CIBC Innovation Banking Podcast

Michael [00:00:01] Some like to be a big fish in a small pond. Others enjoy the hustle of being the small fish in a big pond. But for the founder of Two Small Fish Ventures, Eva Lau isn't just swimming in a big pond. She's swimming with the sharks of Silicon Valley successfully. 

Eva [00:00:17] It's very easy to share what you have done right and make it successful. But there were actually much more learnings by sharing what didn't work so that the entrepreneurs can understand why the thought process led you to make that decision and why the circumstances made it not work. 

Michael [00:00:42] Hello. I'm Michael Hainsworth. The CIBC Innovation Banking podcast explores the world of startups, growth stage companies and late stage companies that have made a big splash in their industries around the world. From her early days at Wattpad with co-founder and future life partner Allen Lau, she leans on her experience exponentially building a user base to help startups leverage the network effect to great effect. The Toronto-based early stage investment firm cuts checks for as much as a half million dollars to startups that mine the data that comes from a strong customer relationship, and mentors firms using a framework she calls ASSET - to turn that data into growth and profits. But doesn't Lau want to be the big fish in every pond. You named your angel investing firm Two Small Fish. Why? 

Eva [00:01:42] Initially, the thought was me and Alan, my husband, the CEO and co-founder of Wattpad, needed an angel investment vehicle. And we thought we are just very two small fish in this ginormous ocean of innovation. And if we could just contribute very little, it will be already very exciting. Remember, in the 50s, since the semiconductor industry, you know, have that boom in Silicon Valley, the name of Silicon Valley. There are many, many startups that grew out from that ecosystem, and we have seen over and over again early stage employees of those successful companies, founders of those successful companies not only reinvest as an angel to share their capital, to share their experience, many of them actually turned themselves into venture capitalists, and that's how that mandate of "let's just kind of reinvest back into our ecosystem" has made it such a successful American dream stories in, you know, just south of the borders. So I strongly believe that in the last so many years, that I have been in the ecosystem here in Canada, we now have that critical mass happening. You know, if we look at the Shopify early stage employees, and executives and founders that are heavily investing in the ecosystem right now, either as an angel or as an angel group, you know, the latest Backbone Angels founded by all those ladies in the Shopify ecosystem is an awesome example of how they give back and reinvest in the ecosystem, not only just capital wise, but experience wise. You know, if we're looking at the two small fish analogy of everyone sharing what they have, we are seeing the early signs of it and I am very, very bullish about what this whole philosophy will do to drive the ecosystem. 

Michael [00:03:42] Women represent less than 20 percent of the partners of Canadian VC firms. How do we change that? 

Eva [00:03:47] We certainly need to fund more of those partners in the VC world. If we look at the composition of Two Small Fish Ventures right now, initially certainly co-founded by myself and Allen, Allen's, involvement has always just been an advisor. It was me running it as a single GP in a fund. Recently we have grown the fund to four people. All four of us are people of colour. I found that people who have that exposure of diversity either they themselves are immigrants or born and raised in other countries and come here. We tend to have a broader view of what global economy looks like. If I looked at my portfolio companies without actually setting any target goal, I naturally achieve, you know, a 40 percent of diversity in terms of people of colour or women in my portfolio companies in terms of supporting the founders. So we can see that once you put diversity in the mix of the decision making rank, naturally, we have the tendency to attract entrepreneurs who have that global view. 

Michael [00:04:52] For Lau, the role of angel investor is that of guardian angel. After raising the Series B round at Wattpad, she took some time off to figure out what's next. During a hiatus meeting with other entrepreneurs, Lau learned that they were hungry to learn about the successes of others. Those meetings informed Lau's model for the firm. Mentoring is a big part of her role in Two Small Fish Ventures, sharing with the next generation the lessons learned from startup life. It led her to focus on building a framework that helps fuel exponential growth. With mentoring a big part of your role, how do you share the war scars of being an entrepreneur with the next generation? 

Eva [00:05:36] First of all, I believe that sharing war scars is a necessity when it comes to mentoring entrepreneurs. It's very easy to share what you have done right and make it successful. But there were actually much more learnings by sharing what didn't work so that the entrepreneurs can understand why the thought process led you to make that decision and why the circumstances made it not work. What happened when you made a mistake or when things didn't work out? The most important thing is what you have learned from that lesson so that you make that decision next time around in a much more intelligent way. 

Michael [00:06:20] OK, so then share with us one of your more embarrassing mistakes that helped you become a better entrepreneur? 

Eva [00:06:28] Well, absolutely no problem. And this is something that I have shared, you know, with entrepreneurs quite a few times. So at one time, online chat within an app, you know, since the success of WhatsApp and Facebook, to integrate that kind of a feature in the product became such a highly demanded featured on Wattpad. So a lot of our users came to us particularly, you know, sending messages to the Community Manager at the time who was me saying that, "Oh, we need to have an online chat feature on Wattpad, we need it, because I need to chat with my friends," and things like that. So I went to Ivan, who was the CTO at the time, and I said, Hey, look, Ivan, this feature, it's a highly requested feature. Facebook has it many other applications have it, we must have it too. And Ivan was like, No, no, no, you know, we shouldn't be doing this because our team, we're very, very small. We have other features that we have to do, and I was like, No, Ivan, this will increase engagement and so on and so forth. So Ivan said, you know what Eva, why don't we do a pilot of the feature on the website only and not fully integrate it into the app. Certainly, initially, it was awesome because the users that were requesting it were loving it on the website and they were, you know, chatting with each other and increasingly, you know, pinging the Wattpad profile and saying, "I want to chat with Wattpad", "Is the Wattpad pofile a robot, or is that a real person behind it?" And they were having so much fun. But what we found out was that once users start chatting on the platform at that time, they no longer come to our platform to do what we ultimately want them to do, which is to read and write stories. That feature did not necessarily contribute to the greater need of the product, meaning that we want to encourage writers to write more stories. We want to encourage readers to go read more stories, share the stories with the rest of the world. And in a way, it was creating noise rather than serving the larger ecosystem. 

Michael [00:08:39] You've told me that your focus is less about distributing seed money and more about helping entrepreneurs build the network effects. The more usage a platform gets, the exponentially more valuable the platform becomes. How does an entrepreneur leverage that? 

Eva [00:08:54] If we look at the success of nowadays technology companies, including Google, the more people search, the Google engine becomes far more intelligent and gives you the proper match of what you were looking for. That's a very typical data network that they have built based on data network effects. If we look at Facebook, a lot of people may not necessarily like it anymore but look, you are still on Facebook because that's where your network of friends are still on. So we can see that the more usage of this platform, the platform itself becomes valuable, that the switching costs of the users are getting more and more difficult to switch away from. So in Canada, if we look at Wattpad, it is a social network but deep down it is a data network on stories, so that we have the largest repository of fictional stories on the internet. We have created this ginormous data network of the intricacy between the interactions on the stories, and that's how we created the predictive models to predict the success of these stories, and turning these up and rising great properties into TV shows and movies and books. 

Michael [00:10:18] So it seems like one might think that to leverage the network effect means you have to want to become the next Facebook, the next Uber. But it sounds like that's not what you're talking about. 

Eva [00:10:28] I'm talking about, you know, entrepreneurship focused on building defensability and value add to the customer, to the users. So yes, you can see that, you know, becoming the next Google, the next Facebook could be a lofty goal. But also think about the network effect that you can bring the value to the customer. So for a B2B company, they may be just thinking about building a solution for, let's say, you know, the fintech space. The data, the insights, the data network effect that's created in the product could actually provide more intelligent recommendations to their users. So that alone, it's very valuable because consumers or customers now not only get benefit from using the product, but getting the insights and the knowledge that other users or other customers have contributed so that this particular user can make smarter decisions on the platform. 

Michael [00:11:32] Let's talk about this framework that you've created called ASSET, and we should start by explaining the acronym and how it works. A stands for Atomic Unit. S is the seed, the supply and then scale the demand side, and then you've got enlarge the network effect and track proprietary insights. I understand most of those letters in that acronym, but what is an atomic unit?  

Eva [00:11:56] Atomic unit, the way that I define it is the smallest product unit that you know, your users of the platform congregate around, and a lot of people ask me who defined that atomic unit? I would say it's absolutely up to the entrepreneur. So let me give you an example. Let's say you and I are kind of like discussing the imperfection of matching a talent with the job. So I'm an employer. I said, Hey, I am a startup. I have all these great positions, but I never find the right candidates for it because no one knows I exist and no one knows I have openings in my company. But you said, no, no, no, Eva, look at me. You know, I am Michael. I have all this great experience, but I tend to actually end up always landing and a job that's, you know, doesn't bring out the best of me because people didn't understand the value I could bring. So I say, OK, let's just kind of go about our own startup, and we have heard about this ASSET model. So let's just kind of use that to be our foundation. So I said, OK, maybe I want the job posting to be the atomic unit so that I can go curate, you know, the best jobs in Toronto from all the startups so that I can have a great network of job posting in the tech ecosystem. So what I end up building was actually very much like a job posting network, like an Indeed, whereas you said, no, I think we should highlight people's resumes, people's, you know, job credential. So I'm going to build a network of people's profile or people's resume. So what you end up building will work very much like a LinkedIn, so you can see that by defining the atomic unit differently, even though we're both trying to solve the same problem, we will end up having two drastically different products and approach of seeding the supply of the atomic unit. So using the same example, if I were to seed the supply of job posting, then the very first thing I would have to do is to engage with employers because I need them to tell me what jobs they have. Whereas in your case, you need to have an approach to engage with perhaps, influencer type people to show off their resumes on your platform, to show that you know, this is the platform to talk about or brag about how awesome you are. So that approach of seeding the supply is drastically different than scaling the demand, which is obviously even more different in this example. 

Michael [00:14:36] After raising $12 million at Two Small Fish, Eva Lau is bullish on the Canadian tech ecosystem and urges us to not underestimate it. She's looking at the fluidity of the internet and how COVID-19 has showed us that we can work remotely. She sees more companies being built across Canada, with teams spread far and wide. It's brought more international opportunities to both the clients and Canadians, and Lau believes she can do far more than what she's accomplished so far. The natural path is to grow the fund size, but she doesn't believe a fund needs to be a few hundred million dollars to be a significant contributor to the ecosystem. You've said Canada's tech ecosystem may be thriving, but it lacks massive scale. What does massive scale look like to you? 

Eva [00:15:25] Oh, that's a very challenging question, because I think massive scale, a lot of people will automatically have thought about, you know, south of the border. I think our success will probably look slightly different than south of the border because we have a very different population, you know, than the US. So inevitably, we will have less startups coming from our ecosystem and relatively less in terms of actual absolute number of all these kind of internet scale success companies from Canada. However, I strongly believe that we do actually have that kind of talent and support to create these success stories. So when we're talking about massive success, if we look at typical VC model of, you know, one company you know, out of 10 will make an astronomical return on the portfolio. So we have to invest in far more companies than what we are doing right now. That's why I am very strongly advocating for investing in early stage startups here in Canada. 

Michael [00:16:44] So what does the environment for angel investing look like as we hope to put COVID-19 behind us in 2022? 

Eva [00:16:51] I think this is actually the best time to invest in startups right now, because every time when there's an inflection point in the ecosystem, we will see a new breed of companies that are in the making to help advance the world in a new model. So think about back in the day when the dot com bubble burst, a lot of people thought that, oh, internet was not here to stay. I mean, of course not, internet, maybe at that time, maybe there were a lot of dot.com properties did not make it. But if we also look at that, then we can see that has literally laid a foundation for Google to be successful because of that data network effect that they have built to become the defacto search engine. 

Michael [00:17:35] The natural path for Two Small Fish is to grow beyond the 12 million investment funds from corporate investors like CIBC and others to meaningfully lead a deal. You need to have a bigger fund to write bigger checks. How big do you want to grow and how do you get there? 

Eva [00:17:50] At this moment, I do not have the aspiration to grow it into a billion dollar fund. When you have such a big fund, you have to do things differently. The way that I look at it is Two Small Fish Ventures in a way, it's a startup fund in the ecosystem doing things differently. Most importantly, I want to have the ability to work with founders by sharing my experience, or I should say, our collective experience in the ecosystem. So one way that is different of Two Small Fish Ventures is I'm supported by a lot of founders in the ecosystem. Founders from when Wind Mobile. founders from Wave Accounting, Freshbooks. They are all very supportive of myself and the fund. So collectively, we are already sharing knowledge and capital of these founders through the fund. But at the same time, you're right, we need to write bigger checks to make bigger impact. So certainly I will be raising a bigger fund. Probably the next one will be like a 30 million, 50 million dollar fund so that we can bring more significant impact, perhaps leading deals in the ecosystem rather than just co-investing. 

Michael [00:19:01] Eva thank you so much for your time and insight. This has been fascinating. 

Eva [00:19:04] Thank you for the opportunity. 

Michael [00:19:07] Eva Lau says Canada has the talent, we just need to provide the support to avoid a brain drain in two key areas of Canadian expertise. She admits it's inevitable that VC companies will go south of the border, but she sees artificial intelligence machine learning, and block-chain as two key technologies in which Canada shines. For companies that can leverage the network effect, seed their supply side, scale the demand side and track proprietary insights, Lau believes Canadian entrepreneurs stand tall among their international peers. I'm Michael Hainsworth. Thanks for listening.