LA Venture: Notation Capital's Nick Chirls On Why ‘Too Early’ Startups Make Great Investments

On this episode of the LA Venture podcast, Notation Capital Partner Nick Chirls discusses the reasons why he invests in companies that are ‘too early.’

Chirls teamed up with Alex Lines to start New York-based venture capital firm Notation Capital in 2015. The firm focuses its investments in seed and pre-seed companies.

“I'm looking for things that are fundamentally new,” Chirls said. “And I have a much clearer sense of what that looks like. If it was up to me, I would build a portfolio of 25 to 30 companies that are way too new in markets that don't exist. And a few of those markets hopefully appear in the next 6, 12, 18, 24, 36 months.”

As an example of a company that was ahead of the market, Chirls cites Bison Trails, which was the first institutional-grade staking company in crypto.

“We felt like there would be a much bigger market for that product in the future,” he said. “And when we built the product and launched the product, the total market size was probably like 10 customers. It was tiny. It basically didn't exist. Our bet was that it would exist in the future very quickly, faster than I think we ever imagined.”

He added, “all of a sudden within 12 months of launching the product, a huge market appeared and Bison Trails was effectively the only product in the market. We went from zero to $30 or $40 million in revenue in the first 18 months.”

To some investors this may look and sound risky, but Chirls said “you have to be comfortable with investing in niche products with the idea that they will always be niche.”

AI is another area Notation latched onto early. They currently have two AI companies in their portfolio.

“Our job is to find the hot thing a couple years before it's the hot thing,” he explained. “We're talking to all the smartest people in the ecosystem and I found that founders are much better at predicting the future than VCs.”

Notation was the first pre-seed firm in New York at the time and has completed a total of three funds : an $8M Fund I, $28M Fund II and their current $45M Fund III.

Chirls says, “I am a very firm believer that small funds outperform and that discipline matters… I don't think we'll get bigger. If anything, I think 45 is probably like pushing the limits of what I think a good pre-seed model looks like. “

Prior to starting Notation, Nick was head of seed investing at a New York-based studio and fund Betaworks. He admitted that one of the driving forces for leaving the firm was because he saw an opportunity to serve early-stage founders who were getting turned away by other “early stage” seed funds..

“We want it [Notation] to be a place where founders could come really early,” Chirls said. “In fact, ideally, years before they've started the company. And so what we realized many years later, was that there was actually a very good financial rationale for pre-seed investing. I'm a very strong believer of this today, which is that the risk profile of a company in my view, does not change dramatically, until many stages later.”

Aside from his role as partner for Notation, Chirls also hosts Origins, a podcast that centers discussions around venture capital - mostly from the LP point of view. The podcast has been around for almost seven years.

Over his years as an investor, Chirls has evolved as an investor from someone who cares about what other investors think to someone who says “I quite frankly could care less around who else is investing…”

“I care a lot more these days about the driving forces behind the ‘why’ for them of starting the company,” he said.

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.