Adam Torres and Joe Merrill discuss early stage ventures.
Subscribe: iTunes / Spotify
Apply to be a guest on our podcast here
Show Notes:
How can someone get funding from Sputnik ATX? In this episode, Adam Torres and Joe Merrill, General Partner at Sputnik ATX, explore early stage venture and tips for founders looking for investment from Sputnik ATX.
About Joe Merrill
Joe Merrill, Co-founder and Partner of Sputnik ATX, and Partner in the Linden group of venture funds based in Austin, Texas. Merrill is a former U.S. diplomat and served as a political, economic and consular officer at U.S. Embassies in Bosnia, Nigeria, and South Korea as well as postings at the U.S. Department of State in Washington D.C..
After leaving the State Department, Merrill worked in corporate treasury, finance and development at Deere and Company before entering the private equity world at a Carlyle-Apollo education fund, Apollo Global. Overall, Joe has over $3 billion of transaction experience in venture investing. Merrill has also founded and exited two start-ups, Pan Am Education and Smart FundEd. He enjoys running around Town Lake in Austin and early morning swims at Barton Springs!
His blog can be found at www.econtrepreneur.com and you can find him on Twitter at @Austin_VC. Below are articles Joe has written for Sputnik ATX.
About Sputnik ATX
Sputnik ATX VC’s 13-week accelerator teaches startups how to sell and gain traction. We help founders reach their full potential by creating an ecosystem to attract hard-working nerds, connecting them with investors, and training them for success. Our only economic relationship with startups is that of an investor — we charge zero fees. “Sputnik” translates to partner, and we want to be your companion for success.
Full Unedited Transcript
Hey, I’d like to welcome you to another episode of Mission Matters. My name is Adam Torres, and if you’d like to apply to be a guest on the show, just head on over to missionmatters. com and click on Be Our Guest to Apply. All right, so today’s guest is Joe Merrill, and he’s a general partner over at Sputnik ATX.
Joe, welcome to the show. Hey, thank you so much. It’s so great to be here, Adam. All right, Joe. So excited to have you on the show today. know I’ve had your other partner Oksana on the show in the past, so fun to get, the other half of the, team on here. And today we got a great topic.
So we’re going to talk about what’s going on at Early Stage Venture today. So excited to get into that. But before we do, we’ll start this episode the way that we start them all with what we like to call our Mission Matters Minute. So, Joe, at Mission Matters, our aim and our goal is to amplify stories for entrepreneurs, executives, and experts.
That’s what we do. Joe, what mission matters to you? You know, at Sputnik ATX, we really believe our purpose is to help people reach their full potential. And we do that in two ways. To the people who invest with us through our fund, we are trying to optimize the yield for our LPs. A lot of VC firms are trying to get bigger and optimize the size of their fund.
We’re trying to optimize our yield and for the founders that come in and work with us that we fund, we, you know, we fund early stage companies. We give capital and we give training and education and support and mentoring and advice. We don’t just give you a check. , we joke that we you know, we’re kind of VCs with an education addiction.
Mm-Hmm. ., and we teach nerds how to sell, right? Yeah. And so , we love to take really smart people and match them. , if you’re smart and poor, we can match you with the resources to help you make your dreams come true if you’re willing to work hard. Love it. Love bringing mission based individuals on the line to share, , why they do what they do, how they’re doing it.
And then also what we can all learn from that. , so great to have you on today. So early stage venture. I mean, this is what , you’re in the trenches day in and day out. You’re looking at deals. You’re looking at deal flow. You’re looking at companies. I mean, what are you seeing right now? Like, what are you seeing at early stage venture?
You know, early stage venture, as far as our ability to source companies, help them grow. It’s probably as strong as it ever has been. I think that historically, talent is pretty evenly distributed globally, but access to capital and opportunity was not. That has changed dramatically. And so VCs that are willing to fund things that are just not in Silicon Valley can find incredible opportunities and have some great growth stories.
And incredible talent, right? And so early stage venture now is branching far away from Silicon Valley. And it’s finding incredible talent, solving problems that no one’s ever even thought of before or considered and having great success and growth. The challenge with early stage venture right now is that the venture capital.
Kind of circle of life is that early stage funds feed late stage funds, late stage funds then get exits. And when that liquidity happens, that money comes back into everyone in a virtuous cycle. And part of the challenge we have is that over the past three years, the late stage funds, mostly in Silicon Valley, were obsessed with getting bigger and bigger and bigger.
And they started raising these giant multi billion dollar funds. Now, there’s not a lot of companies you can deploy that much money to, and so they were all competing for the same deals. As a result, they were bidding up valuations at a time where interest rates were so low, the multiples they were paying were very high.
You know, the short version is, they dramatically overpaid for everything, and so now they’re sitting on that, and they don’t have a way to exit, and they don’t want to tell their investors that they’ve lost money. And so by keeping the companies private longer, they can keep the valuations on paper higher, and they can still look like they are competent and doing a good job, right?
When the reality is their portfolios are deeply underwater, and they can’t exit at market rates today. And so it’s kind of constipated the back end of the system. So we’re not seeing the exits. The market for exits is actually pretty healthy. There’s a record low number of publicly traded companies in the United States and there’s huge appetite for public securities.
Valuations are at historic averages. So it’s not low. It’s not high. It’s just average, , which is fine. And there’s a lot of demand if you do IPO. Great demand. The problem is , they can’t do it because they overpaid. so the holding time right now for a unicorn is around 12 years, where in the past when you became a unicorn, you just went public.
But after successive overpriced rounds, there’s a bit of a mess right now for late stage venture. And I think they’ll sort that out. And there’s alternative paths to liquidity than the U. S. markets as well. And people are beginning to explore those, you know, taking companies public earlier in the U.
K. or in other foreign markets. It used to be a big valuation gap between those markets in the U. S., that gap is closing. And so, I think we’ll see more people taking their companies public in London, or in other alternative exchanges, Singapore, what not. And so, Venture’s doing great. I think early stage Venture’s doing great.
I feel bad for the late stage guys, I think they’re in a jam. But early stage, we’re awesome. do you think that works itself up? You mentioned that they’ll figure it out. How do you think that works itself out? That I don’t know if it’s happened quite this way in the past. Maybe it has, I’m not aware.
over time, if those companies grow fast, it’ll solve itself. It’ll grow into their valuation. It just won’t be a spectacular return. Right. And I think for the early stage folks like me, you know, we’re going to start telling our companies not to even. Go down that path by taking money from Sand Hill Road because you’re going to put yourself on that Overvaluation flywheel and get stuck in it for a long time and not get an exit And so I think , it will work itself out in two ways over time The big funds will have to either acknowledge that they’ve lost a lot of LP money Mm hmm or find ways to grow those companies so they can justify their valuations over time And again, not a spectacular return, but at least they’ll return the money Right.
For the early stage folks, we’re going to keep exploring alternative paths to liquidity, either strategic,, acquisition or go public through some other way. And so you can take companies public on these other exchanges and you can get to liquidity faster. It’s better for the founders. It’s better for the market.
It just won’t be in the U. S. And that’s okay. Yeah. And it’ll work itself out. Yeah. getting back to the early stage side of things, you mentioned that, you know, it’s thriving is that the the market’s going well, opportunities like , what are you seeing out there? Like you don’t have to say the name of a specific company or otherwise, but like industry niche, like anything specific you’re following.
I think right now, AI people talk about a lot. Right. Right. I think the opportunity for AI was probably five years ago. I think now, obviously there’s going to be a lot of AI implementation, but these LLMs, like, , the chat GPTs and the things of the world, those are going to become very commoditized.
There’s still going to be big, right. And there’s still going to be really valuable, but that’d be more of a commodity. What, what I think is going to be big next is we’re reaching the limits of Silicon wafer computing. And when you look at what’s happening with quantum computing and new types of computing, whether it be optical or whatever, there are some really exciting, massive changes coming.
And so I’m less excited about things like AI, and I’m more excited about companies like strange works that are doing cool stuff in quantum. I believe on the AI side. You know, I think about some of our portfolio companies that are already doing great with AI and have already, you know, but AI is kind of a tool that they use to serve their markets better.
Does that make sense? And so companies like Datum and, and Neetex and Growth Channel, they’re all using AI and they’re using it in really, you know, ingenious ways to solve marketing problems global fashion supply chain issues with Neetex. AI is embedded in their processes, right? Right. And you don’t think of them as AI first, but they’re using AI to solve really cool problems.
It’s just not sexy work. Does that make sense? And then I would say that the quantum stuff, the stuff that’s coming next is going to be, is really, really exciting. That stuff is super exciting. Yeah, and we’ll see where that goes so getting into the investing side of things and like what you’re looking for specifically at sputnik atx, maybe talk to us a little bit more about just your investment thesis as we kind of Unpack that and think about like the types of companies or founders maybe that you can look for but maybe let’s just start with Kind of your Your decision making process and, and , what it takes for Sputnik ATX to deploy capital.
we require people have minimum viable product in a customer. And so , that’s the bare minimum, right? We also want you to be incorporated in Delaware. You could be located anywhere in the world and we’ll even accept applicants who are like, Hey, you know, we can reincorporate in Delaware within the next 90 days.
That’s fine. As long as you go down that path, and that could be a deal where C Corp or B Corp. Aside from that, here’s what we’re really looking for. We’re looking for something that maybe nobody’s ever even thought of before. I like stuff that makes me go, wow, that is a big problem, and I never knew it existed, and that’s a cool solution.
, if you really make me go, holy moly, if I had to spend 20 minutes researching this huge opportunity that I’d never heard of, I like those things the most, and we do this because look at how something is consumer surplus, and this is the nerdy way of saying wow, and consumer surplus is the difference between what you pay, and what you were willing to pay, and technology is always being able to do something for you.
With less resources, and that could be time, money, effort, or energy. Technology enables people to do things faster for less, and better. And so if you’re doing a big, hard problem faster for less, I want to see that. And, , , like Neatex is a great example. The global fashion supply chain was basically run the same way it had been since people put boats and went around the world.
They just replaced boats with planes. And so, , here’s someone who’s solving a big problem, global fashion, , managing one of the world’s biggest water consumption and waste,, sources of waste. And they’re doing a great job with it, right? When you look at companies like Growth Channel, they’re using AI to create a digital marketing agency that you could fit in your pocket on your phone, right?
And it’s all just done with AI. And it does the work of thousands of analysts trying to optimize your channels. Right. Does that make sense? Mm hmm. Yeah. So when you see companies like this and how, I didn’t realize how much work, for example, agencies did testing channels and how AI could just with data streams optimize that.
And so I learned a lot from the founder and that’s the kind of stuff that just gets me real excited. Yeah. Speaking of the founders, do you look for in the founder? With founders, we want people who are gritty. We want people who can have the confidence and poise it takes to build a company, you know, and we want no jerk factor.
And I’ll be frank, jerks can build good companies, right? Steve Jobs did, right? But life is short and I’d rather work with nice people. And there’s just a lot of good people out there who are looking for money and it’s just easier to work with a nice one. Is that your coin name, by the way? The Jerk Factor?
I was like, have I heard that one before? I like it. I don’t know, but if your Jerk Factor is 10, you are not getting money from us, right? I like that. You gotta be able to stand up for yourself and have boundaries. Of course. Don’t get me wrong. It’s just, you’re not coachable, you’re gonna make a lot of mistakes as a founder.
And , without saying the name of the founder, you know, we had one founder that over the course of the program became very difficult. We had to sit down and talk with them and he went home and told his wife, can you believe it? They told me I was a jerk. And she’s like, yeah, you are. And then he came back in and he’s like, okay, I think I need to change.
, and he did. He, I mean, he’s really made efforts to be more coachable, to be more you know, to listen to not talk over people. And, thing that I think is great about human beings is we can change, we can get better, and we can grow, and it’s really exciting to see people do that. And so we’re looking for people who want to do that.
They want to grow, they want to learn, they want to change, they’re open to suggestion, and they’re up for that journey of trying to reach their full potential too. And you mentioned that you’re looking for, opportunities, not just in , Silicon Valley or maybe some of the traditional hubs, , like talk to me about deal flow.
Like, how do you go about like going out there , and finding, looking for potential founders, let’s just say in areas that maybe everyone else isn’t looking. Cause you’re looking international, am I right? Like you’re looking worldwide. It could be anywhere. Yeah. And I think too, , just in the last month.
gone to and spoken with founders at startup hubs in the Middle East, in different parts of the United States. And as we go and we speak at conferences or do podcasts like this, we’re letting people know that we’re open, right? And believe it or not, there’s a lot of people looking for money in the world, right?
And the people who are looking for money, they have Google too. And , as they go and they look for money, they find us. We have a great reputation. We tend to come up early in a lot of searches. When people are looking for early stage capital where, , I loathe to call us an accelerator because we’re really a VC fund with an education program.
And when people are looking for VC money for early stage, we come up in those searches quite often. And so we’ve got really great deal flow. We generally see more than a thousand applications for each cohort. People start a process and, we’re going to pick one. 5 to 10 at most. And we do that twice a year.
It’s really tough to get early stage funding and we’re super picky. I think we are the most selective fund I’m aware of. I don’t know of another fund that’s as selective as us and I’ve benchmarked us against a lot of the other folks like us at early stage, and we just get exceptional amounts of deal flow.
But we also have a wacky application. Like, we’ll ask you questions like, what’s your spirit animal, and why? And there’s no wrong answer. Right? There’s no wrong answer. Do you care to share one of the answers? Is there a funny one? I’ve never been asked that question. There’s no wrong answer, right? I’ll tell you, my spirit animal is the tardigrade.
It’s the tardigrade. Now, do you know what tardigrades are? I don’t. I do not. But I would expect you to say something like that because you like going after the, like, you like going after the, the thing that’s new and different. So you had to do that. These aren’t new or different. No, I mean, I will.
oldest living things, but if you Google this, it’ll give you nightmares. They’re like these tiny things, okay? And you can’t see them with the visible eye. They’re just beyond, they’re just beyond the size of our, of our vision. But, these little suckers, they’re everywhere. They’re freaking indestructible. You can’t kill them.
They go to space. They come back. Like, they’re intergalactic voyagers. Some people speculate these are the things that seed life through the universe, right? But these little things that are just indestructible, they eat everything. detritus organic left behind at the smallest level. Wow. And they’re just essential.
They are essential for life. And no one knows they’re there, and they go about quietly doing all the heavy work. And they’re everywhere, and for some reason that resonates with me, so I joke, like, that’s my spirit animal is the tardigrade, yeah. Wow, aka the water bears. The water bear, yeah, you googled it, there you go.
Of course I did, are you kidding me? It’s probably giving you nightmares. Oh, they’re amazing, they’re very different looking, yeah, definitely. They are everywhere, and you can’t get rid of them, they’re just on everything. Wow, that’s so interesting that the water bears. Yeah, everybody Google that. Tardigrade.
They’re gonna be like, what’s going on? And they’re indestructible. You can’t kill those suckers. And is the reason for that process, by the way, it seems to me, like if you were to, by going through that, even those questions you’re asking, like it’s,, you’re going to get to really know a person.
Like if somebody, , if we were having that discussion, I said, what is your spirit animal? And like, you, you get the normal ones, the, the, the lion, the, this, the, that, the, whatever, then somebody says tardigrade and you’re like, Oh, this guy’s different. What is that? Is that part of the reason? It’s interesting.
It’s hard to say. There’s an intangible aspect to that question. And what I always tell people is be yourself. Let your freak flag fly. Yeah. Because that’s the best way to get through my process. Because if I can’t figure out who you are and you’re giving me answers where it’s clear that you’re trying to figure out or gain the system.
Yeah. When you’re trying to figure out what I want to say, that’s really obvious. , and we just don’t tolerate that. I want to really get to know you because I’m trying to understand if you are the right person for this problem, right? And so just let it go. That is absolutely your best way to get in and to get through the process is you be you and you be you with flavor.
Be all in. That’s great and it makes sense to me because you’re also think you’re also going to get a feel for like Just are somebody gonna fit into your culture of what you want to work with right and what you want to be around Too like all right and like that it’s culture too Because it’s got a fit because it boy the worst thing you could do is get funding from us and then discover that we’re the poor A bad fit right because you you can get divorced more easily than you can lose an investor And it’d just be a shame for everybody if you came in and it just wasn’t a good fit.
And so, it needs to be a good fit for everybody, and so just be yourself. Because I’m not going to take a chance if I can’t figure out who you are and figure out if it’s a good fit. It’s great. Well, Joe, this has been a lot of fun having you on the show. First off, this is good. My, my spirit animal, I’m thinking about it.
I’m feeling like it’s going to be an ant, probably like that’s one of my favorites. I’m a big fan of the ant because they could, they do speaking of they’re, they’re very, you know, complex, their systems they live in a very complex society, kind of similar to, to humans, actually.
And then they’re also, they’re also can lift some weight. They punch way above their weight for what, for what for what purpose. For their size. So I like to think of mission matters, kind of like the ant here, you know, we punch way above our weight in our content, in our distribution and everything based on our size and some of the efficiencies that we’ve developed over the last eight years.
But I I think I look at us like that’s my favorite one. It’s an action. That’s been my favorite one. I was a kid probably once I started learning about, I’m like, you know, the ants are pretty cool. So I’ll take that. Doesn’t hurt that my name is Adam, it doesn’t hurt my name is Adam as well, so Adam here.
So, that doesn’t hurt, you know, there we go. Oh, good times. Good times, Joe. Well that being said, and again, it has been a lot of fun having you on the show. If somebody is listening to this and they want to learn more about Sputnik ATX and maybe even apply, you mentioned you take those applications a couple times a year.
If somebody wants to, to do that or learn more how do they do that? Yeah, come to our website. It’s www. sputnikatx. com. And you can read all about myself at Oxana. We are the founders and the general partners. You can learn about how we fund companies. There’s lots of resources for companies there as well.
You can apply for funding, but Nick atx. com amazing right here in Austin, Texas. Amazing. And for everybody listening just so you know, we’ll put the links and all that good stuff in the show notes so that you can just click on the link and head right on over. And speaking of the audience, if this is your first time with Mission Matters this is a daily show.
Each and every day we’re releasing new episodes, new content, new thought leaders, new ideas. If that sounds interesting or exciting to you, we welcome you hit that subscribe button. We have many more mission based individuals coming up on the line and we don’t want you to miss a thing. And Joe, again, thank you so much for coming on and I appreciate your time today.
Hey, thanks, Adam.