Our guest, Carmen Palafox, is a seasoned venture capitalist. She is a Founding Partner at 2045 Ventures in Los Angeles and Venture Partner at How Women Invest. She is also a Partner at MiLA Capital.
Carmen was awarded the Rising Star Award from the Los Angeles Latino Chamber of Commerce. She was spotlighted by the NVCA as a Rising Star in VC and featured by LA Magazine as 1 of 13 of LA’s Powerful Women.
Coming out of USC, Carmen was fortunate to land her first job at Dimensional Fund Advisors, where she scaled operations into LATAM, Canada, and Europe, going from $75 Billion AUM to $300 Billion AUM.
In this episode, Carmen shared her journey into venture capital, launching a fund, the challenges of women and underrepresented founders in the VC world, and what people can expect in the coming years despite the uncertainties in the industry.
How Haas led her to venture capital
I went to Haas thinking that I’d get into social impact investing, and that was in 2011, when impact investing was a little earlier than it is today. At that time, there’s a lot of talk around social impact bonds and pay for success, and that’s where I was thinking my career would be headed. But, you know, one of the advantages of going to Haas was the career development group and just the support I got there and the freedom to really explore. And that exploration led me to venture.
The challenges that women and underrepresented founders face in the VC industry
As women, we don’t want to think that our gender will hold us back. But there are systemic issues. There’s bias that people may or may not be aware of. And I think one of the reasons women are successful when they do get funding is because they are capital constrained and do have to be more efficient. I mean, the same is true for underrepresented founders. You just don’t know if there will be capital around the corner, so you are more judicious with what you have. And on the flip side, I think there need to be more capital allocators that are focused on outcomes, meaning, we want to see more women founders, we want to meet more women funders. And so, being focused on that as a primary driver to change the status quo. I think it’s important to create more balance in an ecosystem. I think that should be our objective. It should be about balance. And I think we would solve a lot of these unintended consequences that we see as a result of the technology that’s out there today if we were to bring more balance to the industry.
Opportunities for early-stage founders
I think it’s an epic time, both because of the reset but also the fact that we’re coming out of Covid, and during Covid, people had a lot of time to evaluate how they were spending their time, where they were spending their time. And so, I think a lot of people, if they’re able to, are prioritizing differently and potentially looking for areas where they can have the most impact in their careers, and where they can shift priorities to their families. I’ve seen or talked to a lot of startups that are able to attract talent because they have flexibility in how they’re going to manage building their company. If you can offer someone with technical talent the ability to work off hours or work remotely from wherever they want, then I think you have an opportunity there as an early-stage founder.
(Transcripts may contain a few typographical errors due to audio quality during the podcast recording.)
[00:00] Sean: Welcome to the OneHaas Alumni Podcast. I’m your host, Sean Li, and today we’re excited to welcome Carmen Palafox. Carmen is a seasoned venture capitalist, founding partner at 2045 Ventures in Los Angeles, and venture partner in How Women Invest. Introducing her work as an investor, Carmen is also an advocate for diversity and inclusion in tech, and has received the Rising Star Award from the Los Angeles Latino Chamber of Commerce.
She is a board member at National Venture Capital Association, was spotlighted by the NVCA as a rising star in VC, and featured in LA Magazine as one of 13 of LA’s powerful women. Of course, she’s also a Haas alumna, from the MBA class of 2014. We’re thrilled to have you here to share your insights and perspectives on the startup ecosystem and more. So, welcome to the podcast, Carmen.
[00:56] Carmen: Thanks for having me, and go Bears.
[00:59] Sean: Go, Bears. I love to start these chats, asking our guest about your background — your origin story, as we call it. If you don’t mind sharing just starting from the beginning, where are you from, how’d you grow up?
[01:15] Carmen: Well, I grew up in San Diego, California and moved to LA to attend USC, where I am now an adjunct professor. So, it’s fascinating to be on the other side of the podium there. And coming out of USC, I was fortunate to land my first job at Dimensional Fund Advisors, which is an asset management company that invests in public equity. And it was an amazing ride for me to start my career at that firm, because of just the nature of the business and the fact that there were incredibly academic board members that are well known in the industry, such as Gene Fama, for example, that were very deeply rooted. And the strategy and approach at Dimensional, and I was there through its expansion. So, when I started the firm was managing 75 billion in assets, and think now they manage about half a trillion.
So, it was an awesome ride. I started entry level and rose to become vice president of investment operations, and was there through the global expansion into Latin America and Europe.
And I left there in 2011 to pursue my MBA at Berkeley Haas. And that was an awesome opportunity for me to be able to explore a different career path. It’s there where I was exposed to venture capital, being in the Bay Area, immersed in the tech ecosystem, and with a program so focused on the venture industry and startups. So, I really started to see myself transitioning from public equity into the private markets.
[03:30] Sean: That makes sense. If you don’t mind me asking, did you have family in business or finance? What was the influence for you to go into economics at USC for your undergrad?
[03:41] Carmen: That’s a great question. Growing up in San Diego, it’s not an industry that’s well-known for finances.
[03:47] Sean: Right.
[03:48] Carmen: Nothing like New York. And so, most of my family is in the education space, law enforcement, and so, I didn’t have a big exposure to the business world. It was more through my studies at USC, I was an economics major, international relations minor, where I was exposed to more of the business world.
[04:11] Sean: Can’t help but notice but, on your LinkedIn, did you also have a master’s in sports management?
[04:17] Carmen: Yeah. That was an interesting period of my life. I, throughout my career, was really thinking about how I could find the intersection of what I’m passionate about and what I’m good at. And so, the master’s in sports management for me was exploration into that aspect of my career. I am an athlete by heart. I run every day. I’m an avid snowboarder. And at that time, I was really into marathon running.
So, I’ve ran the London Marathon and the Boston Marathon. And I was thinking about transitioning into being a race director for marathons, and so, did get my master’s from USF, was just such an enjoyable experience. I think the biggest take away for me from that program was getting just more entrenched in marketing, because sports, obviously, are all about marketing, how you market a team, especially when you think about the fact that, when you’re in a space where there can only be one winner, how do you optimize the experience for fans? So, there was a lot of study work around the experience economy.
So, gained a lot through that. And as I was coming to the end of the program, did get an offer to join a marathon group, but at the same time, Dimensional was expanding internationally. And for me, I just was really excited about the opportunity to be part of that team that grew the presence into Latin America.
[06:15] Sean: Makes sense. Well, so this was before Haas?
[06:18] Carmen: This was before Haas, yeah.
[06:20] Sean: It sounded like you didn’t plan to go to Haas, to get into venture capital, or did you?
[06:26] Carmen: No, I went to Haas, again, just tying back to this desire to find a career path that would mesh areas of passion with my skillset and background. I went to Haas thinking that I’d get into social impact investing. And that was in 2011 when impact investing was a little earlier than it is today. Still being defined, impact is still being defined, but at that time, there’s a lot of talk around social impact bonds and pay for success. And that’s where I was thinking my career would be headed. But one of the advantages of going to Haas is, for me, was the career development group, and just the support I got there, and the freedom to really explore. And that exploration led me to venture.
[07:22] Sean: Wow. So, if you don’t mind me asking, because I think a lot of MBAs would be curious to this day to hear this, what was your path breaking into venture? Because it’s not that easy.
[07:34] Carmen: Yeah, in fact, very, very hard, because of the nature of the industry. You have smaller shops that are one or two people. And so, when you think about the number of people that are at venture firms, there’s not a lot of opportunity there.
And so, for me, my first break into venture was actually starting a fund. And so, that’s how I broke into venture, but going to the Haas really helped me develop my network in venture and pushed me out into the ecosystem.
[08:14] Sean: That’s amazing. If you don’t mind me asking, what were some of the biggest challenges of launching a fund? I guess were there any shortcuts or tips that you can share with us of how you pulled that off?
[08:26] Carmen: My first fund, MiLA Capital, is focused on investing in frontier tech, as I would call it, or companies that were building physical product — hardware, software companies. And so, we invested across all industries, including space tech, climate tech, health tech. And for me, when I was evaluating the opportunity, I saw a big gap in VCs funding hardware, software. And I saw that as an advantage. We’re going in, we’re filling a gap in the market. There aren’t a lot of capital providers that will fund hardware, software. And I was very naïve, obviously, at that point. I now understand why there aren’t a lot of flares in the space. But decided that the team, at that time that we had an edge in the space to be able to underwrite the risk in the companies we were funding.
So, I would say, the edge that I found was having a team that had expertise in the segment and the type of companies we were funding. And also, early investors that would be willing to back us as first-time managers.
So, I think, for anyone wanting to start a fund or break into the industry, I think it’s important to have those early believers, similar to a startup, getting angel investors that was just critical for us to be able to start the fund and then be able to make investment.
[10:15] Sean: That fund is in harvest mode, right?
[10:18] Carmen: Yeah.
[10:19] Sean: It’s fully deployed.
[10:20] Carmen: It’s fully deployed. We’ve made awesome investments in the fund. And I’ll talk about one, because it ties back to the Berkeley community, Caban Systems, is in the climate tech space. The founder, her name is Alexandra Castillo Rasch. She received her master’s from Berkeley, and she actually was a researcher there, and then, went on to work for Proterra, which is builds electric buses. So, she has deep expertise in batteries, and then decided to break off and start Caban systems, because of her background and roots in telecom.
So, Caban Systems allows cell tower owners, who are currently using diesel energy, to transition over into clean energy. Caban Systems’ products are battery storage that uses renewable energy. And also, they have a software platform that allows cell towers to manage their energy usage.
And at MiLA, we invested in the seed round, and the company now is at series B. So, a Berkeley success story there out of the MiLA Fund.
[11:52] Sean: Do you mind sharing a little bit about 2045 Ventures? What do you guys invest in?
[11:56] Carmen: Yeah, 2045 Ventures is backed by data that shows that diverse founding teams outperform. So, if you have a female on the founding team, you’re more likely to return 63% more capital to investors. If you have an ethnically diverse team, you’re more likely to return 30% more capital to investors. And there’s so many reason, we can have a whole podcast around why that is. But a lot of it has to do with capital constraints and capital efficiency, just to create some spice there. But back to 2045, we are a generalist fund. So, we back companies that are founded or have an immigrant female or underrepresented founder on the team, on the founding team.
And we’re generalists. So, we’ll look at all sectors in industries. We have investment experience investing in fintech, health tech and climate tech, but again, are opportunistic. And our sweet spot is at the pre-seed stage. That’s where I got my starts, investing in companies at day zero, making LA accelerators. I’m very comfortable with the earliest stages, and are comfortable being first money in.
[13:21] Sean: Makes sense. What about How Women Invest, can you tell us a little bit about that?
[13:26] Carmen: I’m a venture partner at How Women Invest. And at How Women Invest, we back female founders, female-founded teams. Again, generalists, typically looking at companies that are in the market. So, I would say sweet spot is late, pre-seed, seed stage, across all sectors and industries, except CPG.
[13:55] Sean: That makes sense. Okay, I was wondering how you’re able to be a partner of both of these firms, but it seems like there are different stages of the investment cycle.
[14:05] Carmen: Yeah, and it’s very synergistic. 2045 invests in female founders. And so, if it’s not, I’ll say, for one, it might be fit for the other, and vice versa.
[14:16] Sean: Since it’s International Women’s Month, I want to ask you, what are some of the biggest challenges facing women in your industry today, in 2023?
[14:26] Carmen: That is a very loaded question, right? I think, as women, we don’t want to think that our gender will hold us back. But there are systemic issues. There’s bias that people may or may not be aware of, that continue to be challenges. And I think one of the reasons that women are successful when they do get funding is because they are capital-constrained and do have to be more efficient. The same is true for underrepresented founders. You just don’t know if there will be capital around the corner, so you are more judicious with what you have.
And on the flip side, I think there needs to be more capital allocators that are focused on outcomes. Meaning, we want to see more women founders, we want to meet and see more women funders. And so, being focused on that as a primary driver to change the status quo.
I think it’s important to create more balance in an ecosystem. I think that should be our objective. It should be about balance. And I think we would solve a lot of these unintended consequences that we see as a result of the technology that’s out there today if we were to bring more balance to the industry.
[15:55] Sean: And I think on that note, we’ve seen the news that there was a huge, I guess, gold rush of investments for underrepresented founders and funders in 2020. But as 2022 came around, all the stats were saying that investments in underrepresented founders decreased dramatically. How do we sustain or how do we continue to find that balance, to maintain that balance? It’s a loaded question as well.
[16:25] Carmen: Yeah, it is. And I wouldn’t characterize it as a gold rush. If you look at the Delta, there’s a significant amount of capital that would need to go into underrepresented funders to really start to see the gap close. And so, there needs to continue to be more capital to back underrepresented funders that can then support underrepresented founders.
I mean, you have a multiplier effect when you back an underrepresented funder, right? Like, I, with my fund, will invest in 20 companies that are founded by underrepresented founders. So, that’s the multiplier effect when you invest in a fund manager that is female or from an underrepresented group. So, there needs to be more and more capital.
[17:27] Sean: And I thank you for correcting me on that because, I think, as a layperson, hearing at least back in 2020, 2021, hundreds of millions of dollars put into diversity or inclusion funds, it just sounds like it’s so much money. But in the full context of VC, I just quickly Googled this, out of $600 trillion, I don’t know how much dry powder is out there these days. It’s still such a small fraction of the pie.
[17:55] Carmen: Yeah, there’s very few underrepresented managers that have broken the hundred-million-dollar mark in a fund. And so, compare that to the billion-dollar funds, and that’s the Delta. So, unless we have allocators that are going to put serious dollars behind fund managers, it’s going to persist.
[18:23] Sean: Anything you feel like would be helpful for founders to hear in today’s environment from an investor’s perspective? From an investor/mentor/advisor’s perspective?
[18:36] Carmen: Now sitting in a professor role, I think about, like, this is going to be the topic of discussion in my next class, is exactly what just happened in the industry and the potential ripple effects it will have. And I think this will be a case study that should be discussed in business schools and looking deeply at the fundamentals of Silicon Valley Bank and why this happened. It shouldn’t have happened. And what were the triggers for this happening are all going to be incredibly important for us to peel back the layers on.
So, in terms of founders, I’m just coming back from… we’re recording this in the afternoon. I was at a breakfast for female investors, and it was the hot topic. In fact, the organizers of the event were considering canceling the event because of the fact that a lot of investors did get a lot of sleep last night, if they had exposure to their portfolio companies had exposure and had accounts at the bank. And so, I hope that this won’t result in portfolio of companies going out of business. That’s the worst-case scenario. The best-case scenario is that they’ll have access to 250k in deposits, and then, we’ll have access to the rest of their money in short order. But it is pretty nerve-wracking if you are a founder and it’s something that you shouldn’t have to deal with, but now, all of a sudden, is the top priority for you.
[20:37] Sean: Yeah. Especially if your payroll is more than 250.
[20:40] Carmen: Yeah. And I think some founders have diversified across banks. And so, hopefully, the impacts are manageable.
[20:50] Sean: It’s something that, as a founder myself, I’ve never even thought of. I don’t know if it’s fortunate or unfortunate that we are winding down one of the businesses that we fundraised for. And we have still some money left in SVB, but it is less than the 250k, fortunately.
Just something that I would’ve never imagine that we’d have to deal with, to even think to diversify… I remember opening up a Mercury bank account and I was thinking, well, this is just too much hassle. Let’s just keep our money at SV. But if we had to deal with this, in addition to, obviously, running the company, I can’t imagine what that’s like.
[21:29] Carmen: And my thoughts go back to, should this have happened? And I think it’s avoidable. I don’t think we should be at this point today, but again, something to peel back the onion on, for sure.
[21:43] Sean: Yeah, it’s interesting because I’m sure you remember the collapse of WaMu (Washington Mutual). I was reading this point, this is, I think, the second largest bank collapse, second to WaMu only, which is just gnarly.
On that topic as well, the VC market has been pulling back quite a bit in the past six months, partially due to the markets and just the economy and whatnots, inflation. Curious to hear your take on all that. What do you think the next six to 12 months is looking like in the VC and startup world?
[22:20] Carmen: I wish I knew. But I think, for me as an investor, I’ve definitely witnessed the reset in valuations. And so, at least for the companies I’m looking at, relative to valuations last year, they’ve come down significantly. And the companies that I’m evaluating have traction even at the pre-seed stage. They have product in market. They have revenue. They have clients. And so, I think the bar is higher for companies going out there to raise. I think a lot of VCs are preoccupied with companies and their portfolio and managing for their existing portfolio right now. And so, that makes for a lot of uncertainty in the environment and ecosystem.
[23:23] Sean: I’ve been thinking a lot about also how, if we look back few years, and this is truly like the reset for the next cycle, this is also prime time for yourself as an investor to find the next big companies, the next Ubers or Twitters, out of the 2008 crisis, the YouTubes. So, I feel like there’s a lot of uncertainty right now, which nobody likes, right? But at the same time, there’s probably a lot of tremendous amount of opportunity for next wave.
[23:59] Carmen: I agree. I think it’s an epic time, both because of the reset, but also the fact that we’re coming out of COVID. And during COVID, people had a lot of time to evaluate how they were spending their time, where they were spending their time. And so, I think a lot of people, if they’re able to, are prioritizing differently and, potentially, like myself, looking for areas where they can have the most impact in their careers, and where they can be able to shift priorities potentially to their families.
So, I’ve seen or talked to a lot of startups that are able to attract talent because they have flexibility in how they’re going to manage building their company. So, if you can offer someone with technical talent, the ability to work off hours or work remotely from wherever they want, then I think you have an opportunity. There’s an early-stage founder.
[25:12] Sean: Do you have any book recommendations for founders?
[25:16] Carmen: I’m reading the Cold Start Problem and Super Founders. I think Super Founders is also good. It’s backed by data, looking at the unicorns, looking for patterns in those companies in terms of, were these companies founded by first-time founders or serial founders? I appreciate the disclosures that the author made in terms of, obviously, there might… Although it’s backed by data, there may be bias that has gone into the companies that were backed. So, appreciate that, too. Those are two.
[25:59] Sean: Well, to wrap up the interview, Carmen, what are some things you do for fun now that we’re out of the pandemic?
[26:07] Carmen: I love the outdoors. I run six times a week. I love hiking. We have incredible Santa Monica Mountains. So, this has been a rainy season in Southern California, which has resulted in incredible waterfalls. So, the last few weekends have been chasing waterfalls in the Santa Monica Mountains.
And I know it’s most times that I’ve gone to these specific places have been bone dry, and now they’re just flowing. I love snowboarding, so just I have both passes. So, I have also been chasing snowstorms as well. What I do for fun, which is a great question because I remember someone asking me that and I used to say, read. And they’re like, “Read? Do you laugh when you read?” And I’m like, no, actually. Usually, I don’t. So, when I am active outside, that’s where I find peace and joy and a step-back from the stressful world of our industry.
[27:28] Sean: All right. Well, thank you so much, Carmen, for your time. It was a pleasure having you on the podcast today.
[27:32] Carmen: This has been fun. And I hope we can grab some coffee soon at some point.
[27:38] Sean: Sounds good.
[27:39] Carmen: All right. Take care.
[27:40] Sean: Thanks, Carmen.
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