The first time I heard Scott Wu walk through an investment, I thought, "I feel smarter just listening to him talk"...
Scott Wu, Partner and Head of Investments at Omidyar Network, knows investing like the back of his hand. Our first time chatting was a diligence meeting to discuss an exciting investment that would provide students in Africa affordable financing options for tertiary education through income share agreements. It’s got a lot of moving pieces, it's really hairy and I'm excited to see the outcome!
As my first interview for A Black Girl in Venture, Scott dropped lots of little gems for me on getting into this business. I moved my key learnings from Scott up top and removed quite a bit of our side conversations for the sake of length! Check out some of my favorite parts of interview below. Enjoy!
Key learnings from Scott Wu:
1. CREATE NEW PATTERNS. The past is easy to assess--learn from it, of course, but don't let it distract you from new, untapped opportunities that are often overlooked.
2. Don't think about just what you can do right now but about how you will grow in the role. How will you still add value 10 years down the line?
3. The industry benefits from diversity--period.
Megan: So let’s start with this: in five bullet points, what do you think the journey to become a VC looks like? The things you think are the five most important bullet points. It's meant to be a hard question.
Scott: I think there are many paths to being a venture capitalist, and I think the industry benefits when there's a diversity of paths, because early on it was largely a finance path. It was a lot of investment bankers, and that was natural because a lot of VC work is working with a particular entrepreneur or management team - basically being able to assess patterns, identify characteristics that often lead to success and other things that often lead to failure. So that pattern recognition, that's largely ingrained and trained when you're doing the type of high transaction volume work of a banker.
It also became very clear early on that some of the best venture capitalists came from different realms. Mike Mortiz, he's a journalist, right? I think he formerly, if I recall, wrote for TIME magazine and is one of the great investors of all time. And you have the folks that came out of semiconductors, kind of spawning the dawn of the venture era, that were actually engineers. They were semiconductor engineers.
So I think my journey was more traditional, through the finance path as a banker. But even as a banker, I was really moved and was focused and passionate on working with startups that were raising private capital, and representing those types of management teams that had an idea that wasn't fully formulated, or a business that wasn't yet at scale, trying to raise the type of capital they needed to get there. And then, at one point, for me, I started specializing on an industry. 1995, I started specializing in what is now known as FinTech. But that term wasn't coined yet in 1995.
Megan: What was it called then?
Scott: I called it the Financial Technology Practice. When we launched the financial technology practice, it was the only dedicated financial technology group among the investment banks. So we were able to establish, "Well, this is actually unique and different and special."
When I launched that group, there wasn't a ton of money in 1995 in this space. But when Netscape went public, all of a sudden everybody started thinking about the applications of the internet for different industries. Financial services started rising very high on that list, because unlike other industries where there was something physical that needed to be delivered or distributed, whether it was retail or groceries or what not, financial services is entirely digital, right? So it's very easy to deliver and distribute.
What was very hard at the time was that nobody trusted the internet. So the banking industry often laughed at us and said, there's no way that the general public will ever trust their bank accounts or brokerage accounts to the internet. Sure enough, security caught up, and then they trusted it.
Megan: And here we are.
Scott: And then the financial service industry was behind, and they said, "How do we catch up, and not get cannibalized?" Not be eaten by all these upstarts, where it used to always be the big concrete building on the corner that people trusted . . . with bolt locks, with Brinks trucks driving back and forth. Now, just a website will do. So it was that combination of financial training, the combination of industry specialty, and the combination of an emerging market that was developing that all kind of happened at the same time that left me and my colleagues at the time to say, "Wow. There isn't a venture firm out there that focuses on financial technologies. Let's start one."
Megan: So you started a firm.
Scott: Called Financial Technology Ventures, because one thing we didn't have was any marketing skills or creativity, so we couldn't come up with a better name, and we called it FTV.
Megan: And how was that for you? How was that experience?
Scott: Yeah, it was fabulous, and overwhelming, and the timing was amazing. We kind of hit on a cycle of the market, a venture cycle, the internet cycle, as well as the whole financial service cycle that all kind of came together into a perfect storm. We all of a sudden found ourselves in a marketplace, first of all trying to raise funds, and we're actually pretty fortunate that there were a lot of funds that were looking for a home for something like this at the time. We raised $200 million dollars.
Megan: That's amazing.
Scott: That first year of investing was outrageous. Six of our first seven investments exited, either through a sale or IPO, within 18 months.
Megan: Wow. That’s unheard of!
Scott: And our IRRs were astronomical. At one point we had a deal in the million percentage points. And we would tell our LPs "Don't get too excited. It's declining by several thousand percentage points a day." Just because of the time value of money on that calculation.
Megan: What do you attribute that to? Was that just really good investing, or was it a lot of luck?
Scott: I always attribute that absolutely to luck. Being in the right place at the right time. I wrote about this recently, that if you look at the entire VC industry from the vintage 1996, they returned 101% as an industry. So if you were an average investor, you were talking about looking like a superstar. In 1999, in that vintage, they returned as an industry -1%. The best investors from that vintage, in hindsight look like they were pretty pedestrian.
So it really highlighted, to me, the big cycles in the venture industry, and how timing and luck almost overwhelms everything else. Of course, you don't want to be stupid. You need to be at least savvy enough to put yourself in the right place at the right time to benefit from good fortune. But you can never underestimate the exogenous factors. When you're on the right side of a wave, don't take too much credit for how brilliant you are. When you're on the wrong side, don't beat yourself up too badly for how dumb you are. Sometimes things just happen that are out of your control.
Megan: Let’s dive a little more into diversity. Can you tell me why you think there are so few women and minorities in VC and private equity?
Scott: Yes, I think it's a big focus in the industry right now. It's a big problem. Just as I expressed to you how I came into being one myself, some of those paths are partially the reasons why there aren't more women and more minorities. Because the banking industry is largely a male industry. The entrepreneurial community is largely a male community. So you look at those natural kind of stepping points; the feeders into the venture industry are largely male-dominated. And if you rely on pattern recognition, your patterns become what you've formerly seen, and those patterns keep reinforcing themselves. I think that's why it's so important what we do here at Omidyar - we look for new patterns. We try to create new patterns. We go places where no-one else has gone before, we try things where people haven't experienced success before. Instead of trying to rush in and outbid each other on the next hot thing, we're trying things in much more challenging markets that are more diverse, that are more represented by minorities and women. But even where we are, it's still not even close to sufficient.
What we are trying to do is just establish new patterns. And when those patterns start succeeding, then as I said earlier, capital is fluid. If you can demonstrate success investing in women and minorities, the money will come. The capital will be there. We want to be pioneers in making that happen. We have to pave those paths. We have to go practically looking for them, because they don't just show up. Those people don't know how to reach us.
Megan: So being proactive about building a pipeline?
Scott: We have to be proactive about building a pipeline, we have to be proactive about building a workforce, we have to be proactive about where we're looking and what job routes we're looking at, what schools we're looking at, everything. It's too easy to fall back on where you found success previously.
Megan: Yep. It's safe.
Scott: It's safer, it's easier, it's well-established. But that's what everyone's doing, and that continues to reinforce the diversity issues. So we need more people to step forward and proactively try to change that. And we could do more too, there's no question.
Megan: Thanks, Scott. Tell me a little bit about why Omidyar Network, and second, explain to me what exactly your role is in the firm.
Scott: To me, Omidyar is the perfect organization for me at this point in my life. Given my time on Wall Street, given my time in venture capital, given my time working with a startup and my time working with the U.S. government. I always had the separate distinction between my professional life and my personal passions and interests. So, whether it was banking or venture capital, that was what I was doing for my day job. But in my free time activities I was always involved with education for low-income, inner city kids, I was always involved in international development and the refugee and human trafficking issue. Those are passions of mine, I've been involved in each of those for over 20, 25 years.
But I kept those two separate and distinct and I would jump back and forth. I would go from my apartment on Central Park, working on Wall Street, to actually living in a small village in Tanzania with no water and electricity, and then I'd go back. I'd be in business school, then I'd go visit different refugee camps. I was always back and forth. Then when I was at Upstart.com, this opportunity came up where President Obama had started this program called the Presidential Innovation Fellows, and they were looking for a venture capitalist to advise USAID on their innovation funds investing around the world in entrepreneurs and innovators. I was like, "Wow, that sounds really interesting."
So when they selected me I signed up for a six-month term, and I thought, "Okay, I'll go do that again and then I'll jump back into my existing world. Get that out of my system for the time being." But I kept extending, and by the time I was completely finished it was two years and four months. At that point it was in my blood. I was like, "That was one of the most fulfilling and rewarding experiences in my entire career." So as I was thinking of coming back into the startup world and the investing world, Omidyar reached out to me. Initially I was a little resistant, but the more I thought about it, the more I said, "Wait a minute. What am I waiting for? This is the perfect culmination of all those passions and interests with my skill sets and experiences, all in one."
Megan: Another perfect storm for you.
Scott: It was another perfect storm. Unplanned. I think every good storm and bad storm I've ever hit in my life was unforeseen, unplanned. They happen and you deal with them and you make your decisions, and this time around I said, "I'm in a place in my life where this is exactly what I should be doing." So when you look around the space, it was very clear to me from my time even before USAID, but especially while I was there, that this was the preeminent impact investing platform in the world. If this is what I'm going to go do, there is no better place to do it that's more far-reaching, that has a better team, that has better expertise, where I personally can have the greatest influence and impact on the entire space.
And that leads me into my role with investment management and the legal and finance operations here that I oversee. I truly feel like that's the best job I could have here in this organization. It's where I get to touch every investment that we make that comes in the doors of any of our seven offices around the world. It's where, when anything material happens in any of our portfolio of nearly 300 active organizations, I can get involved and have some amount of contribution to what happens.
Megan: Yeah. I love that. Two last questions, I'll try and make them go fast. Can you walk me through your favorite deal you've made? What was so special about them, how did you find them, were there any red flags and how did you mitigate them? Just tell me about your favorite little thing.
Scott: I'm going to pick a deal that crosses over into a couple of these, because it's more pertinent, I think. It's more recent. Off Grid Electric is not my deal. It wasn't my deal here, it wasn't my deal at USAID. Off Grid Electric is an off-grid solar company that was launched in Tanzania. But my first trip when I was at USAID, USAID basically said, "Hey, take a look through our entire portfolio of investments. We have over a hundred around the world and figure out the ones that you think have the most promise, and go out there and help them." So on my first trip I went to visit Off Grid Electric - at the time very small, I think it was probably a year after their inception. It was a very small grant, $100,000 of ours. I went and sat with this team, and they were just moving into their offices, they were literally hammering together desks, furniture. I spent a few days with the team there, and I was really impressed. I said, "These folks are on to something." They had entirely changed their business model. They pivoted from their original concept into individual solar home systems from micro-grids.
So I came back, and it wasn't even on the radar of the USAID folks because it was such a small grant at such an early stage and they were struggling with changing their business model. I was like, "No. These folks are on to something. It's a great team. Their model is sound. There's the energy of the type of startup that you would see here in the valley." So we then gave them another $1 million grant, they raised a couple rounds of venture capital, and then they went on to raise a large debt facility and we helped them with a $5 million contribution into supporting that debt facility.
And on the other side, here at Omidyar, we were investing in this firm as well, because Omidyar had seen the promise. While we didn't have an energy initiative, this company crossed over between just being an energy provider, and doing it through innovations with the financial technologies that they were deploying into their systems. The ability to integrate mobile payments, and the ability to turn on and shut off devices using mobile payments was something that the financial inclusion team thought was really unique, so they invested in it here.
When I got to Omidyar, I was like, this is fantastic. I've been on both sides of this, both as the grantor in the very early stages, now continuing to think about how we help this kind of mid/later-stage company continue to grow and evolve and expand into new markets with new funding vehicles and access to different types of capital. I think it's a great growth story, and we'll see how this one turns out. I'm very optimistic.
Megan: Awesome. Last one, I promise. So, you're hiring a fresh new MBA associate. What are you looking for? What do you want to see? What needs to be there?
Scott: I think that whenever I'm hiring at any level, I really want to understand and learn the character of the individual. What they've been through, how they see the world, how they see themselves. You know, I can look at their resume and see their experience set, I can often infer their skillsets and expertise. Frankly, that's what gets a lot of folks into the door. But when I'm sitting down with somebody and trying to understand them, I want to hear their life story. I want to hear what challenges and experiences they've confronted and how they've dealt with them; when it didn't work out and how they reacted; when it did work out and what they would attribute that to. I want to see the potential. I want to see the aptitude.
Because, to me, it's not what they can do for us and contribute to the work in the first months. It's what they're going to grow into in that next year, and five and ten years down the road, and the type of leadership role they're going to take within my team and the organization. Where they could help take us as an organization. And you can't envision that out in the future without really understanding the path that they've traveled in the past. That's what I'm trying to understand when I meet with candidates.
You can learn more about the Omidyar Network's VC Fund here.