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Join The Information and NYSE on October 9 during San Francisco Tech Week for a cocktail reception and discussion with the New York Stock Exchange’s head of market development, Erik Peña, Carta CFO Charly Kevers and The Information’s Katie Roof.
Welcome back! How do early-stage venture capitalists pick which unproven founders to back? Most don’t overcomplicate things. Backing a Stanford University computer science grad or an early OpenAI employee often seems like a good bet. Some VCs even use AI to score early startups based on their technical expertise or past successes. Paige and Leura Craig, the husband-wife duo that runs Outlander VC, with $486 million assets under management, has a more unusual approach. Their New York-based investment firm developed an intricate scoring system based on a potential founder’s resilience, character and risk-taking potential that partners use before cutting a check. That system is one of the reasons the Craigs say they backed Scale AI in its early rounds, which translated into a $194 million cash dividend to the firm when Meta bought a 49% stake in the data labeling company in June, Outlander told limited partners at its annual meeting last month. That’s more than six times the capital that Outlander’s first fund, launched in 2015, invested across all its portfolio companies, according to PitchBook. Outlander’s executives told LPs that the firm still holds a roughly $200 million stake in Scale AI. Paige Craig developed the scoring system based on his years working in Middle Eastern military intelligence, running a private military contractor. The experience taught him what drove and motivated people as he earned their trust. When he returned to the U.S., he hustled to build connections in Silicon Valley and started making small angel investments in startups such as Airbnb, Lyft and Postmates. The founder-scoring system now helps Outlander sift through thousands of founder meetings it takes every year, says Leura Craig. Investment partners at the firm then try to spend up to 15 hours with potential founders, sometimes over long hikes, and try to learn about their life experiences and fears. Paige Craig teaches his colleagues “elicitation tactics” to get them to open up about their vulnerabilities. Founders have to get a minimum score in categories like obsession and problem solving to earn a check from Outlander. “The reality is every founder makes mistakes. Every founder has weaknesses,” Paige Craig said. Understanding those weaknesses allows the firm to help founders navigate inevitable problems, he said. The investing tactics at the 10-year-old firm have fresh relevance after Outlander’s Scale AI win. Outlander’s initial bet on Scale originated from a Twitter direct message to Paige Craig from Scale’s co-founder, Lucy Guo, who was in search of early fundraising connections. (She now runs fan site Passes.) Outlander invested a few hundred thousand dollars in Scale in 2016. Outlander is now investing out of its third, largest $150 million fund, and is raising another $150 million for an opportunities fund to keep investing in those same startups. Leura Craig, a former founder who ran Benchmark-backed interior design startup Laurel & Wolf, said the firm’s founder-picking system helped it decide to back Providence, R.I.-based naval drone startup Havoc AI last year. Havoc is run by Paul Lwin, who came to the U.S. as a child as a refugee from Myanmar. He later attended the U.S. Naval Academy, and his startup’s valuation increased to $250 million from $5 million when Outlander invested 18 months ago. I asked the Craigs: Doesn’t this system miss hot deals from founders that don’t want venture capitalists probing their life stories? “We don’t chase hot deals,” Paige Craig said. “Our fund is designed to find the unknown founders. We like to find the under-networked, unknown, undervalued. Our edge for our [limited partners] is that we come in and we pick the unknowns.”
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