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October 16, 2023

Great startups are built, not discovered

Inside Atomic

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Inside Atomic: Great startups are built, not discovered

In this episode, we talk to Healey Cypher. He is the chief operating officer and partner at Atomic, an industry-leading venture studio behind a variety of fast-growing brands such as Hims and Hers, Bungalow, OpenStore, and BoomPop.

Tune in as Healy talks about Atomic's unique approach to startups - building rather than finding. With a firm belief that great startups are carefully built and not discovered, Atomic offers a fresh and insightful perspective on the journey from a startup's birth to its launch. Healey will also share his personal story of founding BoomPop, one of the companies incubated by Atomic.

Subscribe to Zypsy Spotlight wherever you listen to podcasts to learn more useful insights on what the future of venture capital looks like.

Show notes

Timestamp

00:00 Introduction

01:24 Healey’s career journey

07:31 Atomic’s unique venture studio approach

15:02 True value of a company

17:55 Highs and lows of starting a business

22:23 The giver, the taker, and the matcher

resources

Links

Healey’s personal website, LinkedIn and Twitter

BoomPop’s website, LinkedIn, and Twitter

Atomic’s website, LinkedIn, and Twitter

Show notes

Transcript

[00:00:00] Healey: If you look historically at the best returns of any VC general partners in history, it is always the operators that do the best. The big difference between what we do at Atomic versus normal venture fund is instead of spending time interviewing founders and assessing pitches and looking at decks, we just spend time building.

[00:00:16] Kaz: Welcome to Zypsy Spotlight. I'm Kaz, co founder of Zypsy, a design and investment firm that supports startup founders with brand building expertise.

In this series, we'll be exploring new form of venture capital, interviewing four leading founders and capital allocators in the venture ecosystem, sharing their insights on what the future of venture capital look like.

And today we're excited to have Healy, chief operating officer and a partner at Atomic. An industry leading venture studio behind a number of fast growing companies, including Hims and Hers, Bungalow, OpenStore, and BoomPop. One of the quotes I love from Atomic is, Great startups are built, not discovered.

Unlike traditional venture capital firms, which focus on most of their efforts on sourcing good startups, Atomic builds startups themselves and only invests in the companies they build. I'm excited today not only because Healy is working to develop Atomic's Venture Studio model, but also because he himself is the founder of BoomPop, one of the companies incubated by Atomic.

Let's deep dive in. We're cohost, I'm Kaz.

[00:01:22] Kevin: I'm Kevin.

Healey begins with his background, starting from his time in Nebraska and Riyadh leading us through his experiences at Wharton, the corporate world and the unpredictable landscape of startups.

[00:01:34] Healey: I'm from Nebraska. I grew up in Riyadh, Saudi Arabia for 16 years, came back to the States. Then I got into my dream school, which was Penn and specifically Wharton in Philadelphia. Shortly leaving Wharton, I joined a consulting firm in New York and honestly, it was a wonderful training ground. I really learned, a lot about just fundamentals, not just how to model, how to project, but how do you speak business? How do you speak to executives? How do you put Lego block information together? So executives can really understand it. The global financial crisis hit. I felt trapped there, honestly, but I was just happy I had a job. My then girlfriend now wife and mother of my children, my life partner, Rachel got into a master's program at Berkeley and I was trying to make my way up to the Bay Area . I was applying to Google and Facebook, all the places I thought you're supposed to apply to because I was following this known path of climb up the corporate ladder and you'll eventually be CEO somewhere.

I called up one of my good friends from college, a guy named Jack Abraham, and he said, hey, I'm running this company. It's called Milo. I need a VP of biz dev to come in and help me with partnerships more broadly. And a lot of the strategic stuff we're doing to help to hire out the team, like a number two person to help with the company. I called my dad and I said, Hey dad, here's the opportunity. He goes, why would you do that? He goes, that's so risky. You don't know how much money to make. They're not even making money. He goes, that sounds crazy.

Long story short, I joined and five months later, we're in conversations with eBay about M&A and seven months after I joined, we sell the company. And changed my life. I had $34 in my bank account, we could get married now because I could afford a wedding, which I was eternally grateful for.

I got addicted, and I realized that this incredible nonlinear, very risky path of starting a startup was the path for me. It was the octane level that I wanted. It was the type of accelerated learning and impact and upside that you could get.

I stayed on an eBay for a little bit as the chief of staff to the CTO. I convinced him and the CEO, I said, hey, I want to start a new division here called the retail innovation division, where we're going to take your entire thesis of everything you brought together eBay and PayPal at the time and Magento and GSI commerce, all in a red laser, all these kinds of properties let's create proof points and why it's a great thesis.

I thought that I had a really interesting angle on how the future of stores is going to evolve. So I left eBay, I started my first startup on my own. So my second startup overall within a few weeks was able to get a little over 4 million of seed capital.

One of my very close friends had become a general partner at a wonderful VC firm. We wanted to work together on this and we started off by building of all things. It was an interactive mirror designed for fitting rooms in fashion stores called Oak. And it was cool.

Honestly, we were 12 to 13 years too early, actually, they're just rolling out now. And this was back in 2015, but the way it worked is you'd walk into a fitting room. If you look at the proxy of conversion funnels online, it's a very similar conversion funnel in physical stores.

We just found that fitting rooms were both the highest conversion place in store and the worst NPS. Waiting around you can't find someone to ask for another size of pants. It was just wild experience. We built a mirror that when you walked in, came alive, you can adjust the lighting, you could ask for help and make recommendations on what sizes cuts and colors that you could ask for an attendant. And so we launched it. The product goes great to start, 18 months in, it's in a death spiral.

Retail is the wrong segment to target. My investors backed out. My biggest client wouldn't talk anymore because they're closing all their stores. This is what I call the valley of death. I had to go to my entire team is 15 people at the time.

I said, if you want to find another job, no problem. I will help you to find the best job I possibly can. And I love you. And I support you. We've been through a lot. However, if you are willing to stay, then my wife and I will pay minimum wage for as long as we can. And I understand minimum wage is really hard in San Francisco.

We got one shot on goal. And the craziest thing when I think about this, the entire team stayed, every single person and we turned it around. We grew it by 300 and something percent. We had five acquisition offers within six months and we sold and it was wonderful.

That deal interestingly enough, was selling to a company. At the time, which was the largest company that made those interactive ordering kiosks in the US, and you see those touchscreen kiosks, you order food. Zivello did all of those.

The founder said, look, I want to acquire you. I've wanted to have software as part of the equation. You're obviously a very talented software and design team. You're very talented at sales, but Healey, I want you to be the CEO. I want you to help me to sell this thing. I said. Okay, I can do that.

So I came in and it was a different league, we were making good money. We're like eight digits revenue. Ebitda. 75 person team. I came in with this idea, hey, I'm gonna turn this thing around.

Great team of folks. So I restructured a ton of parts of the organization, like introduce recurring revenue, introduce warranty, introduce software, restructure the sales team, brought in new leaders and long story short, 15 months later, we sold to Verifone owned by Francisco Partners, largest payments company.

It was a wonderful deal. It was a great outcome for everybody. Honestly, at that point in life, I was set free. So I was trying to figure out what to do in life.

Do I get back into the startup scene? So again, my great friend, Jack and I had been talking. He said, why don't you come join me? Come on at Atomic, come in as a partner, be my COO and help me to scale the platform. That was about three and a half years ago. Since I've been at Atomic, when I joined, we were, staff of 25 around 200 million total assets under management. We had 14 companies.

We've spent a bunch of time now growing the team, the practice, the discipline. We've now closed 2 funds since then, so we're a little under 800Million. The platform team is now, in the 70s and we have 40 something companies. One of those companies is my baby, which is BoomPop which of course I'd love to tell you about.

Kevin: Next up, Healey shares insights about Atomic's unique venture studio approach and how it differs from traditional venture funds. He will also share his dedication to fostering corporate community and connection, highlighting the importance of people in the business landscape.

Healey: Atomic is a venture studio which means we are a traditional LP, GP, limited partner, general partner fund structure. We have great LPs. And then partners who manage the allocation of capital.

The big difference between what we do at Atomic as a venture studio versus a normal venture fund is instead of spending time interviewing founders and assessing pitches and looking at decks and writing investment memos, we just spend time building. So all of our companies are started out of Atomic.

They start one of two ways. It's either a person first or an idea first. And we do all the initial seed funding, for the most part. We do a bunch of de-risking, thesis building, the product building. We are a team of operators, not a team of investors. And the reason I love that as a general thing to say is if you look historically at the best returns of any VC general partners in history, it is always the operators that do the best.

So Atomic, unlike a normal venture fund, which by the way, I'm not trying to be disparaging at all. I'm just trying to show a contrast here is we are effectively co founders with you.

We're in the trenches with you. We're making every decision, every nuance every pixel, every model we're with it with you. At Atomic, I do some normal venture stuff. You'd imagine like I'm on boards and I help the CEOs out with whatever they're going through, could be hiring executive talent, could be strategy, questions, could be fundraising. And I brand myself as the CEO's board member. Cause I know as a CEO, what I want out of a board member. I try to emulate that. If you're raising, I'm in it and I'm in the deck and I'm helping with the narrative and I'm helping you to think it through, or if you are about to hire someone. I'm writing the JD with you and I'm talking about what matters and how you make sure you manage culture as a scale. I managed the high level operations. Things at the P and L, the internal meetings, the team communication, it's a bunch of stuff that you have to manage the org.

I also oversee the majority of our 0 to 1 team. We have a wonderful group of principals and VPs. That are just maniacs in the best way. All they're doing every day is they're getting together, they're thinking of companies, they're writing investment theses, they're testing things out, they're building product, they're talking to customers.

Just making sure that they're on track, they have what they need. That's the Atomic side. It's a ton of fun.

And then BoomPop is, a passion project for me because one of the things that I just mentioned, is that people are the most important assets of any company, period. You are a full software company. Yes, for sure. But we all know the software decays. You need people behind the scenes making those decisions, being culture champions, being customer champions. So knowing that, and my affinity towards work, we spend what a third of our life at work, at least. A third of it asleep. The majority of our day we're up and I realized all my friends, my close friends are people I used to work with. And so when the world went remote at Atomic, it was clear to me that it was not gonna change and we would be distributed moving forward, but it was gonna put to test our ability to maintain that feeling of connectivity and togetherness.

So in panic, what we first started to do, we found all these virtual experiences where you'd have a professional host. Who would take you through a zoom experience. It could be a wine sommelier sends wine to everyone in your wine tasting in your rooms, it's fine.

And he's showing you the back of Italy, what region of Italy it came from, or maybe it's a magician who's doing like a Christmas magic show for the kids, or it's like a game show we've made for the leaderships, whatever it is. We did this, it started ripping around the portfolio. Everyone loved it.

And so BoomPop actually started as a company called BoomBox initially. It was a virtual events marketplace. We could go and find these wonderful hosted virtual experiences. I remember I emailed 150 friends. I said, Hey, any interest in this marketplace? Here's a link. First month we did $48,000 in sales.

I was like, wow. Second month we did $72,000. Third month we did $110,000. And you fast forward to the ending of our first year. We had brought 60,000 people together. We had 2,500 corporate logos. Our NPS is better than apples. We did a little over 6,000,000 to TTV that 1st year. It was great.

Then we turned the corner to 22 and we raised our Series A from my good friends over at Acme formerly Sherpa Capital. They're early into airbnb, SpaceX, Uber. I met them by the way, cause they had passed on investing in Oak earlier, but I maintained a relationship cause I loved them.

They're so fun. And all of our customers started saying the same thing. They said, virtual stuff is great, but gosh, the world's opening up, we need to get together. The challenge for us is we don't have anywhere to go anymore.

Like offices are gone. We dished our leases and everyone's all over. So we need help organizing off sites and events, both for our teams and for our clients. But it turns out now that we're just giving this blind budget to all of our like engineering managers and VPs of design. They have no idea what to do.

So they're wasting time finding out the hard way that to plan an event. If you want to book over 10 hotel room nights, you got to call the hotel. You got to email the salesperson. RFPs are part of it. If you're, an engineering manager having to talk to someone on the phone about making a booking.

And so they said, can you help us to start planning these really wonderful events and give us a software tool to do that? And initially my answer was like, no way. That seems really hard. Cause it is hard. And then I started to see all these really interesting data signals that made me a little more excited about it. The first was office space occupancy is now at roughly [00:13:00] 48 percent of what it was pre pandemic. There is more money in outer space that used to be like office rent than most industries combined. It's like 1.5 trillion a year is up for grabs. All that money is funneling. I noticed these big companies like Airbnb, Shopify, Instacart, Reddit, we're hiring out internal event teams now, which felt crazy to me.

Just to help with this problem and then finally we surveyed all of our customers and said, look, how helpful would this be? Where are you going to put your savings from office space? And would it be helpful to help you out with events? And I said, look, 70 percent of our savings is going to go towards events.

30 percent was keeping the balance sheet for longer runway. So yes, we need the help. Perhaps begrudgingly, we started a next gen travel company with the goal of making it as easy to plan an amazing corporate event as buying items ecom. Today, we have a little over 5,000 clients. We brought a little over 150,000 people together.

We do more sales in a quarter than we did our full first year. Virtual events. When we started, there's a B2B approach here that I think is a pattern that I tend to believe is one that works. It's not the only one that works, but it does work, which is you find a problem and you stand up a manual operation.

So we stood up 10 event planners around North America. And we said, your job is to service a customer. I understand who's the customer, one of the main pain points, and how do we reach them efficiently? We've figured that out. Then we said, okay, what are all the possible things, all the features you would need to make this full process seamless.

We broke it all down. We measured how hard it is, the impact, the KPI. And we said, okay, we're going to productize it and progressively you're going to get to a place where this entire thing is productized so we can say now it's up to you. You can continue to work with our event planning team with software or here are the keys you can plan your entire own event ecom style.

That's where we're going. And it's super ecstatic. Our net revenue went from single digits initially. And our gross margins were awful, like mid fifties. Now we're, 15 percent net revenue and our gross margins are low seventies.

[00:14:57] Kevin: We're about to dive deep into the DNA of Atomic, but where does Healey believe the true value of a company lies?

[00:15:03] Healey: Atomic is a bit of a black box. We intentionally don't share a lot of how we work.

I think the studio model is exceptionally hard to nail and I do think that, Jack, to his credit and Atomic to the team's credit is doing really well as an organization, how we're thinking about it. We have incredible people, and again, goes to my BoomPop story goes to every other startup I've done.

Every company is in the people business and the sooner they realize that, the more successful they are. And so that is a massive thing that Atomic index is on, is finding amazing people. I would argue that if you were just to meet the Atomic team members, come for one of our times when we all get together. You're like, Oh my gosh, everyone is so smart, so high octane, so ambitious, so kind, so low ego, has such great ideas. The people are truly amazing. And then the question becomes, okay how do you attract and retain good people then if that's the case? I could say the usual autonomy, mastery, purpose thing, whatever.

But I think the actual answer is you hire amazing people. You incentivize them well, and then you get out of their way and you just support them. Our job is to give them cheat codes and to give them shortcuts and to leapfrog their evolution as a company or as a business idea through all the tools and the know how and the centralized knowledge base and the connections we have.

That's our job to make Atomic the best place on the planet to build a company, full stop for anyone. All studios are created differently. I think not all studios can provide capital and I always do question that model where it's you're taking assumably some sort of compensation for providing services, but you have to really point to those services being super successful. We've obviously concluded at a model that we think makes the most sense. I do think it works. That comes down to what are you optimizing for to, the one thing I will say about Atomic, cause obviously I'm being a little vague here, but the currency at Atomic is time, that's a currency. And I love that. One of the things that Jack believes in addition to, what I mentioned, like this broader principle of you get amazing people and you give them freedom to operate is. You have limited shots on goal in your life, limited time in the height of your career.

I think about that all the time. I always say, this is part of my like X amount of good years I've got left. And there's a point where I'm not going to be able to put that in it. I'm not going to have the same energy. And so during those years, how do you make that the highest leverage years of your life?

What do you do? And if you can, for example, spend a limited amount of capital. And find a true negative, not a false negative, but this is truly not a good idea. How do you handle that as an organization? We celebrate it. You did an awesome job. You put your all into it. We definitively found out this is not the opportunity we thought it was.

Great job. Shut it down. Take two weeks off. Come back again. And so I think there's that mindset, which can really help, which I think is something that Atomic has embodied as well.

[00:17:47] Kevin: Up next, Healey will share more details about the highs and lows of starting a business. As well as his advice for first time founders.

[00:17:54] Healey: The mindset advice is whenever someone comes to me and say, I want to start a company, I say, don't do it. No. I want to be an entrepreneur. It looks so awesome. I go, no way. Don't do it. And if a third time they go, no, you don't understand. I'm going to do this no matter what it takes. And they had that force of nature aspect. Then I go, okay, maybe you should go for it. How can I help? Your mental model has to be one of such tremendous resilience, such an ability yourself to nail your conviction and not need outside reinforcement. You have to have that. I would say that it is such a complicated job. It's very hard. It's not for the faint of heart. And frankly, you don't have to do it. There's many other great jobs that pay well. But if you want to go for it, you have to know what you're signing up for. Know that the highs will be very high. The lows will be very low. It'll be more of those throughout the course of the day and throughout the course of the week and eventually throughout the course of the year. But that's what it feels like.

The second is. I think people tend to fall in love with their own idea.

They do this I call it armchair anthropology, where like you're observing the world. This is a problem I need to solve. And you start building that product. That's the product first approach. And I think people under index on the fact that you don't necessarily need a product to find product market fit.

You would very little spend and very minimal amounts of effort. Can figure out definitively whether or not this is a good idea. And if you can effectively scale and distribution channels, which includes not just testing on distribution, but it also includes doing back to the envelope math.

As an example, if you have a market size, like there's a reason that venture capital firms always ask for the market size or something. The reason is that if it's not big enough, it is going to become exponentially more expensive to grow your top line in that industry.

As a general rule of thumb, but around 5 to 7 percent saturation, it becomes really hard and really expensive for you to reach a big company of enduring meaning and value and to grow. Your growth beyond that. And so the question is, if you get 1%, 2%, 4%, can you be over a hundred million dollars of net revenue a year?

If the answer is yes, you can become a public company and yes, you can be a fund returner potentially. That's how they think about it. So the second thing I'd say is yes, trust your instinct, but do the research on market size on the zeitgeist on the why now on the distribution channels and see how much you can de risk before, like you give me 5,000 and a Facebook and a Google login. And I can tell you yes or no. If consumer is good right now, I can do it in 48 hours. Definitively. Here's a threshold to conversion rates. Here's why it matters. So that's the second thing is mindset.

The third thing is, if your assumption here is you want to be a VC back founder, because it's a different game. A VC now is investing in you only if they think you can be in the thousand X returner. If you go to VC investor and say, hey, I can create a 12 percent EBITDA business. It grows 20 percent year over year for the next 20 years. They're going to be like, I'm not interested. It has to return my fund, which is a weird thing to get to know. So third thing I'd say is if you do want to be a VC back founder, one of the first things you have to do, you have to understand deeply, truly, and intimately what it's like to be in a VC shoes, how to think about investments, how they assess it, how they want the story and realize there are, there's a formula you can follow. There's a 12 point formula in your narrative. I promise you, you show that to anyone and they'll be like, yep, I get your business.

Super easy. There is NVCA standards of how term sheets come together, how deals, how your cap table should look. If you follow it, it just reduces friction for you. Vesting, there's all these things I think as an outsider, you're like, I don't understand how it works. The answers are there and it can be a massive shortcut.

If you want to be a VC back founder, I would say get to know VCs, get to know how it works and it will invariably help you to do all the things you're talking about. To hire great talent, to realize you have a good company, to tell the story. So maybe those are the three things. There's a bunch of other stuff I'm sure I could go through on hiring practice and how you operate companies.

But broadly it's one, make sure you're really ready for it. Two is know this could be a big company and de risk your own opportunity costs. And the third is truly understand the investor landscape. If you are going to be in VC and know what motivates them.

Otherwise it will drive you crazy. And it's like a mystery.

[00:22:15] Kevin: In this final segment, Healey will discuss how the giver mindset influences company dynamics and personal interactions. Is it a sustainable way to engage with colleagues and clients?

[00:22:25] Healey: One of my favorite authors of all time is Adam Grant. The average person when they ask themselves, what does it take to be successful in business says hard work, talent, and ambition.

That's the golden three. And he goes, yeah that's all true, but you're missing what is arguably equally, if not more important, which is interpersonal skills, how you treat other people really matters. He talks about reciprocity models at work, which basically is. You could be a giver, a taker, or a matcher at work.

A giver is, I'm going to give you with no expectation of anything back, and I'm just going to help you because I can. A matcher is, I'm going to give you something, you're going to give me something, and now we're equal. That's what most people tend to do. And you have takers, which are a little more predatory. I'm going to limit my personal cost, I'm going to get as much out of you as I possibly can. And he starts off his book, it's called Give and Take, by the way. He says, if you look at the success pyramid, who's at the bottom of the pyramid? And the answer is givers at the bottom. They get trampled over, they can take advantage of it.

That's really hard to hear. So he says who's at the top? Is it takers? Is it matchers? Actually it turns out. Givers are also at the top of the pyramid because if everyone else wants you to win, it's a lot easier to win and givers tend to bring everyone up with them as they win.

It's actually the only way that humanity works is if you trust other people by default, you can't default, not trust. Otherwise, how would you drive if you didn't think anyone listened to any stop sign or you have to trust people to do the right thing and give.

I love doing this stuff. If this helps you out, I'm pumped about it's great. Why not? I think you're doing a beautiful thing and I don't really have an expectation for anything back, honestly. That's a wonderful message for founders too, which is, when you're making these fundamental decisions, how you set up the ownership of your company and the capitalization table, how you compensate people, how you communicate with people.

If you are a giver first. Everyone will pay attention. Everyone will want to work with you. People will want to be your clients, want to be your partners. And it just makes the world an easier place. And on the contrary, if you're a taker, people might get enthralled by your personality to start, but eventually they're going to figure it out and they will not want to work with you. I think broadly, there's an operating way as a founder where you can go and you come with this abundance mindset and you're giving, and you're helping other people , as long as you're careful about not overextending yourself, can be a real winning mindset.

[00:24:45] Kevin: If you liked this Spotlight episode, please leave us a review. We're just starting out, so every review really helps. Follow us on Twitter at zypsycom if you don't want to miss an episode. That way, you'll be able to see every time a new show goes live. That's all from us today. Thank you for listening to this episode of Zypsy Spotlight.