May 25, 2018

Arlan Hamilton 4: Hacks

by StartUp

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Episode Notes

The Story
Arlan has only a few months left before her cash runs out out when a seemingly perfect opportunity comes along. Is it too good to be true? Also, we take a look at Arlan's past as an entrepreneur, before she became a venture capitalist. What did she learn? And can she avoid making the same mistakes?


This is the fourth episode in a six-part series on Arlan Hamilton and her company, Backstage Capital. 


The Facts:

Peter Leonard mixed the episode. 

Mark Phillips wrote and performed our original theme song. 

Build Buildings wrote and performed our special ad music.
Additional music by Matthew Schuessler, Patrick Bower, Hybrid Wold Pups, and Bobby Lord.

For a list of our sponsors and show related offer codes, go to gimlet.media/OurAdvertisers 


Transcript

AMY: What do you mean you’ve had to hack everything else in your life. I’ve never heard you say that.


ARLAN: Really? 


AMY: Yeah.


ARLAN: When I learned what that meant a few years ago, I was like wow that’s what i’ve been doing my entire existence.

 

-music-


AMY: Hello and welcome to StartUp. I’m Amy Standen. We’re spending six episodes with a woman who has hacked venture capital the way no one else has. Her name is Arlan Hamilton. This is Episode 4.In the past - whenever Arlan ran into some seemingly unsolvable problem, she’d find a creative way to fix it - what she referred to as a hack. Now, it was late November. Her company, Backstage Capital, would be out of money on January first. Arlan needed to buy some time. Extreme hacking was in order. 


ARLAN: I still have not met anyone who has built a venture fund from absolute nothing from scratch without a prior connections or any sort of family legacy or any money to float them if things didn't go well.


AMY: There’s no one you could call and be like “what did you do”?


ARLAN: Exactly.


AMY: So when someone says to you like ‘Arlan, I can’t believe you’d sell your GP or sell so much of your GP’ what do you say to them?


ARLAN: Yeah. I say they haven’t been in my shoes. 


AMY: Selling GP - or General Partner carry (which you heard about in the last episode) was a hack. Rich venture capitalists don’t sell their carry - because carry is the most valuable thing a VC has: it’s your own share of future profits. And yet Arlan had been doing this, bit by bit, for years, just to pay her bills - staff salaries, travel, office space. Now she was getting ready to sell another chunk ... when the buyer ... put on the brakes. 


ARLAN: I just had someone today who I was counting on quite a bit of money. Tell me that not that it was not happening, but that it was delayed by quite a bit. People that have money.. Are not in a hurry, They’re not in any kind of hurry that you’re in.


-music-

AMY: Arlan was always in a hurry. She’d been in one kind of a hurry or another her entire life. 

This is partly because she grew up poor, and had been poor most of her life. But it was also because she had a propensity for shooting for the moon -  even when, financially, that was not necessarily a great idea. The more I learned about Arlan’s life, the more I saw this pattern repeating itself. And the best example I know - of Arlan’s tendency to take on hugely ambitious projects  - is the story of how she founded Interlude magazine. Interlude began in 2004. Arlan was 23. She had just moved from Texas to San Diego, following a girlfriend and she’d answered a craigslist ad for an apartment owned by a woman named Shana Brenion. 


SHANA: I had been just working on a typical corporate job for a while and I just kind of assumed that's how everyone did things was you were either in college or you were getting a job and that was just that was life. And Arlan kind of came out with this idea that she was going to put together a music industry magazine. From what I could tell, from with no experience in the field.  


AMY: Arlan didn’t have experience. She just liked magazines. And music. And - as with venture capital - she didn’t want to start small. She wanted to go whole hog, immediately. Which struck Shana as, honestly, a little bit nuts.


SHANA: I had been kind of in the underground comics scene a little bit. I was kind of aware of self publishing as a medium ... but I was aware of it in like the let's go to Kinko's and maybe if we're high-end, we’ll purchase a saddle stapler. She wanted to put together like a real high quality, on matte finish print, full color, huge-size magazine.Like she wanted to do a perfect binding. You know like she had in her mind, this beautiful image of a very expensive magazine to put together. And she just went for it.  


AMY: Arlan had a talent for getting people to sign onto whatever she was excited about. She’d always been a natural networker. She collected people. So for the magazine, Arlan was able to recruit writers and photographers who were willing to work for free. She got musicians she knew to give interviews. She had real legitimate bands on the cover! Fall Out Boy. Gavin Rossdale. Shana couldn’t believe it. 


SHANA: I was a agog that something like this could happen out of this tiny front bedroom in my apartment. It was insane. But when it came time to get the thing printed, Arlan was stuck. 


ARLAN: I tried to get loans, like business loans, I tried to get all kinds of stuff. Nothing worked. I asked my dad when he was alive. I asked him and he wouldn't do anything. We get to the point where if we don't have three thousand or six thousand, something like that, if we don't have that, we can't get it printed. So she did what Arlan does - exactly the same thing she’d do a few years later when she started her venture capital firm: She just started asking people, knocking on doors.


SHANA: I thought she was crazy. I thought she was bonkers because why would a rich person give her a bunch of money for this vanity project. Why would anyone purchase a magazine that they had no you know no confidence that a second issue would be forthcoming. Why would you subscribe? Why would you pay money down for that? 


SHANA: I realized it was to be a part of something. She was just really good at communicating what that something was in her vision and then bringing that into reality. Interlude had subscribers. Fan mail. Hot Topic picked it up to sell in their stores. But Arlan was spending every penny to print the magazine. It was obvious to Shana that Arlan was broke. 


SHANA: One thought that would cross my mind as the boxes of magazines were building up in the apartment was like, so where's the rent from last month? 


-music-


SHANA: She was always kind of living hand to mouth and at some point, she was a couple months behind on rent and she kind of approached me and said look I value the magazine. But I also value our friendship. You've been fronting for a while. I think it might be better if I found another place to live. She voluntarily kind of did that and then made good on the rent that she owed me. 


TERRA: I knew what it could have been. And I wanted it for her. 


AMY: Terra Naomi is a musician. She lives in Los Angeles. Arlan had managed some of her tours. And when Interlude started going down the tubes, Terra is one of the people Arlan reached out to. Terra dug up the email on her laptop. 


TERRA: Mmm yeah this is the one. This is the one. 'Going a little insane' is the title of it. You know it's a long e-mail and she's saying, I need your help. Can you help me think of something, some sort of solution to getting at least thirteen thousand dollars in a short amount of time.’


AMY: All those subscriptions she’d sold, and now couldn’t afford to fulfill - this haunted Arlan. The email went on. 

 

TERRA: ‘I get emails from people every day, every single day, asking what's going on. Some of them are fine, some of them are mean, some of them are confused. I'd be all three if it were me.’  


TERRA: She didn't know what to do and I didn't know how to help her either. I didn't have any extra money either. 


AMY: Arlan describes this as one of the lowest moments of her life. She had convinced friends and friends of friends to loan her money for Interlude, and now she needed to pay them back. She had no hack for this situation. Being in this much debt, especially to people she knew, was devastating. 


ARLAN: I was inconsolable. I thought life was over. I was really a wreck. I just knew that I was really good at making something happen, like magical will happen. But the business side of it was just, I don't know.


AMY: The business side was not her forte, not yet. But making magic happen - Arlan was confident about that. She was good at having a vision for something big and important, and then just going for it, with what seemed like total conviction that it was the right thing to do. And because of that conviction, she didn’t do things incrementally. She started big, right out of the gate - whether it was with a full-color print magazine, or the full-service VC firm.  There’s a lot to be said for this approach - for taking gigantic, seemingly impractical leaps. That’s what Shania Brenion did, after Arlan moved out. She left her boring day job and started a balloon company called Nifty Balloons. Look it up. They’re amazing. Here’s Shana. 


SHANA: It's definitely a leap that 20-year-old me would have never taken. You know my eyes were opened by Arlan Hamilton just not accepting that narrative as the only way things could be. And ... yeah. I'm very grateful to her.


AMY: But sometimes when you take a big risk - you end with a big failure. And that’s what happened with Interlude.  


ARLAN: The problem was, a couple of things because I didn't know too much about business in general, I really didn't, there was no business plan. It just didn't exist. It just, the numbers didn't work. The unit economics did not work. I didn't do the right pricing for the quality of this magazine. I just undersold it. Two years into it, we just ran out of money. 


AMY: After the magazine failed, Arlan left California and moved back in with her mom in Texas. She was drinking a lot, sometimes she didn’t leave the house. It would take her a decade to dig herself out from under all that debt. Still she says … it was worth it.


ARLAN: I didn’t regret the magazine, because of debt that it caused, not at all, I would have regretted not doing the magazine. 


-music-


I know for sure I would regret never knowing that I could do something like that. But it’s taught me more than anything else, just know the game better. Know the rules better. Be prepared.


AMY: Know the game. Be prepared. This is what distinguishes Arlan’s Magazine dream from Arlan’s venture capital dream. The magazine failed because Arlan didn’t understand the unit economics. So before she started Backstage Capital, she spent years researching VC. How startups work. How to structure a deal. In other words, Arlan was doing things differently this time, because she had failed. And then learned from her failure. 


And I want to talk about this world failure for a minute, because it’s so central to why Arlan became a venture capitalist and what kind of venture capitalist she wanted to be. In Silicon Valley, failure is a good thing. A badge of honor. Because it means you’ve learned what not to do. The great luxury of venture capital is that it’s money you don’t have to pay back. If your startup fails, you don’t have to spend a decade repaying your debts. Sometimes having failed actually makes it easier to get funding - because the idea is, you’ve learned from your mistakes. 


As a VC, Arlan saw her chance to provide this luxury to people who wouldn’t otherwise get it - all those women and people of color that Silicon Valley ordinarily overlooks. She was giving them a chance to fail, learn and start over. But now Arlan herself  was skating close to that edge. Backstage Capital was running out of money. She needed another hack - bigger and bolder than anything she’d been doing. And she was pretty sure she’d found it. That hack 


-music-


AMY: Welcome back. Where we left off, it was late Fall. Backstage capital had only a few weeks runway. Arlan needed a new hack. And for a while now, she’d been cooking one up ... with her partner in the firm, Christie Pitts. This was a new direction for the company - actually a whole new company. Arlan sent me an audio diary about it.


ARLAN: For more than a year, I have wanted to build a startup studio, a studio that creates startups that takes ideas internally and turns them into startups, several of them. So maybe a start up on steroids really is a good way to think of it.


AMY: I hadn’t heard of startup studios, but they’re a thing in Silicon Valley. Studio employees work on a bunch of different business ideas, all at once. If one of them’s a flop, they just switch to another idea. The key thing about studio is that Arlan could spend all of the money on her business. She didn’t have to invest any of it. That’s what made it a hack. Because she could move some of Backstage Capital’s expenses over to Studio. Capital staff would become Backstage Studio staff. Arlan and Christie had been tossing this idea around for a while when Arlan met a guy named Paul Cannings. 


Paul was from Houston. He worked in real estate.  He told Arlan that his city was looking to launch a project of its own. Arlan thought: why not base the Backstage studio in Houston? And get people in Houston to fund it?


ARLAN: Houston is the number one diverse city in the country that was named that in 2016.  And to launch a startup Studio there of all places would just be so cool. Arlan needed a big break - and it seemed possible this was it. Arlan and Paul arranged to meet in Houston, to talk about next steps. A few days before the trip, Arlan sent me a recording.


ARLAN: It's Friday. 72 hours from now. I'll essentially know if we’re moving forward or not.  That's pretty full-on. I haven't really let it hit me yet because I'm just preparing for it and. It'll be big gonna. Be really really big if it happens. It'll change it'll change my life. 


AMY: For so long, Arlan had been working her butt off for tiny checks in Silicon Valley. But she’d never really felt like she was taken seriously there. If this Houston deal panned out, Arlan would be leapfrogging that whole scene. And plus, this was Texas - Arlan grew up in Dallas. Her mom, who she was close with, lived in Houston. The whole thing just felt right. I arrived in Houston late Sunday night. The next morning, I met Arlan at her hotel. 


ARLAN: Hello.


AMY: Good morning.


AMY: How are you?


AMY: Fine how are you?


AMY: Her apprentice Chacho, was on the sofa. He’d flown in the night before, went to FedEx at midnight to print out Arlan's pitch deck for Paul. Now the two of them were catching up.


ARLAN: We were talking about um, family stuff. My mom gets test results today at 1:45. So that’s in the middle of all of this … and at 1:45 she goes into the doctor’s office and finds out some pretty um … life altering news … Maybe or maybe not … I’m hoping it’s not. 


AMY: Arlan grew up with her mom and her younger brother. They were close, and since childhood, Arlan had always looked out for both of them. These medical tests scared her. But right now, she needed to focus on business. She wanted a few minutes to herself before Paul arrived, so Chacho and I went down to the lobby. When we got back, Paul was there. A trim man in his late 30s or early 40s, maybe, wearing a navy suit with a cashmere scarf draped around his neck. 


ARLAN: That’s a sharp outfit! 


PAUL: Thank you, thank you very much.


AMY: Paul seemed charmed by Arlan - in a way I’d watched a lot of people be charmed by her, I think because she never seemed like she was trying to be anything other than herself - including how she dressed. Jeans, black T shirt - and purple sneakers to match the purple logo of her company, backstage capital. 


-tape-


AMY: Paul had hired a car and driver for the day to take us around Houston. There were a few stops. A meeting at an architectural firm, coffee with some a couple of women who worked in the diversity space. Paul said that these were some of the people who would be on the team - along with Arlan - building a studio for Houston. 


PAUL: That’s really what today is,  It’s that team that, will definitely, in addition to you and I, will be extra sets of legs.


AMY: This was all encouraging, but a little vague. And Arlan didn’t have time for that. She pressed for specifics.


ARLAN: I would like to know by the end of February what's happening that it's happening because I there's so much going on. I need to know where all my energy is going. 


PAUL: Absolutely, so I'll tell you this I had a meeting on last week sometime, and it was with a person who is extremely interested in funding this. So I’m not as concerned about if it will happen? It’s just packaging it right. 


ARLAN: Ok, cool.


AMY: It wasn’t an if, Paul said. But the when wasn’t specified. Funders were interested, but he wasn’t saying who - at least around me. Meanwhile - there was a building Paul wanted Arlan to see. A possible location for the Houston startup studio. So he asked the driver to head south, to Houston’s Third Ward. And while we were driving, Arlan got a call. 


ARLAN: Yeah but … I’m in a room with people.


AMY: It’s pretty clear that this is the call that she’s been waiting for. From her mother, to talk about the test results she just got. Arlan leaned against the window, her phone pressed against her ear. The only way to give her privacy was to just talk louder - so that’s what we did. About the city of Houston and how great it is. 

 

PAUL: You know, we have the world’s largest Texas medical center. We have two international airports, we have you know ...


AMY: Arlan put the phone down. Looked out the window for a moment. Nobody spoke. Arlan had just found out that her mom had been diagnosed with cancer. I didn’t learn that until later, though. Because after a few long seconds, Arlan toggled back to business deal mode. She couldn’t afford to linger on the news just yet.  


We pulled up outside an old pink single story YWCA building. Arlan looked at Paul, as if to say what I was thinking: what are we doing here?

PAUL: There's room to do what we need to do.  You'll see ... 


ARLAN: Ok …


AMY: The place was pretty worn down. There were weeds poking up through the white gravel. 


AMY: So why are we here? 


PAUL: This is actually one of the locations we’re looking at - we’re talking about a phase one or a part of the overall grand scheme of things? This would be one of the locations. 


AMY: Some of the walls were draped with plastic tarps - rain from hurricane Harvey had damaged the roof. The owners had been holding fundraisers to pay for repairs ... 


PAUL: But Lowe’s donated equipment and Loubies is gonna install it. So they have those pieces of the puzzle. It’s just again no one to illustrate the vision so people can buy into it.


AMY: This moment - when Paul mentioned Lowe’s donating equipment? This is the moment that sticks out most to me - almost out of that whole day in Houston. It’s the moment that it hit me, just how wrong Arlan had been in thinking that this Houston deal might be a solution to the money problems she needed to solve right now. Arlan had come to Houston to pursue what she hoped was a transformational business deal. 

 

And here we were at an old YWCA, talking about donated building materials. It was as if they were on different planets. Arlan wants to become Richard Branson. Paul’s talking about restoring an old community center. We got back in the car and headed to the next meeting. By the end of the day ... Arlan was wiped out. 


ARLAN: Oh, man. I'm so tired.  


AMY: There was so much going on. This Houston deal was not what she had come here hoping for - at last not now. She would need another hack.And meanwhile, she was processing that phone call she’d gotten about her mom while we were driving.


ARLAN: She does have a rare form of cancer ... the good news is that it’s something that she can absolutely have a good quality of life if she takes care of it. 


-music-


AMY: Over the next few weeks, Arlan continued to press Paul for some kind of timeline. Things got a little heated between them. The deal wasn’t going anywhere. By February, Arlan was sounding philosophical about it. 


ARLAN: I learned that if something seems too good to be true, it probably is. I've learned that a few times in my life but sometimes you gotta learn something that important more than once for it to stick.  


AMY: Houston was too good to be true. But if Arlan had anything from Interlude magazine, it’s that you needed to have a business plan. Business plans: a, b, c, d. So Arlan had been looking for other ways to make the studio idea work. She'd been talking to old contacts. One email led to another and she found herself on the phone with a woman named holly Levow. Holly told Arlan she loved what she was doing for underrepresented founders, and she wanted to support her. Arlan pitched Holly the studio idea. And a week before Christmas, Holly gave Arlan her answer. 

 

ARLAN: It’s at 10:54 a.m. On Thursday. 


AMY: The day the email from Holly came in, Arlan was in L.A. with her girlfriend Anna. Arlan recorded it on her phone.


ARLAN: It says thanks for the follow up. How about we do a hundred thousand in the GP and $500,000 in studio investment? 


ARLAN: We can see where that takes us and reassess later in 2018. Best regards, Holly.’ My answer to that is hell yeah!


-music- 


AMY: Holly’s husband, Zach LeVow is one of the founders of Barracuda Networks, and Holly had been an employee there. Holly and Arlan had never met - they’d just talked on the phone. And now, she had given Arlan the break she’d been waiting for. This was was the largest single investment Arlan had ever gotten - about ten times the usual amount. And for Arlan this was a signal. All this work she’d been pouring into being a venture capitalist maybe there were other things she could do, at the same time, to achieve the same goal.

 

Next week on StartUp - the second to last episode in the series: Arlan finally meets her biggest investor, and ... threatens to end this whole podcast in one fell swoop.


ARLAN: If you bring this up at all, even nicely … cause I know you're very nice, we're done.


AMY: That’s coming up next week, on StartUp. If you’re liking this season and you want to go deeper, sign up for StartUp’s newsletter. You’ll get Q&As with Backstage portfolio companies that you won’t hear in the podcast, a look at Arlan’s side hustles before she was a VC. And: photos ... like Arlan with Whoopi Goldberg! Look for the link in the show notes - or go to gimletmedia.com/newsletter. 


And one more thing ... in June, Arlan and I will be speaking together at GimletFest in Brooklyn. She’ll be talking about what it was like to followed around by the StartUp crew for so long, and what she thinks of these stories … which should be interesting. Get your tickets at gimletfest.com. Also at GimletFest: Hosts from Reply All, the Nod, Habitat and more! Check it out - gimletfest.com. 


This episode was produced by Bruce Wallace, Simone Polanen, Luke Malone and Angelina Mosher. Our senior producer is Lauren Silverman. Editing by Heather Rodgers, Emanuele Berry, Lulu Miller, Caitlin Kenney, Lisa Chow, Molly Messick and Sara Sarasohn.


I’m Amy Standen. Our theme song is by Mark Phillips, remixed by Bobby Lord. Build Buildings wrote and performed our special ad music. For full music credits, visit our website, GimletMedia.com/startup. Peter Leonard mixed the episode. 


Find out more about the show at GimletMedia.com. You can follow us on Twitter @podcaststartup. Also, if you’re liking this series and you haven’t left us a review on Apple Podcasts yet, please take a minute to do that. It really does help a lot. Thanks. We’ll see you next week.