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Talking Pittsburgh Startups with Michael Clouser

Introducing Michael Clouser. Michael is the co-founder of The Startup Race, Ask a Techie, and Nautilus Beam. His blog is called The Academic Entrepreneur and he also runs a venture consultancy called NoseCone Ventures.

He’s a former Professor of Entrepreneurship, venture capitalist, and startup founder with a wealth of knowledge and background. Luckily for me, he took the time to sit down and answer some of my questions like: How the VC industry has changed over the years, tips for founders in Pittsburgh, how universities could better support startups and his advice to aspiring entrepreneurs.

Ihope you enjoy it as much as I did.

Zach: Thanks for speaking with me, Michael! I’d love to hear a synopsis of your background, your travels, and what you think of Pittsburgh?

Michael Clouser: I grew up in Pittsburgh and left when I was 18 for university. I studied hotel administration at Cornell University. Then, I ran and did turnarounds of hotels before getting into developing software to solve problems like distributing and selling rooms online.

Istarted an early online travel company in 1994 and sold it in 1996 to a larger player before going back and running an incubator at Cornell University as an MBA for three years. We spun out companies like CourseInfo which is now Blackboard and IPO’d. Since that time, I've been really interested in university generated entrepreneurship and student startups.

After my MBA, I worked in Silicon Valley for a venture capital fund called Dot Edu Ventures. We invested in early stage graduate lead startups which were computer science oriented. I worked with the professors whose students actually started Google, so we were really focusing on that model of computer science startups by graduate students.

It was a lot of fun, I lived in the Valley for about four years. Then I went to the University of Edinburgh and did more education and taught entrepreneurship there and ran a collaboration called the Edinburgh Stanford Link.

Itaught technology entrepreneurship for about seven years there to computer science students and then went to Canada for about four years. I just came back to Pittsburgh in September for various family reasons so it's nice to be back on the east.

Zach: That's an amazing story! It sounds like you got started on the entrepreneur side and then jumped into academics as well as VC work. How did you end up deciding to go into VC investing or how did you get that start?

Michael Clouser: I had started a company in Silicon Valley and raised angel money but we just couldn't get the venture capital round in quick enough. This was back in the hay day, in the early 2000's, so the team sort of broke apart. I lived near Stanford campus, so through some friends of mine, I met this early stage fund that was run by professors from Stanford, and just started working with them. First, more of a part time role and then it became full time after a couple months.

So, I kind of just backed into it, but it was a lot of fun because we were doing really early stage startups from Stanford and other places. It required me to be on campus almost every day meeting with people.

Zach: What are some of the biggest differences between the locations you've worked in? What really makes Pittsburgh stand out compared to Edinburgh and Silicon Valley?

Michael Clouser: I'm still trying to figure that out, actually. I think one of the things about Pittsburgh is it's a little more spread out and it's more suburban, which is, I think, unfortunate. People tend to live in the suburbs and commute into the city center and then out again. I think that probably is not great for the entrepreneurial ecology. Whereas other places I've lived have been a little more city-centric, like Edinburgh, Scotland, for example, or Victoria, British Columbia. On the other hand, I think in Oakland and Shadyside, with the concentration of universities, could really see the community being built around them.

Ikind of see that happening a bit just in terms of office space, obviously there's some residential here already. I would like to see it get built up and more concentrated.

Zach: How do you think the VC industry is changing, or, how has it changed from when you first started to now?

Michael Clouser: It hasn't changed a whole lot in terms of the models. One could argue that for a while it was internationalizing as some of the funds were spreading globally like DFJ, Draper Fisher Jurvetson, and Benchmark Capital, and so on. But, on the other hand, they've since really retracted. DFJ, for example, opened up Draper triangle here, which is based in Pittsburgh, but since that time, DFJ's actually contracted and spun these venture firms out.

Ithink there's some new models, for instance the accelerators have really grown since I first started. They were alwaysaround, accelerators and incubators, but that whole segment has grown because the VCs have been more open to it. They realize they're not really good with the really early stage stuff because they manage large dollar amounts.

So you see these incubators like Y Combinator, 500 Startups of Dave McClure, and a whole proliferation of accelerators fill that gap. Although, I wouldn't call that venture capital, that's really like acceleration and incubation of the early stage, but that’s been a good thing. Other than that, the venture capital model really hasn't changed a whole lot.

It'd be good to see it open up a bit and get more capital into it, with more creative models, but part of the problem is just the whole 10 to 12 year design of venture capital. They are these long fund, private equity institutions, so there hasn't been a whole lot of innovation in it.

Zach: I'm curious to hear your thoughts on how the relationship between universities and startups has evolved over time? It seems like, in my experience, I saw that happening a little bit more when I was in school and now it seems much more common where a university will actually play the role of accelerator or incubator. How has that evolved?

Michael Clouser: Yeah, absolutely. Part of my PhD was looking at that very topic.

Ithink that has evolved in a lot of universities, especially in the UK and then the USA. Not as much in Canada yet. There's definitely more emphasis now and resources going towards encouraging entrepreneurship and encouraging commercialization from the university side. More mechanisms have been put into place, more programs, so there's a lot of learning and sharing of best practices going on around that space. That has definitely increased over the years and become more sophisticated.

Zach: Is there any big room for improvement that you see that you wish that universities or even maybe some VCs might change in how they work with student startups?

Michael Clouser: I think there's definitely a need for more resources at the student startup stage, especially in terms of early stage financing. I believe that universities can play a much larger role in the supply of capital, especially early stage financing, through more creative ways. For instance, there are some university venture funds, they tend to be pretty small, that are internally driven, but also private venture capital funds and their role in those as investors. A lot of these universities have pretty sizable endowments that are investing in things like real estate, public equities, carbon emitting companies and so on.

Ithink that those investment dollars would be better served in localized venture capital funds that are run for profit, but also with an eye toward student startups, faculty startups, and community economic development.

If you look at the history of the industry, universities were responsible for starting venture capital as an economic development mission in New England. MIT and Harvard actually got together and started the first venture capital fund as we know today.

Ijust think that the endowment management from universities is sort of ... what's the word? I don't want to say naïve, but kind of uneducated when it comes to the venture capital asset class. Not all of them, but a lot of them. Some of them are quite sophisticated, like Yale and some of the Ivy Leagues, when it comes to investing in venture funds. Most of them, however, are pretty naïve about the asset class and are instead super conservative. I think there's big opportunities for universities to play a role in providing what would be more early stage capital.

Zach: That's interesting. I didn’t know that backstory! When you were investing did you have a particular product category or a niche that you liked to focus on?

Michael Clouser: I would say software and infrastructure. They were product driven, but yeah, basically at the time it was internet, internet infrastructure. For example, we invested in a caching company in the early days of a globalized caching network. Basically, they were software and internet driven with now more mobile applications. Currently, we're looking at more projects in data analytics and data visualization. Online travel has also always been a focus that I've been involved with just because it's such a big marketplace.

Zach: Let's say you're looking at the travel industry, for example, what is the key metric that you look towards in a startup that says if this is a potential winner?

Michael Clouser: The easy answer to that question would be traction, customer traction and usage. Are people using it right after the the minimum viable product? Are people coming back and engaging with it?

There's also some evaluation of how much innovation is there. In that space in particular, ease of use is a factor. How easy is it to use and how user friendly? I think that UI / UX is really important for people to use products and migrate through them.

Zach: What sort of technologies do you think stand out particularly well in Pittsburgh?

Michael Clouser: I'm still trying to figure that out. You've got the usual robotics and AI at CMU. I think eLearning has a big opportunity here and you see that with DuoLingo.

But, that's a really good question and I'm still trying to find out the answer in terms of where there's competitive advantage. I think the obvious ones are robotics and AI but there's probably some other categories as well.

Zach: In my experience talking with startups in the area, they feel they have access to accelerators and incubators to get that initial seed round to build the MVP. But, a lot of their challenge is in getting that next round, that big investment post MVP.

What advice would you give a startup or an entrepreneur who's looking to raise that big round? How could they maybe approach a VC more efficiently to get that push?

Michael Clouser: That's what we refer to as the equity gap. I've seen it in a lot of different regions including Vancouver, Edinburgh, and I know it's here in Pittsburgh. There's a few things, one is you do have to build traction and highlight that. I think traction today is really important. Even if you can show an increase in customer usage or some kind of revenues, you want to highlight that.

Then, unfortunately, it's still necessary to build a really good pitch. Have your one pager and also have a good short pitch PowerPoint. Then, I would say, go out of the region and contact other venture capitalists, because the more competition you create, the better. New York's not that far away and there's a concentration of venture capital there with companies like Union Square Ventures, for example, especially for consumer apps. Boston, Silicon Valley, Seattle and even Chicago now are all options. I would say track down some folks in Chicago. There's a Groupon mafia there, from what I hear. Almost like in Silicon Valley, the Facebook mafia, you've got a little Groupon mafia in Chicago.

For initial conversations, you can work over Skype or Zoom, you don't have to travel there until you get close to finishing a round. I would say it's almost 100% necessary to go out of the region.

There's a lot of research involved in knowing the players. That's what I always advise my students when I was teaching entrepreneurship. It's research, research, research. Yeah, you've got to develop a pitch and show traction, but a lot of it's researching the players.

Zach: Do you recommend reaching out directly by playing the email game or do you have to work through connections, whether it be on Linkedin or what have you?

Michael Clouser: I would say the latter, it's always better to work through a connection and try to get an introduction through somebody you know. Whether it's LinkedIn or through picking up the phone. It's always better to do that, but there's also a trade off with time. Sometimes, if you don't have the time, reaching out directly is just as effective. Obviously, there are things like networking events and so on, but some of these folks you won't be able to meet without traveling, and travel costs money. Also, I think working through organizations and associations by getting involved is always helpful in meeting people through connections.

Like the Tech Happy Hour in Pittsburgh (🎉) and other organizations and associations. Especially if you're a student, get a student membership and try to get involved that way for $60 a year.

Zach: What is your typical engagement like as a VC after you make an investment? Do you communicate weekly, monthly, quarterly?

Michael Clouser: I think the short answer is there probably isn’t enough engagement. In general, the entrepreneur expectations are much higher than what's actually delivered from venture capitalists. It also depends on the role of the venture capitalist. Whether they're just an observer, a co-investor, or whether they're a lead investor. If they're a lead investor in the company, meaning they're playing a board role as well, there's usually a monthly board meeting and then usually a weekly conversation.

There's a couple hours a week spent on the phone or in person and usually one board meeting a month. That's why the venture capitalists often want to be local, especially the leads. If you’re within a 100-150 mile radius, it's a two or three hour drive so you can be a part of more frequent board meetings.

Ialso think, just from being on that side of the industry, that the onus is on the entrepreneur to engage their investors and pick up the phone. Reach out to them and just communicate what is needed. Whenever I'm talking to entrepreneurs, I always want to know, what are your bottlenecks? What do you need? Usually they'll be able to articulate that and it's just a matter of getting that word out so people know.

Ithink of it like a manufacturing process, a bit. There are constantly these bottlenecks you have to get through. As an entrepreneur you want to keep being able to identify the bottleneck and solve it. Then, of course, there's going to be another bottleneck right after that. So you want to be able to identify and articulate it while getting the help to solve it.

Zach: Yeah, that leads perfectly into my next question. What do you see as the additional services a VC brings to the table other than capital? Recruiting seems to be one that often comes up.

Michael Clouser: Oh yeah, absolutely. Recruiting, filling out management teams, and customer introductions are all key. Now, if it's a consumer play, it might be more of a branded partnership. Say you're a health and wellness distributor of a health product, you might find a bigger platform to go on and make that introduction.

It’s helping with customers, strategic partnerships and just thinking through strategy. A lot of the strategy is where VCs really add value by helping an entrepreneur think through what to do.

Just referring them to, say, service providers that they might need or even speciality suppliers. Are you looking for a virtual reality 3D modeler or developer? It'd be great if the venture capitalist has a network where they know some people that have those technical skills. VCs help facilitate and make things go faster than they would otherwise.

Zach: What is the typical vetting process like? How do you go from enjoying the pitch and liking the MVP to ultimately believing this is the team that can execute the idea?

Michael Clouser: Usually there's a syndication, which means multiple investors, and the stark reality is that some of the vetting process is all about momentum. For instance, a certain VC firm or angel will invest and then everybody else wants in.

But, when talking about the lead investor, they are making more of that vet. I think more and more it goes back to traction. It's really becoming about who has got the early traction.

For instance, if the team is good, the product up and coming with a good vision, and they're getting some traction? That makes a lot of the difference. Being able to articulate and show that today, even if it's the minimum product or service, is really becoming more and more important.

Back when I was full in doing VC, our vetting process was getting technical verification from the professor advisor who'd refer the deal to us. So. we knew it had some technical prowess. Then, we would do some market analysis and research on it. We didn't worry about the team as much since they usually were computer scientists and we could help fill out the rest of the team.

But, I think today it's a little bit different, it's more about some early customer verification. Which is good, I think, because it's more realistic. You're betting on less of a fantasy and more on something that's actually materializing in the real world. Granted, not every startup type can have that kind of early customer.

Some of them have a much deeper R&D. If that’s the case, then you're looking at things like their academic background, their team, and really making sure they understand the customer and the problem they’re solving. How deep are they in understanding that problem? Do they really understand it or not? Then, a lot of times as venture capitalists you're picking up the phone talking to those potential customers yourself to see if that problem really exists and if such a solution address that problem. Now, you may not be as straightforward talking about it, because of IP protection, but you'll want to really understand and verify that customer problem.

Zach: One final question for you. Say it’s the last day of class and you’re talking to your aspiring, entrepreneurial, students. What’s your one big piece of advice you’ll share from your career?

Michael Clouser: Three things. One, entrepreneurship is a team sport. There are some solo entrepreneurs, granted, but usually they're teams. If you look at even people that appear solo, they all had teams around them, like Jobs or Gates.

Iwould say, building a team is really important and learning how to work with people on a team is really important. Sometimes, it requires a bit of compromise and understanding.

The second is, entrepreneurship is a learned sport. It's a team sport and a learned sport in that you learn by doing. I would encourage them to go out and do it and try, and learn, and pivot, and don't be afraid to fail and make mistakes.

I've had students of mine come back to me after years and say, "Yeah, you're exactly right. We had this idea, it was a big opportunity and we didn't do it, and so we went and worked for a company in London, and these other guys did it. They just sold out for $25 million." I tell them, "Yeah, you were just as smart as they were. You might have been a little bit younger, but just as smart, you could have figured it out, you just didn't actually do it." I encourage them to go and try, and learn and fail. It especially helps a lot if you could do that and build a team at the same time.

The third little thing, which is kind of interrelated is just building that network of people you know and can contact. Trying your best not to burn bridges and just keep building that network up. That will really serve you well in the future.

Zach: Awesome. Well sir, thank you so much for your time. This was amazing. I really appreciate it.

Michael Clouser: Yeah, you're welcome, Zach.

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