GP Interview: Scott Orn
Scott Orn is a partner at Preview Ventures and COO at Kruze. He lives in the Bay Area. This is his Emerging Manager interview.
👉 Big Learning Up Front (B.L.U.F.): Investment memo writing is the most important way for our partnership to memorialize our interaction and it allows us to be honest with each other.
Scott, tell us about yourself
I’m a husband and a father. Professionally, I’ve dedicated my career to helping entrepreneurs be successful and change the world. My mother was an entrepreneur and I married an entrepreneur, Vanessa Kruze. Before we were even married, I joined Vanessa as the 3rd team member at Kruze Consulting, an Accounting & Tax firm for Startups. Today we have about 450 VC backed startups clients who have raised over $5B. The team is about 85 people now. We’ve completely bootstrapped the company. What a ride it’s been.
I started my career doing M&A at Hambrecht & Quist, which became JPMorgan. And then I went to Lighthouse Capital, which was a venture lending fund. In 2002, Tech & Venture Capital was a wasteland. I was so lucky the people at Lighthouse took me in. I worked at Lighthouse for 9 years and took a few years off to get an MBA at Kellogg.
Eventually, I became a partner and led about $100M worth of deals into companies like Angie’s List, Upwork, Impossible Foods, Callisto Media, Serena & Lily and Freshbooks. Lighthouse was this incredible firm where I got the business education of a lifetime -- in Startups, Venture Capital, Founders, and Silicon Valley. I learned my single most important professional lesson at Lighthouse, which is that the strongest relationships are built in the toughest times, not the good times.
Describe your fund
I invest alongside my wife, Vanessa Kruze, out of Kruze Consulting, the Accounting & Tax firm we have built that focuses on VC backed startups. When I first started working with Vanessa, I had the investor mentality from my previous experience as a Partner at Lighthouse Capital. At Kruze, we quickly found that we get so emotionally and professionally involved in our clients’ journeys, that you can’t help but want to invest. You see everything they go through, the highs and lows, and you want to help them and support them.
At the beginning we invested our own money. It was old-school angel investing. Since we were bootstrapping Kruze and paying ourselves very little, it was a major sacrifice every time we made an investment. We had to really think about it. A lot of the companies we work with at Kruze come to us as a two-person company where we're helping them formulate everything. So you see the Founders unvarnished. It’s very pure. We’d throw in what little cash we had just to be a part of it.
Then we raised a small friends and family fund to continue doing it. We also added Healy Jones, an old friend from the Hambrecht & Quist days, who also works at Kruze. It was actually Healy’s idea to raise a fund. We were fortunate to have friends and even some former clients who had exits supporting us. To me, it was a validation of all of our hard work and the trust we had built in the startup ecosystem. The ecosystem rewards people with integrity. If you do the right thing over and over for 10-20 years in our case, eventually the ecosystem will support you when you want to take a leap.
Share 1 process improvement you’ve used individually or as a team which has made you a better fund manager
For us it has been the simplicity of a great deal memo. Our investing team is unique because it is an outgrowth from our main business (Startup Accounting & Taxes). So we have viewed the companies from multiple angles -- ops, sales, tax, compliance, FP&A, everything that most VCs don’t ever look at. So when we invest we’ve really been through these companies in a way probably nobody else has. The memo writing is the most important way for us to memorialize that interaction and it allows us to be honest with each other.
Which founder from your portfolio has had the greatest impact on you and why?
Ben Munoz of Nadine West. Ben and I went to business school together and we started a non-profit together 14 years ago called Ben's Friends. Ben couldn’t find support for a rare brain aneurysm he had suffered so we built the community to bring everyone with his condition (AVM) together. That worked really well so we built another 40 communities for people with rare diseases. Ben’s Friends is still going today. We learned a lot about startups, nonprofits and each other.
When Ben started another company called Nadine West, which is a women's clothing company, I knew I had to be involved. I didn’t know anything about women’s clothing, but I knew everything about Ben.
I was already working with Vanessa @ Kruze so we helped them get going. Ben and his partner Sidney are incredible operators. The single most important trait a Founder can have is being a good problem solver. Nadine West was bootstrapped for a long time so Ben had to be super resourceful. I draw inspiration from Ben. Whenever we run into a challenge at Kruze, I ask myself, “What would Ben Munoz do?” - And I usually came up with the right answer. :)
Investing in Ben & Nadine West was a really good life lesson: If you really believe in someone, even if you don't quite understand what they're doing, assuming the risk reward is good, then go for it.
Ben always says, “Happy customers and happy employees make a successful business.” I love that. I love how he puts his team and the customers first and everything else works out. At Kruze we say, “Kruze Cares More 💗.” If you say it and live it, then good things will happen. It’s kind of that simple.
What’s 1 thing you wish you knew before you became a VC?
Just how difficult it is. It is incredibly difficult picking the right companies, staying with the companies and going through tough times. Fred Wilson talks about this a lot. You actually put in way more work in the not so great companies.
One experience at Lighthouse comes to mind where we invested in a founder and his company didn't work after five years. We were going to lose a lot of money on it and the CEO was going to lose something he put five years of his life into.
However, he worked super hard to sell the company, even though the process was painful. This was a downturn, perhaps around 2008. He ended up selling the company and got us our money back at Lighthouse.
Nine months later he came back to us with an idea for a new company. I couldn’t wait to hear the pitch, as he had proven to be a very resilient CEO. It turned out that I loved the pitch. And so I went to our partnership and said, "He got us a bunch of money back -- he saved our bacon, and his new company seems pretty cool. We should put at least $500k into this company." I think a lot of the people at the partnership didn't really understand what he was doing, but we did it and the first round was probably at a $3 or $4M valuation, then we invested again six month later when they had some initial traction.
That company is now worth a lot and he’s been a great CEO. It didn't workout for him the first time, but this one did. One day they will IPO and Lighthouse is going to make a ton of money on it. We were both rewarded for persevering and building that strong relationship in tough times. Again, it's easy to be friends with people in good times. You build the strongest relationships when things are tough and they'll stick with you your whole career. That's what happened with this company and it totally worked out.
Tell us the story of a rabbit hole you recently fell deep into
I'm a finance nerd. I love how accounting + banking / finance are converging. Just like how the transportation sector is changing rapidly, something similar is happening in accounting and finance today.
You have banks adding bill pay and other sophisticated accounting tools. We’ve built a lot of automation at Kruze that plugs into Quickbooks and reads the bank feed automatically. This allows our software to categorize and label transactions automatically. The computer does about 70% of the work an accountant would have done 5 years ago. I think the convergence of banking and accounting is going to drive a couple more step functions in accountant productivity.
Name 1 GP and 1 LP everyone should learn from -- and whom we should feature next
GP: Reilly Brennan. I met you through Ed Aten of Merchbar when you were thinking about becoming a VC. I told you at the time that you were doing all the work a venture capitalist does, you just weren't investing money for a fund. You were doing the hardest part because you loved it and not cashing the VC checks. You were doing it for the love of the game.
I have a lot of respect for you because you took the risk and started your own fund. You had a pretty good life before the fund. It would have been easier to avoid the career change but you felt pulled and you responded. I did something similar with Kruze and it’s been the most rewarding six years of my career. Life is a great adventure if you let it be one. You took the leap and six years later you and your partners have built a great firm.
LP: Pick yourself as your biggest LP. People are going to roll their eyes reading this but it’s true. Of course you want the big Endowments and Pension Funds behind you. At Lighthouse we had MIT as our lead investor and it made everything easier. Smaller LPs follow big / famous LPs just like some VCs follow the big Sand Hill funds.
My point is there is a clarity that comes with having a big chunk of your net worth tied up in the fund. It doesn’t have to be big absolute dollars. What’s important is that it’s big relative to your net worth. This mostly happens at the early stages of a fund, like your first fund. I’m sure you did this with Trucks first fund. We did it in our angel investing.
It’s funny because the money has to be meaningful but simultaneously you have to be able to abstract away the risk in your mind so you actually take enough risk. Maurice Werdegar at WTI would always say that if they weren’t losing some money they weren’t taking enough risk.
The way to learn this balance is to invest a lot (relatively) of your own money. Nowadays you can learn this lesson much earlier, faster and cheaper with things like AngelList syndicates. There you can be the LP and but also armchair quarterback like you are the GP just by deciding to invest in the syndicate.
A bonus tip for becoming a better LP is to read every VC firm annual report you can get your hands on. Rick Stubblefield, the co-founder of Lighthouse, would sneak me the annual reports of the funds he invested in. The best funds will talk about their wins and losses. Absorbing lessons from other funds from the LP perspective will 1) Make you a better investor as a GP and 2) Make you empathetic to the challenges and pressure LPs face.
Once you demonstrate you speak the LP language, it will be easier to raise from other LPs. Remember, Silicon Valley rewards integrity. Always do the right thing no matter how painful, and good things will happen.
Finally, what are the 3 best emojis?
❤️🌴🌺
Scott is now on the EM roster at EmergingManager.vc. << View all these EMs, learn from them and then teach me some new things.
In many ways this entire idea for 'The Emerging Manager' originated with my discussions with Scott back in 2014. Without his guidance and support I don't believe I would have been able to build the confidence to start my fund. He was also an early backer of Trucks which was quite meaningful to me. Thank you, Scott. Scott's contact: @scottorn or LinkedIn
Thank you — @reillybrennan, rpb@trucks.vc, Trucks portfolio