StoneAlgo’s Devin Jones on “Zillow for diamonds” + Mar Hershenson on the art of picking | E1766 | Summary and Q&A

TL;DR

Successful venture capitalists like Clive Davis and top firms like Sequoia Capital have shown that picking the right investments requires being in the right place, having early wins, and a healthy dose of paranoia. It's crucial to develop insights about the market, evaluate founders based on their market knowledge, execution, and character, and combine intuition and rational thinking for successful investments.

Key Insights

• 😉 Being in the right place, having early wins, and maintaining a sense of paranoia are critical factors in achieving repeated success in any industry, including venture capital.
• 🤩 Developing insights about the market, evaluating founders based on their market knowledge, execution capabilities, and character, and combining intuition and rational thinking are key to making successful investments.

Transcript

it was actually through finding out about launch from all in huh and then through looking you guys up on crunchbase and seeing how active you were in this stage of investment and make my own spreadsheets obviously to kind of like qualify who who are the VCS that were going to be interesting to us and who who is the likeliest to be interested in us ... Read More

Questions & Answers

Q: How did Clive Davis achieve repeated success in the music industry?

Clive Davis achieved repeated success by being in the right place, having early wins, and maintaining a sense of paranoia. He identified emerging music genres and signed top artists, which attracted more talent. His persistence and dedication led to decades of success.

Q: Why does market knowledge matter when evaluating founders and companies?

Market knowledge is crucial because it shows that founders understand the landscape in which their companies operate. It enables them to identify opportunities, make informed decisions, and adapt their strategies accordingly. Strong market knowledge increases the chances of success.

Q: How important is execution in the evaluation of founders?

Execution is vital because even the best ideas can fail without proper execution. Founders who can turn their ideas into reality, demonstrate a track record of success, and effectively lead their teams are more likely to build successful companies.

Q: Why is character an essential factor in evaluating founders?

Character is crucial because building a successful company requires integrity, resilience, and ethical decision-making. Founders with strong character traits are better equipped to handle challenges, build trust with stakeholders, and make choices that benefit their companies in the long run.

Summary

In this video, Jason Calacanis discusses his investment decision-making process and the importance of transparency in the early-stage investment community. He introduces his portfolio company, Stone Algo, a marketplace for diamonds that provides price estimates and insights to help consumers make informed purchases. Devon Jones, co-founder of Stone Algo, joins the conversation to share the journey of building the company and its unique business model.

Questions & Answers

Q: How did Devon Jones come up with the idea for Stone Algo and how did he build it?

Devon shares that the idea for Stone Algo came from his own need for a reliable and transparent diamond marketplace when he was purchasing his wife's engagement ring. He and his co-founder, Jason Modica, initially developed a pricing algorithm using Microsoft Excel and later taught themselves Python to build a real-time accessible platform. They focused on aggregating diamonds and providing useful insights to customers, such as fair price estimates.

Q: What is the business model for Stone Algo and how has it evolved?

Stone Algo initially started with performance-based affiliate marketing, where they sent traffic to online jewelers' websites and received a commission for successful sales. However, this model proved challenging due to cash flow constraints. To drive organic growth, they built products that ranked highly on Google for relevant keywords and attracted a large number of visitors. They eventually transitioned to a cost-per-click model similar to Google Ads, which allows them to generate revenue from quality traffic.

Q: What is the diamond supply chain for natural diamonds and lab-grown diamonds?

For natural diamonds, the supply chain starts with mining in specific countries rich in diamond deposits. The diamonds are then sent for cutting and polishing, often performed in India. Afterward, they are distributed globally, with many entering the United States through the Diamond District on 47th Street in New York City. Lab-grown diamonds follow a similar supply chain, where diamonds are created in labs using advanced technology and then distributed through the same channels.

Q: How does Stone Algo ensure the authenticity of diamonds in the marketplace?

Stone Algo works closely with grading organizations, with the Gemological Institute of America (GIA) being the most prominent and trusted one. The GIA verifies the authenticity of both natural and lab-grown diamonds by laser-inscribing a unique certificate identification number on the diamond. Stone Algo uses this information, along with other data, to generate accurate price estimates and provide verification services for diamond owners.

Q: Jason Calacanis mentions the importance of product excellence. How has Stone Algo focused on product velocity and differentiation?

Devon emphasizes the value of developing unique and useful products to drive organic growth. Stone Algo recognized that people were searching for specific diamond-related tools, such as price calculators, and built these tools to rank highly in Google search results. By leveraging their unique data sets and combining them in novel ways, Stone Algo created products that differentiated them from other competitors. They focused on providing useful insights and prediction models to enhance the consumer experience.

Q: Jason Calacanis mentions the importance of Capital efficiency. How has Stone Algo approached this in their business?

Stone Algo initially bootstrapped the company and relied on sweat equity to keep costs low. They used performance-based affiliate marketing to drive growth when they had limited traffic and resources. As they grew and developed unique products, they shifted to a cost-per-click model that allowed for better cash flow management. By being resourceful and capital efficient, Stone Algo was able to achieve significant growth without raising large amounts of funding.

Q: How did Stone Algo discover Launch and decide to reach out for potential funding?

Devon explains that a competitor initially approached him with an offer to join their company, recognizing the value and potential of Stone Algo. Through discussions with this competitor and their connections in the VC community, Devon learned about Launch and its proactive investment approach. He researched Launch's activity on Crunchbase and used his own spreadsheet analysis to identify potential investors. Devon then cold-introduced himself through Launch's website, leading to the investment opportunity.

Q: How does transparency in the early-stage investment community benefit both investors and founders?

Jason Calacanis emphasizes the importance of transparency in sharing investment decisions and strategies publicly. He believes that early-stage investors and founders are not in competition with each other but rather collaborating to support startups' growth. By openly sharing investment decisions and strategies, investors can build their reputation and ensure they are part of promising startup journeys. Founders benefit from investors' transparency as it attracts more investors, increases credibility, and potentially leads to more funding opportunities.

Q: What expectations does Jason Calacanis have for Stone Algo's growth and revenue?

Jason expresses high confidence in Stone Algo's potential and predicts it will become a unicorn company, reaching a valuation of $1 billion or more. He challenges Stone Algo to achieve $100 million in revenue and believes they can accomplish this goal with only two rounds of funding. Jason advises the founders to focus on sustainable growth and capital efficiency to ensure a successful and scalable business.

Q: How does Jason Calacanis maintain a sense of urgency and responsiveness in his investment process?

Jason emphasizes the importance of speed and responsiveness in the early-stage investment process. He aims to reply to founders within 48 hours after reaching out to his firm and ensures that a phone call is scheduled within a week. While he values thoughtful decision-making and proper due diligence, he wants to maintain a sense of urgency to match the efforts of hardworking founders.

Q: How did Stone Algo find and connect with investors for their funding round?

Devon explains that a direct competitor in the diamond industry connected him with prominent VCs and provided warm introductions. He also researched VCs independently, using platforms like Crunchbase and his own spreadsheet analysis to assess their potential interest in Stone Algo. Cold-introducing himself through Launch's website allowed him to connect with investors actively looking for promising startups in their stage of investment.

Summary & Key Takeaways

• Clive Davis, known for his success in the music industry, emphasizes the importance of being in the right place, having early wins, and maintaining a sense of paranoia to consistently pick winners.

• Venture capital is a challenging industry, with statistics showing that only a small percentage of companies secure funding and achieve unicorn status. However, top venture capitalists like Sequoia Capital have managed to beat the odds.

• When evaluating founders and companies, it is crucial to assess their market knowledge, execution capabilities, and character. Combining intuition and rational thinking is vital for making successful investment decisions.