reason why you stepped down as The Motley Fool's Chief Financial Officer is that you had a different dream in your mind. I actually told a portion of the story on My Road Less Traveled in 10-and-a-half Chapters, Ollen. You were one of those chapters and I've told this story, so a lot of listeners will already know this. But it was the chapter about gravity. Could you just retell your story? I probably got a few things wrong when I did it on my podcast, but what was going through your mind somewhere around 2017?

Douglass: Somewhere around that time and was just thinking about it, I had been head CFO for a while. We were doing some private company investing as we talked about earlier. I really began to think about what I wanted to do at The Fool going forward. We have a wonderful program called "the sabbatical," where you get to take some time off and spend time doing whatever you want. It was a two-months sabbatical to me and plus I tapped on another month of vacation.

Gardner: Nice. By the way, we've Fool-ized so many words in terms and concepts. I can't believe we're not calling that the Foolbatical, but we actually, it sounds like we just call it a sabbatical.

Douglass: I'm not sure what a Foolbatical is. I thought I'd get hit with it. Hit it with a head of a Foolbatical.

Gardner: Hit it over the head.

Douglass: But what was interesting about that is in the CFO slider, I had a lot of things going on and I will give Tom credit for this. When we talked about how we're going to make this happen. He had me put out a list of all the things that I had on my plate. The things that I didn't really enjoy doing, but the things that I had to do because we're all adults and we do them. Then the things that I love to do and I brought that list to him. He said, "Well, why don't we do this? Just do the things you love to do." I'm like, "You're going to pay me?" He said, "Yes." I was like that's awesome. Let's try that. I went off on my sabbatical and shared the things, just like we talked about. In that moment of sitting there looking back on what it is that I picked that I love to do and what is that I actually spent my time on when I was out. The only thing that I kept up with on a regular basis was venture capital investing.

When I came back to work and had a conversation with Tom about what we should do next, I was like, "I don't know, Tom, I really liked this venture capital thing and maybe I'll just retire and be an angel investor or something like that. I would say, these are Tom's exact words, which means they weren't, but let's pretend that they were, he said, "All of those are a stupid idea." He said, "Well, but if that's what you want to do, why don't you stay here? We'll let you hire someone to do that, to work for you and then you can keep doing great stuff with me and I'll do it and you can oversee this venture capital stuff." I went out and searched far and wide for someone to run the venture capital fund and then came back to Thomas, and I said, "Tom, I found the person." He said, "Who is it?" "It's me baby, it's me." I was able to hire and fire myself. I quit and rehired and went on to launch the venture funding. In some ways, this is the job that I'm doing in my retirement, if you will, that has no expiration date. It's doing something that I really enjoy doing. With the confidence that if I wasn't doing this for The Motley Fool, I'd still be doing it. It puts me in a great place, I think.

Gardner: Well said. It reminds me, what I said back on that podcast and that chapter was that you took some time away. You gave yourself time, you gave yourself space, and your question to yourself, as I remember it anyway was, what is my mind keep going back to? Once you've given yourself time and space, where is the gravity? The answer for you was venture capital investing and that's why Motley Fool Ventures exist today. I find that an inspiring story. I told it because I want everybody to hear that and think about that for themselves. We don't all have a sabbatical coming up this year or next, we're all at different places in our lives. But when you can find yourself some time and space and then see where you gravitate that often can help lead you to where you should go next. Well, we're going to talk a lot more about Motley Fool Ventures a little bit later, Ollen. But is there anything else you'd like to say just from a biographical standpoint either? Why do you love this stuff? Did you love it as a kid? Anything else we should know about Ollen Douglass before we move on to talking about the allure of venture capital?

Douglass: David, growing up I had no idea if venture capital existed. I had no idea investing existed. It wasn't until watching episodes of, you may have heard this guy, This Week with Louis Rukeyser.

Gardner: Is that right? Yeah. You're saying that a lot of listeners won't notice, but my one job before The Motley Fool, was writing for the newsletter for Louis Rukeyser, the head of PBS's show, Wall Street Week.

Douglass: Yes.

Gardner: Which was the longest running show on PBS several decades at that point. That's how it started for you, Ollen.

Douglass: That is how my interest in investing started.

Gardner: I really do credit Rukeyser with democratizing and popularizing investing in the stock market for many Americans.

Douglass: Yes.

Gardner: That's great to hear that connection.

Douglass: For me I think that started the love of investing, and venture capital really started. I didn't really learn about it until I was cramming for my interview at The Motley Fool. When I figured it out I should know a little bit about this venture capital thing, you would venture back, but we actually became almost accidental VCs, if you will, at one point early in our history of the Motley Fool, in the mid 2000s, 2007, 2008. We had a subsidiary in the U.K. and we performed a management buyout. They wanted to pursue a different business model and we wanted to be supportive of them. We sold them off and retained 20% of the company.

Gardner: We're venture capitalists now.

Douglass: Yes, we were venture capitalists. We looked around and said, "Hey, look at us, isn't that cool?" That turned out to be a great investment. It was really interesting. It really submitted the foundations of the fund that we have right now. Because when we structured that deal, it was really about the intersection of purpose and profit. We were trying to do the right thing where we were trying to set everyone up for this to be a successful business and a successful transaction as well. We were able to actually do that. We created a new brand, we did a spin-out. That company went on to grow and be acquired by a public company over several years. That turned out to be very successful, The Motley Fool has grown on. It really got me thinking about what C planning is, I wonder if we could do this as a business one day.

Gardner: That's a great recounting. I wasn't even connecting that part of our history, but you are absolutely right. We learned how to manage an external investment that wasn't a stock. It was a private company. See that through, a great way to learn things, training wheels, which we didn't even intend to have on our bicycle. Yet that's how it went. Ollen, let's shift now. I just wanted to spend about five minutes on what I think of as the allure of venture capital. A word I used earlier in this podcast. What typically interests and excites people in the world, especially people who become limited partners, which is, I think, the term we used to describe somebody who's in a venture capital fund. What interests and excites them?

Douglass: I think a lot of people are drawn to being LPs and venture funds because of their potential returns. I will give you a great example, WeWork obviously was in the news, and not in a good way.

Gardner: Yes. WeWork, the provider of office space.

Douglass: Yes, provider of office space, where they were on the verge of going public and there was somewhat of a minor implosion.

Gardner: Couple of years back.

Douglass: Couple of years back. A lot of divisions pointed their way, but what people don't realize is that even after their downturn, those investors, who were early investors in WeWork, had to figure out a way to reconcile the fact that they were still ahead 100X in that investment. For the people who are early stage investors, and they end up investing in a company that goes all the way public, the returns are just incredible and I think a lot of people are attracted to the potential for the returns. Part of our job is to make sure they understand the probabilities of that and the risk associated. But what really excites me and for me, the allure of Venture Capital is that, tell me a favorite Rule Breaker stock, David. Not the favorite, just a favorite.

Gardner: Sure. A favorite, I led off with it as an example earlier, Zoom, is a pretty great company. It's a company my brother Tom first recommended in Stock Advisor. I then took a shot into it and Rule Breakers, many, many Motley Fool members, many people listening right now, may well own some, ticker symbol ZM. A lot of us know the brand and know the business today, so Zoom. Ollen, what about Zoom?

Douglass: The question would be, what really excites me about Venture Capital, and the CEO of Zoom is Eric Yuan, is that right?

Gardner: Yeah, that's exactly right, Eric Yuan.

Douglass: What really excites me about Venture Capital? We do some of the earlier companies, in Venture Capital, this idea of meeting Eric and him saying I have this idea of Zoom, I have 10 companies that are using this and I believe is going to change roles. You'll listen to these founders and then say if you can see the future before it arrives, and to play a role in helping that future come alive is what really excites me about being an investor in Venture Capital. I think that can be the allure as well.

Gardner: That's really well described. I think we can all imagine iconically having been in that room. First it was Steve Jobs as he explained what Apple might be. Or sometimes talking about Jack Dorsey, who owns a couple of successful companies at this point. But especially like first explaining Twitter, 140 characters that probably just sounded crazy, and yet he did get the backing, went on to create something worth 10s of billions of dollars today. Ollen, I think a lot of us as public market investors, what we see is we see the public company. That's when we can become investors in the company and we're excited about the potential for 10X or 100X, returns from that point. But Venture Capitalist is when a company comes public, let's say with the $15 billion market cap, that means somebody was in there probably at about $1 million or $15 million. They already have enjoyed substantial returns. It's starting that compounding clock at a lower cost basis even earlier. That seems to be a big part of the allure.

Douglass: Yes, it is. I think you're right. Also, I think those things are just being on the forefront of history and the potential returns from the wins is what largely gets people excited.

Gardner: The funny thing about that, Ollen, is that what we see is the successes, because the public markets, even if the stock doesn't do that well, which some don't, at least they made it to become public, which is very hard to do. There is a lot of blood, sweat, and tears even to get to that point. But we tend to see there's a survivorship bias. As investors, we tend to see all the ones that show up. We don't really have awareness, a lot of us. Just how many companies try and never make it to that point? As we move onto this next section of our conversation Ollen, which I'm calling the world of venture capital, just writ large here. I want us to talk some about how Venture Capital works and what the world in the big picture looks like. I was thinking about asking you, roughly what percentage of venture backed companies succeed by becoming a public company? If you had to guess from their early seed stages.

Douglass: My guess is that it's probably less than 1%. Somewhere around that number. It's what you hear from time to time, maybe one% of the company. You invest in 100 companies, maybe one will go public and generally what people say is maybe that one% are your huge outsize winners. They may go public, or they may be someone like an Instagram which never went public but got bought for billion dollars by Facebook. I think that's a win as well because it only had 19 employees.

Gardner: Wow. Going public isn't the only route to success. In fact, I think what you're suggesting to us Ollen, when you say one in 100, get there. There are some winners outside. It's not like 99 others lost, there's a bunch of wins within that. I'm not sure. Maybe you can help us with some big picture thinking in terms of%ages again, what%age of 100 start-ups in your mind provide an exit, maybe it got bought by somebody else, that is desirable and has people around the table happy, roughly what%age of start-ups achieve that?

Douglass: I think most Venture funds look at their portfolios and say that, 10% of the company's or 20% of the company. It's like the 80-20%, 90-10% rule. It's a small number of companies that are overwhelming wins. Generally speaking, roughly half will generate some return and half will generate none.

Gardner: No return.

Douglass: You will lose money on at least half. There's another 40% that will make some return that is OK. Then that final 10% is where all the big wins are. But what's interesting about that David, another thing I'll add to that is what most people don't realize, if you look at what happens to private companies, probably the biggest exit by far, maybe half of the companies that have a positive exit or negative are bought by either other companies or other private equities. M&A is by far the No. 1 outcome of an investment in a private company.

Gardner: Mergers and acquisitions.

Douglass: Another company comes in and buys that company. In our fund that we have today, we have three companies so far in three years that have had what we call an X which is just a liquidity event, which means money comes back to the company. All three of those were purchased by public companies. None of them went public themselves. But they had found homes as units inside of larger corporations.

Gardner: Motley Fool Ventures will talk a little bit more about that later, but has about 30 holdings. You're saying about 10% so far in just three years in a 10-year fund, and roughly 10% of them have already exited. They've sold their businesses to somebody else, generally at favorable terms.

Douglass: Yes.

Gardner: Yes, dot, dot, dot. Ollen just laid down a really important number, fellow Fools everywhere. He said 50% of the investments that you make in a venture capital fund return zero. When we talk about Rule Breaker investing, and we talk about the public markets where we know we're going to lose a lot, we don't go to zero very often. Even some of my worst stock picks, I haven't quite hit zero. This is a good example of how different these forms of investing are, or at least the mindset that you have to have as you enter into venture capital investing. Flip a coin, that thing may dust within weeks or months, or you could hit it big.

Douglass: Right. The thing that makes it really challenging, David, is that it often takes a long time before you know. You know that business don't grow in straight lines and probably every successful business, The Motley Fool included, has a story about when they were near death and had to overcome that, and part of venture capital is having that patience and really trying to figure out what are the signs of success that you can see even in the darkest days.

Gardner: Well said. Let's go through the ABCs, a little bit of venture capital. I'm quite literally thinking about series A, series B, and series C. Again, a lot of our listeners have no experience in venture capital, Ollen. We're going to break down some of our terms here. The way I think of it anyway is, some bright person has an idea, they need some money to make that happen. Often, the first thing they do is they look for what is called, I think seed capital, and they're looking for a so-called angel. It might be a family member, it might be a friend, somebody's rich uncle. They need somebody to write them that first check. Is that the seed round and is that how things start?

Douglass: Yes, it is. In stocks, actually, even a little bit earlier than that. We have something called pre-seed now. Typically, people start with ideas and there's a variety of things or there's that person that you know that can invest in it. There are groups called incubators and accelerators which will take people who have ideas and will work with them to form it into a business and a structure. But that is the very first stage, when you're getting going and then those angel investors, which are usually individuals, write checks between $5,000 and $250,000. If you're above that, you're like a super angel. But those are your angel investors that will come in. They accept a lot more risk. They're really betting on the person. Usually, they have some association, whether they're experts in that field, or they know that person, or something like that to support them. But that is a high-risk and somewhat specialized thing, that is your seed stage.

Gardner: Okay. Angel investors, and for example, in the Washington, DC area, there are groups of them. They meet together and people come and pitch them. These are higher net-worth people usually who can write a check like that. Well, I always thought of seed rounds, but now because I know the right people and I'm sharing him with you this week, I now know there are pre-seed rounds. We've got pre-seed rounds, seed rounds, but then comes what is called in the parlance, series A. Now, I know this is a specialty of yours, Ollen, because this is where Motley Fool Ventures focuses. But there's series A, which is a little bit bigger than seed, and then B, a little bit bigger than A, sometimes a lot bigger than A, and then C, which can be quite big. These are successive, larger and larger rounds at the appropriate stages of these companies growth.

Douglass: Yes, and that is correct. I think as you may imagine the labels, the exact definitions on them aren't entirely clear, and no, there's also a West Coast series A versus an East Coast series.

Gardner: It's like football and the offenses.

Douglass: Exactly. Very much like that. West Coast A is not much different than a West Coast office. It is high acting in every sense of the way. But generally speaking, that series A is roughly considered qualitatively your first level of professional investing. When you have some tracks and you have customers, you're beyond the proof-of-concept. You have something where you're really starting to scale that. With each level, every company has performance and potential. At each stage, what they're looking for really is your potential to become clearer and clearer with each stage, but your performance also is expected to go up in each stage.

Gardner: You can't just keep selling people on your song once you get far enough through the lyrics. You're going to really need to start singing. Let's just double back there for a quick second, give our listeners some round numbers Ollen. Series A investments, typically, how much money comes to a company from series A and roughly what is the size of that business? I realize this is very subjective. It's like saying small-cap stocks. A lot of people have different numbers in their mind when they think about what a mid-cap is. Let's put some stakes in the ground on this. What's a series A company?

Douglass: Got it. I will say that that number has moved and everything is increasing, the old A is now the C, and the old C is now the pre-seed.

Gardner: So true.

Douglass: In this day and age, I think that most people look at a series A company of someone that is generating at a minimum on a trajectory of $1-3 million a year of revenue growing up. Then those companies that are doing that generally have valuations anywhere from $10-30 million, $40 million, 50 million, it depends on how much that revenue grows. Very much like Rule Breakers, David, these companies, the key metric for these, what we call early stage when we talk about those companies with less than $10 million in revenue or something, those early stages, are revenue multiples, where we look at the value of the company, looking at the structure and you apply a multiple to that revenue. In venture capital, you generally don't get venture capital investment if someone is not willing to pay at least five times your revenue, maybe four times at the low-end, but people can pay up to 20 times depending on how fast you're growing. In a different little market, David, just to think about the type of companies, typically, the companies we invest in, we look for them to be growing at a minimum of 100% a year. Then that's the bar that we're looking for.

Gardner: $1-3 million revenues headed to 5%, 10%, 15% really fast. At least for Motley Fool Ventures, I'm sure there are some slower growers out there and there are different styles. It's hard to generalize. I'm being unfair to Ollen by asking him to give real numbers to A, B, and C, but that's why I have Ollen on because I can be unfair to him and he can be unfair back. Ollen, I took questions in advance of this podcast from some of our listeners. @DavidJ_Vance on Twitter had a few questions and they're now relevant for this part of our conversation. David asked, "How do funding rounds work, seed round series A funding? When does a company conduct a new round?" For example, you just gave us the numbers for A, at what point is the Chief Financial Officer, if they have one yet, of that company thinking about series B? What is the scale and numerical expectations from that transition from A to B?

Douglass: That's a great question. I love that because it really highlights something that we probably should have talked about. The biggest difference between public company investing and private company investing is that in the public world, you find a company, you do your research, and you decide to invest, and it really is an individual exercise. For private company investing, you can do your research, you can find a company, and that's just the beginning of it because in some form or fashion, you have to connect with that founder, get their permission to invest in them, and then depending on what role you play, negotiate the terms and the price of that investment. It's all a relationship, it's all negotiated, and that's what makes it really difficult. For example, at one point I owned Apple and Microsoft and to no one's surprise, I didn't have to ask Bill Gates or Steve Jobs if that was OK. I didn't have to explain to them when I sold either because in the public world, you have that flexibility to solely think about yourself. In the private space, that would be problematic to be investing in Apple, especially back in that early stage to be investing in direct competitors. For instance, for our fund, we do as a policy, if we think there is a competitive investment, we talk to both of the CEOs and they both have to say it's OK or we won't do it because there's some relationship business.

Gardner: That is a big difference between that and individual investing in public stocks, you're absolutely right.

Douglass: That leads up to the point of, so what typically happens when you invest and you negotiate that price, someone is telling you the story of their business, and they're saying that, I want to accomplish this goal. I have a milestone that I'm trying to reach. If you invest X dollars, that will be sufficient for me to hit this milestone and which will increase my value. The answer to the question with that backdrop, and this goes through all the stages, founders set milestones. They raise capital on a promise of delivering those milestones. When they deliver those milestones or when they have clear visibility in those milestones, they try to raise money, or when they've spent money and still haven't hit the millstones, but they'll need more money, they go back out and try to raise with revised expectations.

Gardner: Is that a fairly clear binary distinction that you would make? I realize we're more focused on series A at Motley Fool Ventures, so I'm not asking a series A guy a series B question. But would it typically be that next stage, you're either hitting it and you have the performance to show people, or you specifically haven't, and both of them want money, but maybe for slightly different reasons?

Douglass: Yes.

Gardner: Okay.

Douglass: This is stage agnostic but generally speaking, companies want to accomplish a long-term goal, they have to break it up into chunks, and they raise around living those chunks, but life happens in between every single one. I would say the majority of the companies like I said, businesses don't grow to the right and up without breaks. Life happens, COVID happens, and most of the business plans for 2020 were thrown out the window, but you still have employees, and you still have expenses, and you're still trying to do sales and so companies sometimes and not unusual, get low on cash and may need to raise before they're ready and that's where the negotiations come in, and price may go down.

Gardner: That's where I want to hit back to David Vance's, close-up his question. Because, Ollen, he asks, "How is a private company valued by VC investors, and how does a private company decide how many stock shares to approve or issue and their worth, each?" Basically, a lot of us are used to knowing already how many shares outstanding are there for a public company, and there are ratios we can run in computers that are helping us parse the data, but in these cases, the timing of when you raise money sounds like a huge effect over the valuation you're going to get. Timing matters a lot in venture capital investing.

Douglass: Absolutely. It's a huge component, and also the metrics are a little bit different. The idea of the%age of a company that you own is something that's very relevant in private company investing, but I was thinking about the other day when I was having a discussion, we'll call it, where if any of us who own private stocks, we open up our statement, the two numbers that we see are the number of shares we own, and the price per share. If you want to know what percentage of a company you own, that's a research exercise.

Gardner: That is a big difference.

Douglass: This is a huge difference, but in the private company investing, founders think about it as a pie. I have a pie that's 100%, and every time I raise money, I am basically selling off a piece of that pie.

Gardner: But the rest of the pieces of the pie don't necessarily have that much awareness or knowledge of it.

Douglass: Yeah, but in private companies, the founders, and the other investors, we do know what percentage. It's funny, I have a better chance of guessing the percentage of a company I own than the number of shares that I own, because we're really looking at growing the value of the entire company and we think, what is our percentage of that and the number of shares is just a mathematical exercise, just like in the other world, the percentage of the company is an exercise. For us, the percentage of the ownership is important because for that company that is worth $10 million, and I buy 10%, I want that company to go to, in this, the math doesn't work like this, but I want that company to go to $1 billion so that my 10% is now worth $100 million. That's how we look at it. You are looking at the dollars that I invest and what those dollars will be worth when this company reaches that point with sales or goes public.

Gardner: Well, certainly, public companies do use the public markets to launch secondary offerings and raise money that way, but there is a constant expectation for early stage companies that you are going to be diluted. That they're going to be raising more and more money, and sometimes, if they have a really big exciting round, later on, that may seem great. But if that takes that $1 million that you injected, which was important to you early stage, they've succeeded so hugely that you have nothing like 100X return because the constant dilution and sometimes big money piling in and series B, C, and even D, I don't know, before IPO can really change the game.

Douglass: Those letters go up, and usually what they talk about is A and B in the early stage, and then you have C, D, and E at late stage, and then you have after that, you have growth. Pre-IPO is part of growth, or sometimes people call it right there. But those are general categories. You're right, dilution is really important, and that's what really takes venture capital from an art to a science to some degree because that part of venture capital is very much numbers-driven, and you have to understand the math and the mechanics. We had an investor in The Motley Fool with a company called Mayfield. His name was Allen Morgan. I consider him a mentor, and I remember Allen Morgan once saying, "Ollen, give me the price or the terms, and I can get any deal done." It speaks to the idea that there's so much power in the terms around an investment that, for example, if you have a company you think is worth a million, and you want me to pay $10 million for it. That may be unreasonable. What I can say to you is, sure, I'll invest in that company, but in terms, I will say I get the first $10 million that comes out of it. Basically, you can take the terms and capture all of the value of a company and not have it show up in the price.

Gardner: One thing I am picking up from you, Ollen, is that, and again, contrasting with what I do, which is buy public market stocks, there are few key skills I never have to use doing what I do that you have to have and it strikes me. One of them is something like emotional intelligence and probably some wisdom because I could talk to my Zoom stock all day long, and it won't listen to me or really care, and it'll keep moving, and the price will be real, and it will be liquid every minute. But on the other hand, emotional intelligence to work with founders, first of all, to ferret out who are going to be the good ones or not, but then also your fellow investors, because usually venture capital funds aren't the only single-source. They pile together their money for each of these rounds, so you're working with your peers, and so emotional intelligence helps there, but also negotiating feels like that's a big part of what you do, Ollen. I don't think I'm good at that at all. I'm glad you're doing that, but have I accurately pulled out a couple of attributes that are important for somebody in your position that a lot of us should know about?

Douglass: Yeah, it is that emotional intelligence, the negotiating. As Brendan Matthew, a VP on the team likes to say, the average venture capital investment lasts longer than the average marriage.

Gardner: Wow.

Douglass: You're going into a long-term relationship, and it's important who you go into that relationship with, and it's important that you can communicate because there will be ups and downs, and a lot of it really is just being clear on your role. The role that you're going to play for that company. As you can imagine, at some point, maybe not nearly, but at some point, everyone wanted to invest in Zoom as a private company, and the CEO had a choice of who he would allow to invest in his company.

Gardner: Great position to be in.

Douglass: Everyone is telling him the wonderful things that they can do, and he has to decide which one of those people are doing the things that he needs and what does he value from an investor and who has that reputation of being able to deliver what they're promising.

Gardner: Ollen, beforehand we were talking offline, and let's now shift into venture capital investing. Just some tips and tricks and some wisdom from you in this section of our conversation for a few minutes. You were saying that venture capital investing at its core, now that you've been doing it successfully, may I add, for three years now there are only three questions. What are your three questions that summarize venture capital investing at its core?

Douglass: I'm going to take this from a Rule Breaker's perspective and really break it down, but there's really three questions that a VC wants to know. You won't see this phrased this way in many places, but at its core, this is what's going on. The three points, David, are; No. 1, do I like you? No. 2, do you know what you're doing? No. 3, can I make money? We will find a thousand ways to get comfortable with the answers to those three questions. You can double click and do I like you is not just a personal interaction while that's important because again, we're going into a professional marriage and so I do have to actually like you and there are some people who don't feel that way. It's also, are our core values compatible? That's probably more what you're trying to do, are you trying to accomplish something that aligns with what I want to affiliate myself with. That's behind that "do I like you" is that really, is what you're trying to do align with what I'm trying to do.

Gardner: Love that one, and I get "Do I like you." We'll do a short bit on the six traits of Rule Breaker investor stocks and make some comparisons. Let's park that for now, "Do I like you?" But I certainly get the human element that you're speaking to there. Ollen, do you know what you're doing? Your second question, that made me laugh earlier. What do you mean when you ask, "Do you know what you are doing?"

Douglass: That is, can you convince the VC that you have a particular expertise? The funny part about that, David, is that sometimes the real question is, do I know what you're doing?

Gardner: Yeah, because if somebody is talking about some machine learning and you're not actually that versed yourself in AI machine learning, it's not necessarily on them, although I hope that a good communicator could make it communicable to you, but it's actually partly on you, I suppose.

Douglass: Let's make it a little more humble. No. 2 is "Am I smart enough to understand what you're doing?"

Gardner: How about, "Do we know what each other is doing?"

Douglass: Yeah, do we both know what you're trying to do?

Gardner: Right. This does seem particularly pertinent, but at least the heart of it initially on to return to a slightly more serious angle here is, you're trying to figure out if this person, they may have a great idea, can they operate? Can they actually build a team that will make this? Because it's not going to be one person both dreaming up and operating it. You need to be able to be a leader of people who are inspired by a vision that might be technologically driven and isn't that easy to achieve, that's why they are asking for capital.

Douglass: Right. It's like what are your execution chops? How are you going to turn this idea into reality? Because the unfortunate reality, David, is there are a zillion great ideas out there. There just really are, people tend to overestimate the value of an idea alone. What really separates that idea from the investable business is the person that can execute on an idea and is willing to take that risk and that effort.

Gardner: There's so many aspects of that, from truly knowing your market to actually building a good product or service, to keeping track of your finances and all of the things that need to happen generally well for something to thrive and it's not trivial. It's something I deeply respect. One of the reasons I love investing is finding these kinds of people and possibilities when they really can deliver. Seth Godin, who was on this podcast a few years ago, I'm a big Seth Godin fan, the business author. He agrees with you. He was saying, the world doesn't need another great idea. You got a great idea, great, you've got a great idea. So many great ideas, that's not what we need. We need people who can actually execute and turn a great idea into a great reality. That sounds like it's the Ollen Douglass school of thinking when it comes to what's really needed out there.

Douglass: Exactly, David. The third point, as we're moving to that is, the question of "Can I make money off of that business?"

Gardner: Which is separate. You can get the first two right and still not be able to say yes to the third.

Douglass: Absolutely. I think about some of them, we're in the old town of Alexandria, which has lots of small shops. They have plenty of places where you can go and get a great little lunch. I remember a little restaurant called [...] and they had just an awesome chicken sandwich.

Gardner: Right near Fool HQ in Alexandria, Virginia, here in the U.S. They have a great chicken salad, did you say?

Douglass: Great chicken salad sandwich. I loved it, I'd go and buy one and it was awesome. There is no way I would invest in that as a business. What they did was great but in order for that venture capital to get the returns, it needs to generate the profits that I need. It has to scale to a tremendous size. There are plenty of businesses out there that are outstanding, that are wonderful, but they're just not right for venture capital. I sometimes think about our venture capital fund, we generally won't put less than $500,000 into a company. If you are a business and you think $500,000 is a lot, you're probably not ready for venture capital because those are companies that by the end of the day could easily have $100 million put into them to deliver the returns that we're looking for.

Gardner: That really is just totally different scale and it's worth remembering. Yeah, there are so many great small businesses across America and so many people of heart and character who deliver a fine product or service every day out of their food truck, or they're working within nursing, or there's so many side gigs and lots of great work being done. But the rarefied space of real scale is where venture capital that rubber hits the road for the industry. Ollen, let's move now at the conclusion of our conversation to Motley Fool Ventures. We've referenced it a number of times, but can you just give a few of the statistics about the size of the fund, what you've seen so far in the first three years. Give us a quick overview. This is not a sales pitch, people, because it's already a fund, it's already been funded. This is an educational exercise, learning from somebody who is in the fourth year of building this plane as he flies it and he's sharing his pilot insights with you and me.

Douglass: Thank you for that, David, and that's correct. We're not raising capital now, so please don't view this as a solicitation because it is not. At Motley Fool Ventures, we consider ourselves an early stage fund, which means we invest in that series A, which you said several times, which is a grounded level. Sometimes we do a little bit less, sometimes we do a bit more, but that is our sweet spot. We focus on companies that we look for, it's not so much exclusively the next Rule Breaker per se, but there are not a lot of analogies. We are looking for companies that are trying to solve large problems. We, like The Motley Fool, which we're a subsidiary of, find a great appeal in companies that are using technology in innovative ways and so many of the companies we invest in, we call them tech enabled, which means they're using technology to drive scale, efficiency, or access in what we call really large markets. That means that we can see opportunities for several companies to be billion-dollar companies in those markets.

Gardner: Paying a couple of examples, you can name names if you like or not, but what are a couple of examples of companies that look like that?

Douglass: Sure. We just recently, and you can go see in the news, I think there's been a lot of publication around it. We just invested last week in a company called Esusu, E-S-U-S-U.

Gardner: So, not Joe Isuzu here. There's no Zs or Is, it's E-S-U-S-U, that Esusu.

Douglass: Right. You'll see lots of headlines. There is Serena Williams, a tennis star, invested alongside us.

Gardner: I did see a story, and it was all about how Serena was investing in Esusu. But wait, weren't we the lead investor in this one?

Douglass: Yes, we were the lead investor. I did not realize this, but it turns out that Serena is more well-known than I am, David.

Gardner: Well, that's fine. It's good to be on her team, let's put it that way. But what is Esusu doing?

Douglass: What they're doing is trying to address the problem of people in America that do not have credit reports or credit files. There's 45 million Americans without them. When you hear stories about the average American not being able to cover $400 bill or $1,000 out of their savings, more likely, you're talking about people that don't have access to credit. While we all know the dangers of credit, if you don't have it, you end up with an existence of either being subjected to payday loans or living a cash-based existence, which just limits your ability to build wealth and to reach that financial stability that we all want. So when you think about a company trying to solve a problem that 45 million Americans address.

Gardner: That scale.

Douglass: That scale. That's what we're talking about. They're doing it from a unique way of working with property owners. So instead of trying to solve that problem one person at a time, they're solving it one apartment building, one property owner at a time. They're doing it in a very efficient way. Addressing a market that's been underserved. It's that kind of access. They're really ticking all the boxes of what we think a company needs to do to be able to grow, and really solve a problem that if they do solve it, it's in their case, which we really love, is additive to the economy. You're talking about people who are being left out, and as we create situations where they can get financial security and start to generate wealth on their own, it benefits all of us.

Gardner: So, it sounds like a great idea. I sure hope it works out for Serena and us. I'm curious, Ollen, roughly when did you first hear about that company? How long do we do due diligence? What's a typical timeframe between the announcement last week and when we first heard about it?

Douglass: This one is a record for us, David. I was introduced to the CEO, his name is Abbey Wemimo, two years ago, and we hit it off, and I've been informally advising him, building that relationship for a couple of years. It's a genuine relationship. I genuinely like him and his co-founder, Samir, and they were too early for us when it came time for investing. They weren't at the targets we were, but we kept in touch. I've helped them. They've made introductions for me. When the time came to do this round, we had that relationship. We had dated.

Gardner: Two years?

Douglass: Two years. But typically speaking, it's probably closer to something measured in months. Between the time you meet someone, and the time you invest, anywhere from three to six months. Then the investing process itself, instead of going to your discount broker, finding it, and clicking "buy," just the transactional portion can easily be a month just by itself.

Gardner: Ollen, give us an overview just briefly, how much money is in Motley Fool Ventures? How many companies? What's the skinny there?

Douglass: The short version is we have $150 million, which are commitments, which is the sum of what our LPs have given us to invest on their behalf. We have plans for investing in 40-50 companies, which is the range that we said. We're at 30 now, we may end up a little bit outside that range. Probably maybe if anything, on the lower side of that. As you mentioned, David, it's generally venture capital, you invest in the money, and you're locked into this, which is something to understand. I think that's important because of the volatility, it's easy to get shaken out if you weren't locked in. But it's a 10-year fund and with the idea that the money that is committed to The Motley Fool comes in over a certain period of time, usually, the first five years, and that second five years, the company's growing and developing, and then finding their exit. Whether it's being bought out by someone, whether it's going public, whether it's like The Motley Fool deciding that the IPO route is not right for them right now, and they're buying investors back, or for those companies that don't succeed.

What I always find funny about venture capital, David, is that in most of the descriptions of what happens to companies that VCs invest in, they use the term "fail" to describe a big portion of those companies. On a technical term, The Motley Fool will be considered a failure in the sense that we didn't go public, and we weren't bought by someone, and we paid our investors back, and it wasn't that 100X that you look for, even at 10X. Oddly enough, for the cohort we were in, it wasn't actually a bad investment given that those people came in 2001 or whatever. But failure from the VC perspective often means that the venture capital fund didn't make the returns that they wanted, which is in a nuanced way different from how we describe failure. We like to say we didn't get our returns.

Gardner: Sure. I often just try to beat the market when I pick a stock or a five-stock sampler or a whole portfolio, I hope it will beat the market. I don't necessarily target a specific return, and say, I think that it should be this. But understandably, that is often how venture capital investments are conceived, and so they have a hit rate or a fail rate based on their expectations, not necessarily whether the thing was good ultimately or not.

Douglass: Because from the portfolio side, there are return expectations. Generally speaking, they're looking to get an annualized return of 20% on their money.

Gardner: Big money. That's a big number.

Douglass: It's a big number, and it's to justify the risk.

Gardner: Well, I know that numbers aren't always public. This is after all, private market investing, Ollen, but you mentioned Motley Fool Ventures, $150 million fund. Let's just pretend that Esusu's your very favorite investment, and I'm not saying it is. I don't actually know. I'm not on the team. But what portion of your $150 million portfolio could you put in your very favorite investment, ballpark?

Douglass: Very good. Well, if Esusu is listening to this podcast, yes, you are my favorite investment. If my other companies are listening, you too are my favorite investments. So what you're talking about there, David, is portfolio construction, so I can abstract away from Esusu a little bit and I can talk more freely. In our fund documents, we can put up to 10% of that money into one company, so we can put up to $15 million into a single company. As I talked about before, we don't put less than 500,000 into any company. When you think about $150 million, I can't invest that $1 million or I can't invest that $10,000 at a time, I'll be dead before I get it all to work. So generally speaking, again, with that 40-50 companies, whatever, we tend to write that typical million-dollar check. The companies performing the best will be in that $10-15 million range, the companies that don't, probably a little bit less. We look at it as a long term relationship, so our first check is not our only check of companies performing. We build over time.

Gardner: So a series A fund, when a company succeeds, and they've actually hit their metrics, and they're ready for series B, you are invited in by the big shoulder B players who say, "Let's throw them a bone there, they were there in series A." Is that typically how it works?

Douglass: No, it's worse, but better.

Gardner: Do say.

Douglass: Typically, in your terms that we talked about before, if we're a series A investor and we have a right to invest in the second round of what we call pro rata. We own 10% of the company. We get a right to invest at least 10% into the next round so we can keep our ownership percentage. That's how we managed dilution. The reason I laughed is because when that big loan Series B investor comes in, depending on how much they're investing and how much they want to value the company, they may come in and say, "You know what I'm going to quadruple the value of the company and I'm going to take your pro rata rights," as we call them, "I'm going to ball them up in light of more fire and toss them off to back deck."

Gardner: Make this real for us. I think this may have happened to us, if you're not going to name names or numbers, but what is happening exactly? I thought that we had the pro rata, but then is it that they jacked up the valuation and so high that we can't participate now?

Douglass: Yeah, depending on the situation that the company is in, basically this is an invitation to come in to invest. It always happens. The first time it happens, it's just the CEO that says you're invited in. But as the round goes, every time someone is added to the table, that investor, that already they're bigot part of parts A. For example, when Esusu comes in and someone comes in and says, "Hey, Ollen, the next round, in order for this to work for me, because I have a trillion-dollar front, and they only want to raise $50 million, I need to put all $50 million myself." I'm like, "Well, I don't want that because I think they're going to keep going," and they are like, "Well, what if I value the company so that your X is worth 5X in one year when you let these stupid pro rata rates go."

Gardner: Right, it doesn't matter what you think. A lot of us as individual investors in public market companies, we want to pick the right stocks. That's a big thing that I think about. I want to own this one, not those other ones. That's step one. Step two is, what size will this position be for my portfolio? You mentioned portfolio construction for you as a venture capitalist, Ollen. But there's a third step which you need to do, which I don't really do, which is to try to maintain parity. Or again, through some combination of negotiation and emotional intelligence, you're actually jockeying for position in a way that the rest of us don't normally have to think about.

Douglass: I will say, David, that is the advantage of being in a venture fund. There aren't a lot of individuals that have $150 million to go about the world investing in it. When you invest through a fund, you give up some control of what you pick because this is like a blind pool. You are giving us money and you don't have a say on which company to invest in. But you do have the security that you have professionals.

Gardner: You bet.

Douglass: Investing on your behalf in using your collective capital to make sure that if you're going to get pushed around, someone's pushing around for a pile of money. That pushing around [...] Foolbatical.

Gardner: Yeah. Well said. Ollen, I promised earlier and I want to deliver on that promise here at the end that I would reshare the six traits of Rule Breaker investing, which I've talked about and written about ad nauseum. I'm curious how they grade out in terms of how well they work or matter for you, as a series A focused Venture Capital Managing Director. Will you play that game with me?

Douglass: I would love to play that game, David.

Gardner: Maybe like a minute on each. The first one is looking for a stock, a company that is a top dog and first-mover in an important emerging industry. How well does that grade out for you?

Douglass: That one I would say if I put them in high, medium, and low, I would say that one is a medium. You're certainly looking for companies that seem to have an advantage over the competition. But they're so early that it's really hard to definitively say who's the top dog because there are many companies trying to do things, picking different approaches to solve similar problems. I'm really looking more for absolute success in relative.

Gardner: Yeah, so it really does become more evident as companies mature and industry start to mature. Who is the actual leader? It's just not that effort at this early stage when you have 23 different people with their idea about how to add machine learning to coffee. Because it's all about ideas. Anybody can have an idea.

Douglass: Yes.

Gardner: All right. That's great, so that's medium for No. 1. No. 2, is this sustainable competitive advantage, of course, that can be measured in many different ways, often having a visionary founder would be an example. Sometimes inept competition, sometimes patents, there are lots of forms of advantage, but we're looking for sustainable competitive advantage. How does it grade out?

Gardner: I think that one is high and that goes to that idea we talked about before; do you know what you're doing? Can you articulate a mouse trap that genuinely sounds like it's better than what we're doing? Can you describe that mouse trap in a way that doesn't lend itself to be replicated by the next company that comes along? That one is really important, and I think there's a lot of similarities with that one.

Gardner: Trait No. 3 of the Rule Breakers stock is strong past price appreciation. Now, that's very easy to see when you have public market companies with real-time grafts and historical data for how their stock has done. You know the importance of that, I've often said it. Last week, Frank Reich said it again, even gave me a little bit of credit for it, but winners win. Obviously when we're talking about series A, there's not that much history, but do you see something, a proxy or an analog for strong past price depreciation that grades out well or not for you?

Douglass: Yes, I would put that high if we can use a proxy and that would be strong past revenue growth which is what we look at if you have a history of growing your revenue. Like I said, those levels, which we do at Motley Fool Ventures which is not unusual. People are looking at 50% growth, we start to scratch our heads and say, what's wrong, right? Strong past revenue growth is really important.

Gardner: Excellent. Trait No. 4, good management and smart backing. It's the humanity, I can't imagine this grades out poorly. It's got to be at least a medium for you, Ollen and I've thrown you in there too because you're the backers and often when people look at trait No. 4 of Rule Breakers stocks, they're just thinking about the CEO and they're saying, "Is this is a visionary foundry I believe in?" But no, I also care about who's backing them, what we can learn from them. You're not going to give yourself a meaningless grade, are you Ollen?

Douglass: I would say for most venture capitalists, if we were to break that into two pieces it's a high-high. Honestly, David for the Motley Fool Ventures it's a high-low. We want smart, great people. Venture capital as an industry has not done a very good job of reaching out to the population of entrepreneurs out there. In particular, Mitch Kapor, who we are co-investors with and I told him he was my hero. He's part of venture fund called Kapor Capital, but he is also one of the founders of Lotus 1-2-3.

Gardner: Back in the day.

Douglass: Yes. [...] the precursor to Microsoft Excel and was critical in my career but he has a quote that says, "Genius is evenly distributed, but access to capital is not." That was based on a study by one of the Ivy League Schools about, if you look at all the people who have been granted patents and you look at them by ZIP code you can't distinguish anything from California, New York, the Midwest, they all have the same per capita grant capabilities, but venture capital was not. 80% of venture capital comes in Silicon Valley, New York, in Massachusetts. So for us, smart backing means following people who we don't know, doing things that we don't understand in very narrow geographic regions. Name brands don't carry a lot of weight for us, but if it's David Gardner who runs that, who we know, and we have an idea of what he does, and what his style is, and what's his track record, then we put weight on it. But just because you are from someone that we have heard of that in of itself does not give you any extra credence and I think that opens up opportunities for us, for investors who may be overlooked by others.

Gardner: But boy, is it important to find that talented CEO and or team around that person. One of my early mentors, as I thought about this world, was a former board member of the Motley Fool, Fred Singer, who is an investor in Yahoo! and has done lots of great work and he used to say, "There are no perfect people, only perfect teams." It's got to be high and I'm glad you said it was high for the management part of it, but it's not necessarily about one star Elon Musk. A lot of times it might be about more of a synergist to rocket term from Les McKeown, previous author, previously interviewed on this podcast where you're looking for somebody who's egoless, but is great at building a team and making sure it could be, we're not perfect people, but it could be a perfect team.

Douglass: Yes. I remember this, I can't remember his name, said to me he will not invest in companies with a single founder because he wants to verify that you could convince one other person besides him to invest in the company. Go convince someone else to quit what they're doing and work for you and then I will talk to you about investing because you're right, that leadership quality and that's one of the reasons why we are at the level we are because we want evidence that they can attract quality people.

Gardner: Yeah, so important. Trait No. 5 of the Rule Breakers stock is a strong consumer brand. How does that grade out for you?

Douglass: I would say high, David, and it does require us going into the details of what you say about the consumer brand because there are companies that are not consumer-facing. But we want companies that have strong reputations inside the areas that they are doing. You look at that largely from the customers that they attract. When you're a start-up, having a company work with you as a business is something that we really look at and one of our favorite criteria, David, is having a company that is a customer of The Motley Fool, that is a strong endorsement for us, that this is a great business.

Gardner: How about naming a name or two here, not necessarily specifically a Fool customer, but I hear you. If we're buying from them, that probably says a lot about our esteem of whatever their technology, product, or service is. But Ollen, what are a couple of examples in your mind of companies that, you're right, not everything is a consumer brand, but every product and service does have a buyer? They might be a B2B, business-to-business buyer. What are a couple of early stage companies within the Motley Fool Ventures fund companies that you think are doing a good job with the brand?

Douglass: There's several of them, there's a company called Hungry Marketplace, I think has a great brand that is out there. They deliver prepared meals usually to office locations or other locations and obviously, they're affected by the pandemic but did a great job of pivoting around that and they're doing well. There's this company, UrbanStems, which delivers flowers.

Gardner: You bet, I love UrbanStems.

Douglass: I think they have a great brand. There is a company, MotoRefi, which is helping people to refinance their auto loans. Which we think is a great brand.

Gardner: Those are all great examples. So none of those is a universally known brand at this point but we're talking about the series A investments we've made in these companies. Sometimes follow-on as they scale and they probably have somebody who really understands how to build a brand, which is certainly a good trick if you could pull it. Having your bag of tricks as a business person, a real understanding of how to build a brand.

Douglass: I think the best known companies in our portfolio, we're investing in a company called Madison Reed and so if you're someone that's familiar with hair color, you may know the Madison Reed brand. We're investors in a company called Carta, which helps companies manage their stock options in capitalization tables, we call them. I think those are two that are fairly well known. There's a company called Republic, Republic is an interesting one in that for people who are interested in experimenting with investing in private companies, Republic is a crowdfunding platform that The Motley Fool has invested in. We're very excited about what they're doing and there's a place you can go to maybe experiment with investing in private companies.

Gardner: That's great. The final trait and this will be fun to hear you speak about, is my special sauce trade for Rule Breaker Investing, that is that we want people to call the stock we're looking at overvalued. We want there to be a general perception that people would never actually buy or invest in that one because it's so overvalued. How does that grade out?

Douglass: That's pretty common, and it's almost a [...] so when you have an inefficient scattered marketplace, lots of people are looking for the companies that are going to outperform, as it turns out, as a series A investor it was literally impossible to overpay for Zoom.

Gardner: Wasn't it? Exactly.

Douglass: We are looking for those companies. In evaluations, you often hear them in private companies, people don't understand why people are paying so much, but it's hard to fathom what it means to be growing 100% a year, and what that means for $10 million of revenue at 100% a year for five years. For example, [...] that's $10 million to $320 million in five years, that's just incredible growth.

Gardner: A big question I think on a lot of my listeners minds, at this stage and you just mentioned Republic, Ollen, so it feels relevant is can I participate? Now, one of the things I love that you did for Motley Fool Ventures for our first fund, I learned this from you, Ollen, most venture capital funds want to work with as few limited partners as possible who write as big a check as possible. A lot of venture capital funds are just five different VC firms all writing a big check to another one and they've got a lot of fun now. They just have a few people to deal with and check and give the financials and check with them on the phone and that's how the industry is. You want to minimize the number of investors that you have and get as much money from each one as you can. As you started Motley Fool Ventures, you did the exact opposite. Could you explain that in a minute or less?

Douglass: Yes. The investors in most VC funds, they're family offices, they're institutions, they're corporations, they're big entities. We decided that we wanted to, as you said, David, flip that upside down, bring in as many people as we could with relatively small checks. They still had to have accreditation requirements, which we can talk about. But we ended up with 800 limited partners in our fund, which is, I don't know, 20, 40 times more than your typical funding and multiples more than anyone who has ever told us that they've seen. It's been exciting.

Gardner: It's an amazing story. It is a total Rule Breaker-y approach to venture capital. I love that you had that idea and acted on it, Ollen. It means that we have a lot more fun at our meetings than others do at theirs because theirs are just perfunctory governance based open and chat [...]. Once we get back to meeting face-to-face again, we have hundreds and hundreds of people who are invested with us. But that leads me to this question Ollen, what about the rest of us? I think the minimum check we can accept is $100,000. Well I'm sure there's somebody who's listened all the way through this week's podcasts who thinks this is exciting, but they don't have $100,000. They might have $5,000 or $15,000. Could you speak briefly to how the venture capital world is set up to include everyone or not.

Douglass: Yeah. Venture Capital really is not, but there are a few things and as you mentioned earlier, David, there is the company Republic that we invested in. They are democratizing private company investing. They have crowdfunding opportunities which do not have a significant minimum requirement for participating in crowdfunding. They do have opportunities for accredited investors, which means you need to have a couple of $100,000 in income or some other ones. But they do a vetting process to make sure that the companies on their platform are of a certain quality and standard. I would say, David, very much like public company investing. Very often, the best thing that you can do to be successful is to just get started. When we all look back at our first stock, in retrospect, we realize that getting in the game and beginning to learn is really the way to really get started. The education from your first investment will almost unbearably outstrip the financial returns from it. To the extent of those people who have been thinking about crowdfunding, they may not think that it's safe. I think from a safety standpoint, we certainly can say that Republic has a reputable platform, not to say that investing through the Republic platform is a great way to make money. We're not guaranteeing that you won't lose money. In fact, you probably will, because that's the nature of private company investing, but you will learn so much so that when you get to the point where you can allocate more significant amounts of money, you're prepared, you're ready, and you can make better decisions.

Gardner: I'm glad you said that Ollen because here at the conclusion, there are so many people fascinated by cryptocurrencies and various exchanges within that. We're certainly not here to say that we find some interest there too. I think most of us will be best served if you're going to spend time with that scrutiny on a platform of crowdfunding. I think looking at actual companies and ideas, products and services as opposed to somebody's next idea for how to use the blockchain, which is itself a really cool technology worth paying attention to. But I think a lot of us are shifting our focus toward these kinds of early stage companies. I'm much more in touch with how to do that and do well at that than I would be guessing somebody else's crypto these days. A little bit of editorializing there from me. Well Ollen, this was so much fun. You were so generous with your time. You've talked us through a lot of the world. I feel like we only got started. In fact, one of my favorite lines, the greater the island of knowledge, the longer the coastline of mystery. You've helped build up our knowledge a little bit, but I find myself left with probably even more questions and the knowledge we can never speak to it all in one podcast. But I do want to thank you Ollen, because I think we are going to get some good mailbag questions this week. Again, our email, [email protected], tweet us @RBIPodcast. Ollen, if I can drag you back, I might have you in a little bit next week to speak to some of the questions we inevitably occasioned with this week's podcast. But before I let you go, one thing we used to do back in the day, as you know from our radio show because you were listening to it back in the day, is we would ask people, buy, sell, or hold, but we wouldn't ask them about stocks. We'd ask them about something happening in the world, a product or service, a fad, a trend, and we'd say if it were a stock would you be buying, selling or holding?

Douglass: Got it. I remember that game. I remember it well, and I enjoyed it, David.

Gardner: I know you're going to play the game with me, Ollen, I got three for you here. The first one, well, we just talked about it, cryptocurrencies. Buy, sell, or hold, capital C, cryptocurrency?

Douglass: David, I'm going to go with a buy there. It was interesting. I actually own Bitcoin, because I opened up a crypto account, just as an experiment. Like a toaster, they gave me $5 worth of Bitcoin.

Gardner: Wow, when was this?

Douglass: Unfortunately this was when it was at $40,000.

Gardner: I see, I was hoping it was about eight years ago.

Douglass: No, I think it's about eight weeks ago. I am a holder of crypto because I opened up an account.

Gardner: Yeah. But that says something on its own though. You have interest and we love, we always want you to be exploring new realms, so that's awesome. Ollen buy, sell, or hold, HelloFresh. HelloFresh is one of those meal delivery services. I'm just thinking about it because people in my household love this thing. I'm curious whether you use HelloFresh or not. I don't even know, are they public or not? Blue Apron didn't seem to do so well as a public company, buy, sell, or hold specifically; HelloFresh?

Douglass: I am a sell on HelloFresh David, because we have a company in our portfolio called Territory Foods, which I believe is a competitor, and so I hate HelloFresh.

Gardner: HelloFresh, by the way, is German. It is publicly traded. They've made huge inroads here in the U.S, but it's a German company. Last one.

Douglass: I'm a homie, Dave.

Gardner: I hear your last one for you, Ollen. Working from home, flexibility, buy, sell, or hold?

Douglass: I'm a buy on that, David. I think that flexibility is going to be paramount and working from home is going to be a part of what we do, how we look at business forever. We are not going back.

Gardner: I'm sure that's already part of our Motley Fool Ventures portfolio. Well, we ran a little bit long because I just think it's such a fascinating topic. As I said to Ollen, Ollen we shouldn't have waited 'till year seven to have this conversation. I have a feeling we'll be hearing from you again here in 2021. Such an interesting topic, I know for many Fools and prospective Fools, they are interested in this. I'm delighted to know it's getting a little bit more democratized everyday. Ollen, and keep up the great work.

Douglass: Thank you very much, David. If I could ask you one quick question. Buy, sell, hold, will it be seven years before I'm back again?

Gardner: I'm going to sell that. It is not going to be seven more years before you return to this podcast. Thank you so much for your contributions. I hope everybody has a Foolish week. Next week is of course, our mailbag, [email protected], as I've mentioned a few times, looking forward to seeing your questions, comments, stories, poems, whatever else you have for us here at the end of July. In the meantime, Fool on.