​Fanduel, Ipsy, Zynga, Marketo: Here’s How Bullpen Capital Keeps Working Its Magic

Henry Truc  |

It’s a fascinating time to be an investor in the private markets right now. On one end of the spectrum, companies with multi-billion dollar valuations are staying private much longer than they’ve historically been able to, thanks in large part to the deep-pocketed venture and institutional funds willing to cut the big checks to get ahead of the eventual IPO. On the other end, new regulations like the JOBS Act have opened up the ability for self-directed retail investors to participate in early-stage startups and private emerging growth companies.

But in between the seed stage and “super-sized” A rounds of financing exists Bullpen Capital, a venture fund targeting that sweet spot that most other firms typically overlook. In this Equities.com exclusive interview, Bullpen Capital’s Paul Martino breaks down his firm’s unique strategy and the traits he looks for when winners in the private market.

With names like Fanduel, Ipsy, Zynga (ZNGA), Marketo (MKTO), and a host of other eight- and nine-figure companies under Bullpen’s belt, it’s safe to say Martino knows exactly what he’s talking about

EQ: Bullpen Capital describes itself as a lean venture, super-angel fund. How does your approach to the VC space set you apart?

Martino: It's very funny because I would say the vast majority of people in our business go on gut deals. They go on things like, “This market is big,” “I like the founder,” “This space is going to be huge” or say things like, “Five years from now 3D printing is going to be big” and “10 years from now everyone is going to have self-driving cars.” So when we started our fund we thought that this left an opening for using a more analytic approach to venture investing.

I’m a lifetime winning sports bettor just as an FYI. A lot of my bets that I ever made were against my hometown Eagles over the years. This taught me a lot about how to separate your emotions from the data. I always had this in my mind as we were looking at companies. Just go look at the numbers. Companies are going to win if they have awesome numbers. We're one of the only funds anywhere in the early-stage that operates this way. Obviously, later-stage funds in the public equities space work this way, but they're very few people at early stage who operate like this.

EQ: One of the biggest challenges of getting analytical in the private markets is the availability of data. How do you do it?

Martino: We have one key requirement in our companies: We won’t invest unless their product is in market. We aren’t bleeding in the early stage. We won’t invest in science projects or PowerPoints, but we will invest in a company that has had its product out for only 90 days. At that point, we find we're able to project very well which companies are going to be winners based on a purely analytical framework as opposed to a lot of prognostication.

This is why the Bullpen model is investing at the post seed stage. Our whole mantra is it's early but it works. Our companies have typically been around for 12 to 18 months. Their products are out in the market for three to six months. It's too early for most people to be able to say if that's a winner or a loser, but we've honed our skills in trying to figure that out on the small datasets. It’s a very different approach.

EQ: There seems to be two prevailing schools of thought in the VC space. Some firms make dozens if not hundreds of small deals a year, and others make very concentrated bets in one or two deals a year. Where does Bullpen stand on that?

Martino: Our whole business model exists because of the dislocation created from those two business models. Back in the day, there was only one style of venture investing: the life cycle. Make two or three bets a year and invest every round of financing. That is how Sequoia, Kleiner and Bessemer got started. But 10 or so years ago, Josh Kopelman at First Round and guys like FloodGate and Jeff Clavier at Softech invented this kind of option-buying model style of investing. So higher volume, lots of shots on goal, let the losers die quickly and double down on your winners.

So you have your life-cycle investors and your option buying investors. In between those two models exists this spot that post-seed fits into, which is where Bullpen lives.

EQ: You’ve got some nice wins in your portfolio with companies like Fanduel, Ipsy, Zynga and others. What other companies that you found that you thought you have gotten in at the right time?

Martino: I would say almost every company in the portfolio. Other examples are Namely in the HR space out of New York. Spot Hero out of Chicago with on-demand parking. These were all companies doing their first half-million to million dollars in revenue by the time we invested. But they weren’t the kinds of things that other Series A investors were confident would be breakout winners.

In the case of Fanduel, for example, they were just getting to the point where they were at about a million-dollar run rate. It was interesting enough to pay attention to but most people were like, “Oh fantasy sports is a scary category.” “Oh, the company is in Edinborough, Scotland.” “Oh, it's a husband and wife founding team.” All that gut stuff didn’t match. But we looked at their numbers and we saw these guys were making a million-dollar a year run rate with only 10,000 registered users. There aren’t many companies that have numbers like that. To us, this looked like it could be a winner. There weren’t many companies back in 2011 that had 10,000 downloads and making a million dollars.

If you took it from a purely analytical framework, Fanduel was an easy investment. But if you took the gut feel around the team and the geography and the category, it was an easy no.

EQ: We know capital is very important, but there are other considerations that startups need to factor in when taking on investors. What kind of value does Bullpen bring startups and entrepreneurs, aside from the capital?

Martino: We're going to put you in boot camp and show you how to turn the crank to go from $50,000 a month to $500,000 a month. That is what our whole value proposition to the entrepreneur is about.

My partners (Duncan Davidson, Eric Wiesen, and Richard Melmon) and I know how to run companies. Between us, we’ve started 14 companies. I started five, one with Marc Pincus [Co-Founder of Zynga] called Tribe. I started Aggregate Knowledge, which was acquired by Neustar (NSR). Rich Melmon started Electronic Arts (EA). Duncan Davidson started Covad Communications. We come from telecom, computer gaming, predictive modelling. We have run a company of almost every stripe at this point.

When we give money to an entrepreneur, we basically tell them, “Here is the money. For the next year, I’m going to go kick your butt so that you can hit these milestones and a year from now, we can take this deal to Accel, Greylock, Kleiners and Sequoia.”

When you talk to our CEOs–like the CEO of Namely, the CEO of Fanduel–they’ll tell you that no one gave them the time of day when Martino and his guys over at Bullpen invested, but a year later, after going through that boot camp, they became the darlings of Silicon Valley.

If we play the game right, we're the last cheap money that goes into the deal.

EQ: New rules like equity crowdfunding and Reg A+ have opened up the private markets to some extent to average investors to provide a new pool of capital for startups. How has this affected your business?

Martino: From our perspective, it literally gives us more opportunities to play our game. If our game is to find a company in year two after its seed money, then the more ways that they have to raise that early money–whether it be seed financing from first round, equity crowdfunding, or AngelList, it’s great. Unless there's a high volume of companies coming out of that seed ecosystem, we can’t do our magic. Every time an early stage form of financing gets invented, it creates more companies for us to play our game. We are super supportive of these efforts because it basically gives us more chances for our magic to work.

EQ: Are there any particular areas you’re looking at or avoiding outright?

Martino: There are plenty of areas that are overhyped right now. I mean virtual reality, augmented reality and artificial intelligence are so ridiculously overhyped right now. They’re just like what Bitcoin was two or three years ago. In general, we stay far away from those categories when they're at the beginning of the hype cycle. We wait until the hype cycle dies down, and companies are out in the market and they’re making their metrics.

One of the first deals we did in our third fund is an e-commerce deal we did at the beginning of the summer. We haven’t announced it so I won’t tell you the name but we did that company when the whole e-commerce category was in the toilet. No one wanted took at e-commerce. Two months after we do the deal Dollar Shave gets bought for a $1 and Jet.com for $3 billion. Now, everybody is scampering for which e-commerce deal they should they be in. It’s funny to us how herd-oriented the venture people are in the later stages. If you're in a category in or out of favor dictates what the valuation looks like.

EQ: What about the areas that you think have some attractive opportunities?

Martino: We’re always looking at things that are in the trough of disillusioned phase. For example, we're looking at Bitcoin companies right now because that’s just not hot anymore. Too many people lost money on the first wave of companies.

And in two or three years, guess what we're going to be doing? We’re going to be doing a whole lot of AI companies because those guys will come back to earth. They’ll have gone out of that hype/froth cycle, back down to basics and when they’re back down to basics is when Bullpen invests. In many ways, we look at the categories people aren’t looking at anymore because they were hot a year or two ago. That is a big part of how our strategy works.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
EA Electronic Arts Inc. 80.00 0.77 0.97 6,191,119 Trade
MKTO Marketo Inc. n/a n/a n/a 0 Trade
ZNGA Zynga Inc. 3.68 -0.02 -0.54 9,712,117 Trade

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