512. Is SpaceX Over or Undervalued, Why Consensus Kills, How Chewy Beat Amazon, and the GameStop Saga from a Board Member (Larry Cheng)

**Nick Moran** (0:00)
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Now on to the episode.

**SPEAKER_2** (0:24)
Welcome to the podcast about Venture Capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran, and this is The Full Ratchet.

**Nick Moran** (0:39)
Larry Cheng joins us today from Boston. He's the co-founder and managing partner of Volition Capital, a growth equity firm currently investing out of a $675 million fund. Before Volition, Larry led investments at Fidelity Ventures and began his venture career at Bessemer.
He was the first investor in Chewy and has invested in companies including US. Mobile, Rounds and Global Trans. Larry, welcome to the show.

**Larry Cheng** (1:04)
Great to be here, Nick.

**Nick Moran** (1:05)
So I'd love to start off and talk about some public companies.

**Larry Cheng** (1:08)
Let's do it.

**Nick Moran** (1:09)
You know, we've got some interesting public news on the forefront, so we'll put a pin in that for a second. But you were the first investor in Chewy.

**Larry Cheng** (1:19)
Correct.

**Nick Moran** (1:19)
And, you know, what I'm curious about is, you know, what made you believe that they could build a standalone e-commerce winner in the pet category when so many categories, you know, had been or would be sort of subsumed by Amazon and eBay?

**Larry Cheng** (1:35)
You know, Amazon is the everything store. And what I saw in the pet market was a large segment that was moving online, but the customer wasn't going to be taken care of well in a superstore and an everything store. And what Chewy had done was focus their experience and their merchandising, their pricing, their fulfillment, everything around wowing the pet food customer, which is something that Amazon couldn't do. So it was the classic sort of a specialty, super tailored experience against the generic experience. And the pet category in and of itself is an emotional category. People really care about their pets and the humanization of pets was expanding. So we thought Chewy had a great chance to win in the category. Their customer retention was like phenomenal, like Amazon prime level retention.
And we saw the math and the business was working. We thought they had a shot and I would be lying though if I said I wasn't worried because when I was in due diligence on the company, I was getting Amazon boxes that were advertising their pet food store called WAG at the time. And I thought, am I freaking insane that I'm investing in this company and Amazon's advertising for their own pet food store? But it worked out well.

**Nick Moran** (2:45)
How do you overcome those hiccups? Late in the deal, you've written about this a bit, but there's like a psychology thing going on here. If the financial situation, personal financial situation is difficult, if the markets get rocked and drop substantially, if you get bad news about a portfolio company, if colleagues start talking about the downsides of an investment, there's all these factors that can creep up late in the diligence process.
How do you use selective memory or compartmentalize these things to still push forward with confidence?

**Larry Cheng** (3:27)
Every good investment, there should be someone saying something negative. There should be an alternative perspective. And so I think I'm used to that at this point, is that you're not looking to hit the finish line of an investment and hope everyone around you is cheering you, saying, this is fantastic, please do this investment. That is not the case. That's usually a recipe for just saying you've missed something in due diligence. And so the question is, for any great investment, and this took me years to learn, there are going to be very, very good reasons to pass at the time of the investment. Because you could have passed on any number of companies. Think about the one that was on public, SpaceX.
There are probably a thousand reasons to pass on that at every round. And so you have to become accustomed to that and understand, like, what is the true exceptionality of this business? Is that exceptionality in my head, or is that real and demonstrated in some way? And will that carry them through some of the risks that might be in any business?
And so it's sort of having that true north mentality around exceptionalities are what carries a great investment, not the absence of flaws.