B Capital’s Howard Morgan On The Key To Early Stage Investing

On this episode of the LA Venture podcast, B Capital Group General Partner and Chair Howard Morgan discusses his thoughts on early stage investing and the importance of company ownership.

B Capital Group is a multi-billion dollar venture capital firm with an L.A. office based in Manhattan Beach. The firm has multiple focus areas including digital health, supply chain, deep tech and ad tech companies.

Precision Neuroscience is one of Morgan's investments, a company that leverages neural technology to develop a minimally invasive delivery of brain-computer implants, enabling patients with a better approach to treating neurological illnesses.

Throughout his years investing, Morgan has seen companies from all different sectors make their mark. Lately, he’s noticed that there is a lot of interest in quantum software companies from other investors in the industry.

“There are problems that can be solved with quantum computing,” he said. “They're in pharmaceutical and drug discovery, obviously in codebreaking. What quantum computing can do is search those simultaneously. It's not just in parallel, but it's literally in an instant.”

Morgan said there are two things for quantum computing to succeed, 1) quantum bits and 2) people who understand how to build quantum algorithms.

So far, “IBM has a machine with 439 today, and we need several thousand at least. We need to get to millions eventually.”

Morgan, a pioneer in the venture landscape, also co-founded Philadelphia-based First Round Capital, a seed stage fund. He recalled that by 2010, there were several hundred seed stage funds. With decades of investing experience, Morgan learned that the key to becoming a successful investor is ownership.

“You may only have one or two of your companies that really win and if you own 10% or 20% of them at the beginning and you get diluted down to maybe eight or 9% at exit that's still a fund maker,” Morgan said. “But if you own 1% of a lot of companies, it's not a fund maker.”

During First Round’s third fund, when they invested in Santa Monica-based smart security device company Ring.com, Morgan realized the importance of having ownership over each company he invested in.

“We ended up with only 1% or 2% and so it got sold for a billion dollars, which if you had a small fund might have been great,” he said. “But for us, it was a $20 million dollar exit and 100 million dollar fund, so it didn't move the needle. So you really do have to focus on ownership with big funds.”

Since then, Morgan has transferred everything he learned at First Round and applied it to B Capital.

“In our Ascent fund, we want to have at least 7% at the seed stage and 10% at the A stage and we'd like to buy up,” Morgan said. “We'd like more, but that's kind of our minimum and we pretty much won't do a deal for less than that because it takes your time, takes your effort and it's not going to return the fund.”

According to Morgan, the key to venture success is sourcing.

“It's not a sin to pass on a great deal,” Morgan said. “But it's a sin to have not seen the deal and be able to pass on it. So you really have to say how do I get into the flow where I see all the great deals, and if you're focused and you become a quote expert in that area, you'll see all the great deals and those entrepreneurs will want to talk to you.”

Morgan said that as venture capitalists, they are constantly receiving pitches, but the key is to make sure the founder’s vision is big enough because if it’s too narrow, that becomes a problem. Given his 15 years serving as a professor, Morgan is skilled at evaluating people, which has led to picking great partners and selecting which entrepreneurs to invest in.

“I look for integrity in somebody,” he said. “I look for the fact that they'll tell me the bad news first and not always try to tell me the good news. And I really look for them having passion and persistence because not everything goes right and you have to be able to stick it out when things go wrong.”

dot.LA Reporter Decerry Donato contributed to this post.

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This podcast is produced by L.A. Venture. The views and opinions expressed in the show are those of the speakers and do not necessarily reflect those of dot.LA or its newsroom.