In conversation with Pete Soderling of Zero Prime Ventures

Transcript

Matt Malone Hey Pete, good to see you again. Pete Soderling Same, always great to chat. Matt Malone I appreciate you taking the time to talk to us today. So for those in our audience who may not be familiar with you and your company, Zero Prime, could you just give us a brief introduction? Then we'll dive into some more details on the background. Pete Soderling Sure. I'm Pete Soderling. I'm the founder and general partner of Zero Prime Ventures. We're a first check fund into day zero engineer founders across data and AI, infrastructure, machine learning, DevTools, and other forms of B2B enterprise software. Matt Malone How did you get started? Have you always been an investor, or do you have a different background coming into Zero Prime? Pete Soderling No, I'm an engineer myself from the first Internet bubble in the late nineties, and I was a software engineer in New York City, then I started my first company in 2003, and I was lucky enough to start two companies in New York and two companies in San Francisco in the last twenty years. So I've been a repeat founder and serial entrepreneur myself, and sort of figured out how to be an engineer founder along the way, meaning that I had to learn a lot of business things as a deeply technical person through the experience of running my companies. Matt Malone So is that what inspired you to switch over from being a pure engineer and founder to being an investor? Pete Soderling Yeah, the story there is a little bit interesting. I ended up starting the world's first data engineering conference in 2013, and I thought that I'd take a break from some of the crazy life of startups and surround myself with the best data people and then end up coming out the other side and starting another company. But instead, the conference itself started to draw such amazing startups and engineering talent that I realized there was a big opportunity to support those engineers founders and with my experience and then also with capital. So over the years, I've transitioned that platform into being an investment platform as well, where I'm able to support these engineers that we discover at the earliest stages through the conference. Matt Malone And so, digging into a little bit of data council and the conference you put together, how do you attract talent to that group, and how do you select the right types of engineers that are ready to make a transition from being a pure engineer to being a founder? Pete Soderling Yeah, we have a very interesting there's sort of this narrative arc of the engineer-founder that we've uncovered, and it was sort of by accident, but it's actually a little bit similar to the dynamic of YC. So, in YC, an engineer at a company will apply to the program, get their application reviewed, get bubbled to the top, sort of get blessed and accepted, and then start the company and get a check from YC. Well, in our case, Data Council operates in a strangely similar way where an engineer will be working on an infrastructure project or an open source tool at a company, an Airbnb or Stripe, or Uber. They'll apply to speak at our conference because they want to share that knowledge with the rest of the community. Their application, their talk will get peer-reviewed and sort of the best funds bubble to the top, and then they'll become a speaker, a data counselor. Well, I'm nine months or 12 months later, X percentage of those engineers go on to start companies around that idea. So, through that process, we've been able to sort of build a relationship and identify them early on in the process and then be a first check in the company when they decide they start to want to officially leave their job and start a startup around that idea. Matt Malone So beyond, you know, being the first check and supporting this transition financially, you know, what, what are you doing, and what is Zero Prime doing to support founders to build these next generation of companies? Pete Soderling Well, one of the main things is really utilizing the network that we have because data council is such a massive global network, we're able to help early-stage companies with design partners, early customers, sometimes technical hires as well. And so I think just the fact that we have this large network at our back gives us sort of a really unique asset that we're able to use for high leverage introductions, for the founders themselves. And honestly, this is one of the reasons that they take our money, you know, over other competing alternatives, because it's very, very hard to build this global network. And we did that on its own as a business, standalone business over the last ten years. And it's not just simply something that'll be bolted on, you know, to decide as being a VC platform, so to speak. So that the community is quite exciting and is really a big differentiator in the way that we offer helping and differentiated value to the portfolio companies. Matt Malone For folks that aren't in the software investing space every day, you know, our clients hear a lot about different strategies to invest, and we hear a lot about software investing. You're at the very early stages. You're working with engineers. You talked about a lot of different pieces of support that they need. What is something that an outsider may not be attuned to that you're focused in on when getting these companies off the ground? Pete Soderling Well, I think one of the things is that deeply technical people are often not great at the business side. And this certainly goes for me, myself as an engineer-founder, I say that I got myself an MBA, you know, through my first couple of companies. And so there's many deeply technical people in our community who have genius, technical ideas, but they may not exactly know how to go to market or how to analyze the opportunity, how to do direct sales, how to build a marketing team. And even how to build a finance team, or any team at all, to be quite honest. And so all of these things are sort of, you know, it's important that we unlock all these skills and teach engineer founders how to start and operate companies. And so we operate across many of these different axes to teach them how to do that and to give them support and coaching at the same time.

Matt Malone Switching gears a little bit from just the general strategy and what Zero Prime does to support these early-stage founders and companies, can we zoom out a little and talk a little bit about the competitive landscape in early-stage VC? We've seen a lot of headlines about what's going on in the venture capital world, some good, some not so good. You also mentioned, you know, in terms of the sectors you focused on, one of them is AI, which is now a hot topic. So be great to see what your take is being boots on the ground in this space. You know, looking beyond just the headlines people are reading. Pete Soderling Yeah, well, the AI space is very exciting. It's, you know, interestingly enough, something that we've been focusing on for ten years, and, you know, it's been called data analytics or machine learning or deep learning, or there's this sort of various types of technologies that could be considered AI. But we've been specializing in all that tech through our community and data culture for the last ten years. And so it's very gratifying to see the world kind of finally come to the point where they, too, are excited, as excited about AI and machine learning as we've been for many years. That was one reason that I started the Data Council community in 2013 because I saw the future of data, and I saw how powerful this could be in revolutionizing lives. And so it's exciting to see the general public even wake up to the power of ChatGPT and other potential large language model applications. So, you know, it's only good for us. And I think that there is some similarities and some differences in sort of, you know, what this new tech needs and many of those things. We have companies on our portfolio, who we’re already focusing on, and we're continuing to sort of dig deep in that space and look for the greatest ways to support the next wave of innovation in the AI and machine learning space. Matt Malone Are there sectors in the economy that you think will be, you know, are the ripest for applications of AI machine learning or any of the other early-stage software companies that you're focused on developing? Pete Soderling Yeah, for sure. I think computer vision is a really big sort of horizontal theme that cuts across many different industries aerial imaging, medical imaging. You know, these types of applications, I think, are currently being revolutionized by AI. But there's also the textual-based, generative AI NLP stuff that we're seeing with, you know, speaking to a model in natural language, which is extremely approachable for any consumer. So there's really a sort of, you know, big swaths that all sort of fit under this, this major bucket of AI. But in terms of verticals, there's many applications in health care and legal and any kind of professional knowledge work that we're exploring, not to mention biotech and other, you know, deeper sciences as well. So I think that these models and this talk has the power to really make people's lives better. So we're focused on a bunch of, you know, sort of instances where that can actually benefit humanity. Matt Malone I mean, you're an early-stage investor. There's been a lot of noise about VC valuations, whether they've been out of whack, whether it's a good time to be a VC investor. Could you give us some guidance on, you know, what has gone on in the early stage world? Has it been as much of a bubble are there good opportunities now, is it not the right time? What do you think about early-stage versus middle to late-stage, and when people should be thinking about deploying capital? Pete Soderling Yeah, well, I think there's definitely a trend in the world, in the investing world, towards emerging managers who or formerly operators or formerly entrepreneurs. I think that the investing world discovered that those folks have good platform with the with current entrepreneurs because they speak their language and they sort of have gone through the company-building aspects themselves. And so there's definitely a trend in early stage towards operator investors who have that experience.

The other thing is, you know, especially on the early side, early-stage investing, I think there's a focus on folks with some kind of differentiated advantage and especially when it comes to niche networks. When I started my last company ten years ago, YC was basically the only differentiated network that you could raise money from that sort of had credibility. And now I feel there's many other solo GPs or emerging GPs like myself that access to their own large communities, either through businesses they've built or through multiple startups they've started. And so they themselves sort of become, you know, the center of the hub of the spoke and network. And so I think that early stage, you see, is being disrupted by folks that have some sort of niche network advantage that's manifest in their own special way. In terms of valuations, obviously, you know, we're seeing some valuations drop in this market. Obviously, the AI valuations are a little bit more immune to that.

But overall, you know, this is a great time to be investing in venture. I think of, you know, Warren Buffett's exhortation to be greedy when others are fearful. And so there's a lot of opportunity here, I think, for, you know, folks to really invest in the next great batch of companies. And it's no doubt that the next generation of decacorns are being funded now and in the next two years. And so we're actively, you know, excited about advertising that message to the world. And we're as active as ever in looking at deals. And, of course, valuations are always a concern, especially at the early stage. You want to sort of get in at the right price at the right time, but regardless, innovation is here to stay.

Matt Malone And so we talked a lot about, you know, the overall network and how you think about the different sectors to invest in what engineers transition to founders need to be successful. But when you're sorting through all these different opportunities, are there things that are disqualifiers for you, if you see something from either an individual or an idea that you would say this is going to work, or we have to reframe this or rework this for us to be successful? Pete Soderling Yeah, I think the biggest red flag is a founding team who really doesn't have any commercial sense or a commercial interest in really seeing this product successful in the form of a business. And so because of the space that we play in and because so many folks are deeply technical, that's one thing that we have to watch out for. And conversely, to that, you know, we do look out for that capability on a founding team. So not every engineer has to be an amazing salesperson, but it's helpful if they can, first of all, be willing to sell early product to other engineers. You know, that's a big thing that we look for, or else they have someone else in the team who is more commercially minded and go to market minded, and that can support them in actually generating dollars for the company. Because, you know, I think the days of I'm just purely investing in open source projects or companies that don't have a shot at making revenue are definitely, you know, not in fashion these days. And so it's always been important to us from day one to make sure that engineers and founding teams have the capacity and the skills, and the interest in actually generating revenue in those companies because otherwise, venture doesn't make sense. It has to be a high growth, you know, curve. Otherwise, the venture model just doesn't make sense for these companies. Matt Malone And after you've invested, are there key waypoints, are there key inflection points that you're looking for as to whether you're going to continue to invest or whether to maybe stop investing? I mean, we all know that venture, we have to make a lot of bets, some of them don't work, and other ones are, you know, 10X, 100X. We want to balance those things out. So what are you looking for on the growth trajectory that makes you want to move forward or maybe pull back? Pete Soderling Well, our approach and our strategy is to help companies from the first check all the way through to their institutional series A, and that could include a pre-seed and or a seed round, you know, and potentially a ridge round. So that's the space that we play in. So we want to make sure that companies understand the metrics that series A investors look at, and they work backwards from those, even from the time we make the first investment. So we're constantly working with founders to make sure that they have the right number of design partners, the right number of early customers, the right constellation and type of early customers, that they're clustered in a particular industry or not. So these are all things that we sort of triangulate based on the downstream investment interest and our contacts, our deep contacts in the network with many other funds who'll be support companies at series A. So, you know, we basically take market science from downstream investors and make sure that our companies are fully aware of the KPIs and the metrics that they need to hit so they can be successful in getting that next round of funding for the company. Matt Malone Zooming out to some of the broader economic drivers here. What we're seeing in the broader economy. You know, happens to be a great time for AI, which is part of your strategy, but we have some other noise in the economy that people are concerned about and may want to think about how that impacts your strategy, venture generally. I mean, is this the interest rate environment something that concerns you? Is, you know, a recessionary environment something that concerns you? How do you think about economic cycles and your investment strategy? Does it matter, given the timeline you're investing on? Pete Soderling Yeah, I mean, ultimately, at the end of the day, it really doesn't matter so much. You know, we try and stay focused on the on the medium term, the short term, sometimes presents challenges in any kind of economic market. You know, certainly, when interest rates are high, it's harder to raise money as a venture capitalists. When people can get 5% of their money risk-free and obviously more in the bond market. But, you know, we're in this for the for the mid to long term, and we sort of understand how these cycles develop in tech. And so it's not an existential threat for us. Our platform is highly differentiated. We look very different than many other early-stage VCs. And so we're seeing a lot of the tailwinds of that and benefit of that, you know, in our own process of raising and deploying capital. So I couldn't be more excited for the future. And, you know, well, sort of interesting, you know, economic macroeconomic trends in the short term, don't really disrupt that too much. Matt Malone Let's talk about some of the some of the other sectors that you're focused on beyond AI. I'm sure everyone wants to talk to you about AI, but let's talk about some of the other sectors that you have in the fund, and maybe you can explain that to some folks that may not have all the details on how these different software companies are developed. Pete Soderling Yeah, well, I think the main thing that's really in our DNA is we are infrastructure investors, and that means we invest in engineers for building tools for other engineers. Some people call this the picks-and-shovels world, right? It's like Levi's selling jeans to those people mining for gold. Right. Miners in the gold rush. And so, you know, we're very much in that sort of flavor. And we actually don't invest too much out the application layer. So even, for instance, the AI applications that have a tendency to see bubble valuations or go up and down or sideways, you know, I think there could potentially be a lot of consumer backlash against some of these applications when they realize that they're not all they were cracked up to be in the short term.

That being said, you know, we really invest at the infrastructure layer, which is one layer down from that, and that supports AI, that supports data science, that supports other kinds of data collection because data volumes are growing across industries, that supports developer tools, building tools for other engineers to be more productive. So we are really a tooling and infrastructure investor, and that's the one thread that's common across all of our investment themes is sort of that focus on the infrastructure layer. Matt Malone And what are some companies that people might know that are either public companies or larger companies that would be good examples of infrastructure companies that you would have liked to have seen, you know, many, many years ago? Or maybe you did... Pete Soderling Yeah, it's a little tricky because these are not often the consumer brands, but some people know them from the stock portfolios or, you know, from their wealth manager, maybe their friends in tech. But in the early days of Data Counsel, when we started Data Counsel, we had a bunch of these companies all sort of come to the conference, and they were Databricks, Datadog, Snowflake, Elastic, Elasticsearch, Confluent, and others. So these are the companies that went on to become rocket ship, you know, companies sort of not just from a private standpoint, but also in the public markets and have really left a dent in people's appreciation of what the power of data, infrastructure, and infrastructure, in general, can be. So those are the class of companies that we find and discover at Data Council, and we like to believe that we're investing in the next batch of great infra-companies that are still up and coming.

Matt Malone I think that's really helpful to illustrate how people should be thinking about this strategy and being able to be early into some of these companies that have gotten quite large at the IPO stage and really add a lot of value to the overall infrastructure of software. But the overall economy I know we use here at Opto, we use a lot of those services to build what we're building here, as well. Anything you're hearing that you think is being overhyped in terms of technology or software that maybe people aren’t analyzing the right way in the current economy? Pete Soderling Well, I think it's a little overhyped that AI going to steal all of our jobs. Of course, there will be job dislocation. But when you think about it the way we do in the sense of investing in tools, like every time a caveman invented a tool, you know, that sort of gave them more leverage, literally and figuratively, and, you know, albeit the need for exactly the same amount of human force to complete the same job. So when you're a tool investor, you sort of implicitly believe that the tooling that companies build will help other people be more efficient. And at some level, you know that dislocates certain jobs. But society has sort of moved along this curve over the years, and people need to be retrained and reskilled. And societies learn how to become more efficient and to build bigger and greater stuff. You know, I firmly believe that this AI wave will sort of have that effect on society. And it's not going to erase all jobs or even all low-end jobs. I think that people would just have to be reskilled and retrained and need to learn how to sort of cooperate with the technology and use it to their advantage instead of resisting it. So that's one thing that I think is a little bit overhyped, you know, in some doomsayers, for instance. Matt Malone Yeah, I couldn't agree with you more. I mean, I think we've seen that every stage of major technological advancements that, there's always been pushback, there's always been fear. You know, people tend to like to stick to the status quo, worry a little bit about change. But I think ultimately what happens is it raises the standard of living. It allows people to offload more mundane tasks, focus on more complex tasks, and it creates, you know, new opportunities and new jobs that people didn't even know would exist because of the way it impacts day-to-day life and the economy. So, yeah, I'm certainly very excited about the changes that are coming. And you know what it's going to do for my children. I don't know if I'll be around long enough to see all the impact of the economy and the world that AI and the next generation of software and technology is going to bring us. But I think it will definitely give us all more time to do the things we think are more important and more high-value tasks. Pete Soderling Absolutely agree. Matt Malone So, I mean, since we're talking about long-term, where else, what else are you excited about long-term? What can tech do for the world long term when we're talking big ideas 15, 20, 30 years out?

Pete Soderling Well, that sounds like Elon putting people on Mars that time horizon. I'm not sure that I'm, you know, qualified to speak that far in the future. But I'm certainly in the nearer short-term mid-term, I mean, I think people are becoming aware of the power of the data that they have about themselves. So, for instance, if you could take the power of ChatGPT but you could train it on all of your own personal data, your email and your calendars and talks you've given and things you've written, you can imagine the powerful assistant, A.I. assistant, that could be created. So I think that in the future, we'll all be surrounded by various models that are sort of trained on a combination of our data or external data and are offering help and support or assistance to us. And that can be anything as remedial as calendar planning and contacts and messaging and travel planning, or it could be as sophisticated as legal advice and medical advice and, you know, additional professional leverage in our career. So I think that we're stepping into this world where people understand the power of their data. It's not just used to serve them personalized ads anymore. It actually can be used to make their lives smoother and better and operate with less friction. And so I think that as people are to harness that data and figure out the controls to sort of give that to other models who can then interact with each other, perhaps in an agent-based world, I think we're stepping into a very exciting time for the knowledge worker and for many kinds of professionals and consumers who will access to sharing their data and controlled ways to get really high-quality semi-automated results from service providers in the future.

Matt Malone Yeah, I mean, I think that's something I personally think about a lot is is this my own personal data sharing and what I should put out there, what I should keep to myself. Are there any additional I mean, you mentioned advantages and some of the customization that's going to be available for people by using some of these tools? You know, with each iteration in technology, though, we've also seen that you know, people need to be more and more wary of their data of imitation. Is there anything that folks should be aware of or focusing on as we're entering into new conversations with these new forms of technology and how we should protect ourselves, or should we feel comfortable being open and putting things out into the public sphere? Pete Soderling Yeah, I mean, I think we need as consumers or as contributors of our own data to this data cloud or these models or however sort of the manifestation of this looks in the future, I think, you know, the onus is on us to ask questions, basic questions, at least to understand the security in the privacy of our personal information and how that's handled on the vendor side or on the partner side. And so I think many startups and tech companies will have to become more privacy forward, you know, more clear on like Apple is, for instance, on the way they sort of treat your data and your privacy and your security. And so I think that for many companies, that could actually become a competitive advantage, even as it has for Apple, as they've learned to be extremely clear, transparent with their consumer about how their data is used.

So I'm not sure that, you know, the government regulation GDPR is exactly the answer because I think most of us in tech would realize that there's a lot of misguided bureaucracy there that sort of inflicted, you know, weird constraints that maybe it might not solve the problem. But I think as individual companies themselves took up that mantle and realize that it's a competitive advantage for them to be more privacy-aware and communicate that to their customers and the people they expect to entrust them with their data. I think there will be certain companies that will sort of scoot to the top of the line due to that positioning. And Apple is an example of that. I think there's another large batch of companies that will follow.

Matt Malone Yeah, it's interesting watching on. It's certainly something we'll be paying attention to as all this stuff develops. So, Pete, we've covered a lot of ground, but let's come back to where we started, and I think in threes, I think a lot of people think in threes. If there's three things people should think about, or remember when they’re thinking about Pete Soderling and Zero Prime, what do you think those three things are? What are three takeaways, and what should people be focused on for the future? Pete Soderling Well, I think they’re first checks into day zero engineer founders. It's going B2B enterprise software, especially at the infrastructure level, and it's our amazing network at Data Council, you know, which continues to run strong today and welcomes technical people from across the world to share knowledge with each other and to advance the future of data, machine learning, and AI.