Underscore comes up in just about any conversation about Boston’s startup scene, as the tech-focused, early-stage venture capital firm has a vast ecosystem of advisers, operators and former entrepreneurs in the city (and beyond), and is known to be one of the friendliest shops around.
Startup Boston caught up with Underscore Partner Chris Gardner, a self-described “technology omnivore,” to discuss his firm’s investment philosophy and views on the economic and business environment, particularly the boom in artificial intelligence. As a former entrepreneur himself and alumnus of PayPal, Chris has a unique insight into how founders can navigate the hurdles of the current tech landscape. Check it out.
Startup Boston (SB): You've had a long career, and have overseen a number of successful exits. Given that track record, what are the traits you look for in a founder that indicate future success?
Chris Gardner (CG): You’re asking the right question. Any success I have enjoyed is because I picked the right teams…not the right companies. I always chose the people I wanted to work with, more than the logo on the door. Investing is very similar.
Great founders often share a number of characteristics and we literally use that as a filter for our investments. Here’s a framework we call the “7 A’s” that we use to evaluate founders.
A less academic answer is that we look for founders that have unique insights (expertise) into the problem they are solving, are terrific story tellers (fundraising and sales), supernatural grit (persistence) and have the ability to attract employees, investors and customers (articulating a vision and motivation).
SB: Your bio notes that you do more than find and invest in founders, you also help them out as they grow their business. Where do founders most need help, especially in those early stages of building?
CG: This varies widely based on the founder profile. A technical founder may not need help on software development, but instead needs to learn (or import) skills in sales and marketing. A great visionary strategist and story-teller often needs help on the operational side of running a business. A first-time founder often needs support on the basics of standing up a company (legal, hr, accounting, payroll) while a repeat founder already knows who to call for that stuff. Our job is to connect those dots…either ourselves or with other experts.
Everyone at Underscore has been “on the other side of the table” as an operator and we relish getting our hands dirty! We’re not a bunch of investment bankers and MBAs who decided they wanted to become venture capitalists. We've all spent time at companies, and have walked miles in the shoes of founders, which gives us an advantage in helping them avoid the sand traps we experienced.
We talk about ourselves as a community-led VC shop, and we've got hundreds and hundreds of people in our ecosystem, which allows us to engage in matchmaking with founders. Some of those people end up as advisors or contributing members of teams, and we carve out parts of our profits to compensate them. It’s a unique model that lets us punch above our weight.
SB: And with all that's going on in the economy this year, how is the startup climate looking from your vantage point?
CG: While later stage companies with lofty (some would say crazy) valuations are clearly seeing a sharp pullback, as early stage (seed) investors, the impact of an economic pullback is more muted. Yes, valuations are a little lower, fundraising rounds are a little smaller and the benchmarks to get to the next round are higher.
That said, we see this unequivocally as healthy. Existing founders used to “easy money” are learning the value of cash efficiency, unit economics and “gasp” margins! New founders have to learn this from day one now. This is good and companies that can navigate these waters will be better businesses over time.
Recessions have also historically produced iconic companies! Square, Uber, WhatsApp, AirBnB, Slack, Instagram, and many more were all born in the ashes of the 2008-2009 recession. Companies that have lived through these pullbacks – or are founded in one – learn a set of skills out of the gate that you don't often see in frothy times: being laser focused on conserving cash and paying close attention to customer acquisition costs and burn ratios. For those companies, it's much easier to accelerate their spend a little bit later in life. And it's much healthier, honestly, when you've figured out a little bit more about your business.
SB: Since you're a "technology omnivore," I'm curious how you see the boom in AI influencing the fintech sector. Will fintechs need to inject AI tools into their products to stay relevant and competitive?
CG: AI and ML have been part of the technology toolbox in fintech for nearly a decade. Use cases include analyzing customer behavior in spending and investing, predictive analytics, fraud monitoring/predicting and even customer service. The emergence of language learning models (ChatGPT and others) adds a whole new suite of capabilities to this toolbox – especially in the area of customer interactions. Customer support, financial advice and the ability to interact via social media platforms will be transformative. Back-office work like programming, data analysis, fraud and risk analysis will see step function accuracy and efficiency improvements – something shared with all sectors, not just fintech.
It's going to take a little while for people to deliver value at the enterprise level, and it’s hard to create tons of value if your tool is built superficially on top of an open source program. Tech that will add value will include proprietary data sets – diagnostic data, data coming out of a supply chain ecosystem, or fintech and payments data like e-commerce payments data.
We're B2B investors, not consumer tech investors, so we get excited when we see someone that has unique insight into a particular vertical market and is talking about using these tools based on data that's more proprietary than just an open source.
We’re careful not to chase rainbows. If a chat front end or some of these large language models make your product more interesting, whether it's in customer service or being able to do predictive work, that’s great, but we're not saying your next round hinges on those capabilities. That said, all companies are going to be asked about AI, and we certainly expect them to have a point of view on whether it makes sense for them to spend resources on it.
SB: And how would you say the Boston startup scene is positioned to capitalize on this AI boom?
CG: The rapidly accelerating progress in AI will be as impactful to technology ecosystems like Boston at a level not seen since the emergence of the Internet. And this will cut across every single technology sector that has long thrived in Boston, including: software, hardware and robotics, healthcare, biotech and financial services.
And as one of the world’s leading academic ecosystems, Boston is at the forefront of research in this area and is already minting (graduating) AI experts in droves! These people will be the researchers, founders, and employees of the next generation of great Boston companies that have a powerful new set of tools they can use to build their businesses.
About the author: Randall Woods is a former editor at Bloomberg News and currently is a Senior Vice President at SBS Comms, a communications agency for technology companies and startups.