The Art of Early-Stage Investing | Rex Woodbury (Daybreak)
Insights from Rex Woodbury on how to find winning investments at the earliest stage
In this inaugural “Investor Series” Steelhead post, I’m excited to write about a conversation with Rex Woodbury, GP at Daybreak Ventures. Rex isn’t just an investor, he’s a writer, an anthropologist (of sorts), and a community builder. In our conversation, Rex and I go deep into what makes a good early stage investment (pre-seed / seed), including his framework for early stage company evaluation, a strong emphasis placed on founders, realities of investor value-add, and a lot more.
Rex’s Path to Venture
When I talk to people about their background, I’m most interested in knowing the non-LinkedIn version. What’s the underlying story or north star, that often goes back to their most formative years, that helped guide them to where they are today?
Rex is able to trace his path to venture back to his childhood. Though not quite Gen Z, Rex is very much part of the “digital native” generation (also the name of his Substack on tech + trends with a cool 59,000+ subscribers). He came of age during the rapid proliferation of everything we take for granted as “normal” today - the internet, cloud services, mobile phones, and social media - and saw firsthand the incredible impact it had on society. This is one part of his path to venture.
The other part is his intense interest in people. The anthropologist in Rex is particularly fascinated by the interplay of technology and human behavior. If you choose to subscribe to Rex’s Substack (you should), you’ll see that this isn’t just a nice sounding story. Every week, Rex goes deep into how technology impacts society. Recently it was about the promise of Telehealth and a few weeks before that it was about deep fakes and the Apple Vision Pro…
Of course, Rex has an impressive “LinkedIn” story as well, having gone to great schools and having worked at great investment firms, but you can check that out for yourself. Those accolades may have given him the ability to start Daybreak, but it’s his deep passion for how technology can help humans and society at large, and his desire to help entrepreneurs along their journey, that are the driving forces behind why Rex is in venture, why he started Daybreak, and why he’ll be here for a very long time.
Digital Native - More Than a Newsletter
I’d be remiss not to write a brief aside on Rex’s substack, Digital Native. With more than 59,000 subscribers, Digital Native is no longer a small side project for Rex; it’s one of the most widely subscribed to technology Substacks today.
The genesis of Digital Native goes back many years. His father - a writer who has written a few novels - started a family project where each day Rex, Rex’s brother, and he would write for 15 mins. By the end of the year, at 9 years old, Rex had written a book! A rip-off - in Rex’s own words - of Lord of the Rings, replete with elves, dwarves, and epic tales.
This family activity taught Rex many things - persistence, the power of a small task compounding over time, how to write (fast), and a genuine love for writing - all which would eventually form the skills and drive necessary to start and grow Digital Native to what it is today.
While Digital Native started as a classic newsletter with links to articles that Rex had read that week, over time it evolved to include Rex’s own commentary on a trend at the intersection of technology and society.
Rex’s ability to write consistently good content week-over-week is an impressive feat, and pays dividends in many ways. In particular, Rex and I explored how Digital Native helps Rex with his investing. Rex shared many thoughts on that topic, which you’ll find a few sections below.
Rex’s Investing Principles
After talking to Rex about his background, we moved onto the core topic of our conversation - what makes a good early-stage investment & the art of early stage investing.
Rex was quick to emphasize the importance of market timing and business model as foundational elements—what he refers to as "table-stakes." More on these in the section just below. Beyond these two table stakes elements, Rex called out time and again during our conversation that it’s all about the founder. Rex elaborated on 5 critical elements he looks for in founders:
Founder/Market Fit: Rex looks for founders with a deep, intrinsic connection to the market they are targeting. This connection often manifests as a personal passion or a professional background that aligns closely with their business.
Clarity of Thought: Successful founders have a clear vision for the near and distant future. They should be able to articulate what the next six months and the next several years look like for their company and the slice of the world they’re building in.
Missionary vs. Mercenary: Rex prefers founders who are missionaries; deeply committed to their cause rather than only the financial rewards. This dedication often translates into long-term thinking and extreme perseverance. He expressed concern over the recent influx of "tourist founders" and venture capitalists, emphasizing that entrepreneurship shouldn't be about the allure or celebration of fundraising milestones or other vanity metrics like headcount growth. Instead, in Rex’s words, "we should celebrate performance, for example good customer feedback and revenue growth." To highlight the resilience of true missionaries, he shared a compelling story: "The founders I invested in were two women building for restaurants. When COVID wiped out their initial business, they didn't give up. Instead, they pivoted to direct-to-consumer brands and rebuilt the company to achieve millions in revenue during the first few years of the pandemic."
Intellectual Horsepower: High cognitive ability / raw IQ allows founders to solve complex problems and adapt to changing environments quickly. It’s also important for what’s arguably the most important job of a leader - to hire a great team to execute on the vision.
X-factor: Rex is always looking for that often indescribable x-factor in a founder - a combination of grit and a metaphorical chip on their shoulder - which often drives founders to outperform their limitations. Famous venture capitalist Doug Leone, from Sequoia, calls it being a “killer”. I’ve heard others describe it as a certain “je ne sais quoi”. It’s vague because it can’t be defined, but is apparent when it’s in front of you.
“Tablestakes” - Market Timing and Business Model
Rex and I went deeper into the importance of market timing and business model - two factors that Rex calls “tablestakes” for a good investment.
On market timing, Rex highlighted the significance of "tailwinds"—market conditions that naturally propel a business forward without the need to constantly push against barriers. He gave the example of Webvan and Instacart to illustrate how similar business models can have drastically different outcomes based on when they approach the market.
Rex added, "It's not always about catching the latest technology wave like AI, mobile, or cloud. Sometimes, it’s about recognizing shifts in consumer behavior, such as the trend towards individual buyers in enterprise settings or the need for centralized repositories in increasingly distributed teams."
💡 It's not always about catching the latest technology wave like AI, mobile, or cloud. Sometimes, it’s about recognizing shifts in consumer behavior, such as the trend towards individual buyers in enterprise settings or the need for centralized repositories in increasingly distributed teams.
On the topic of business models, Rex and I discussed innovative business models, like companies charging for work instead of user licenses (more and more relevant with advancements in AI), or companies monetizing payments instead of user licenses (Shopify and Ramp are salient examples). Rex’s main point on business models, however, is that the company must be able to support a venture scale outcome. It’s a power law business, so each investment must have the ability to return the fund.
The Role of an Investor Post-Investment
During our conversation, I asked Rex whether, after writing a check, he can influence the outcome as an investor. Said differently, I was curious - could the art of making good early-stage investments actually be about the help you provide as an advisor post-investment?
In response, Rex stressed the importance of being the founder's primary thought partner, "My goal is to be the first person a founder thinks to call—not just during office hours, but also at 11pm when they’re facing a crisis" he explained.
My goal is to be the first person a founder thinks to call—not just during office hours, but also at 11pm when they’re facing a crisis.
However, he made it very clear again that it’s all about the founder. They’re the reason the company will succeed or not. They’re the hero on this journey. Rex, as an investor, can hope to increase the chances of them building a billion dollar + company by 1-5%.
Manufacturing Serendipity
Reflecting on how writing his newsletter, Digital Native, impacts his investing, Rex shared a few important points.
Long-form content generation forces clarity of thought, making Rex sharper and more informed about different parts of the economy and/or society where he may want to invest. This helps him know what excellence looks like in a certain domain - making him a better investor.
Writing helps connect him to people who are building companies related to topics that he writes about. If he writes about the mental health crisis, for example, and a founder building in the space reads Rex’s article, the founder will know not only that Rex is interested in the space, but that he has a point of view on it as well.
To build on the second point, this visibility plays a crucial role in deal flow. "After I post about a specific trend, I often receive messages about founders working in that space. It's about manufacturing serendipity—staying visible so the right opportunities find you," Rex mentioned.
💡 It’s about manufacturing serendipity - staying visible so the right opportunities find you.
This idea - that a good investment isn’t solely about choosing well once the entrepreneur is in front of you - is an important one. Rather, a large part of being a good investor is making sure the right opportunities find you, or you find them. This clip of well-known VC Bill Gurley explains this exact point.
For Rex, Digital Native is one way to achieve this, while also genuinely providing value to his subscribers.
Wrapping Up
To wrap up our conversation, I asked Rex something I ask everyone, which is what his personal “Steelhead” goal in life is - something that is incredibly challenging but will be well worth the effort.
For Rex, it’s about building and maintaining rich relationships. He mentioned how on our death beds we won’t care about how much money we made, but rather the closest relationships that we formed along the way. He stressed the importance of leading with kindness and compassion in each interaction, and contrary to popular cultural belief, he believes that this is an advantage in a business world where a degree of ruthlessness can often be seen as necessary to achieve success.
Throughout my conversation with Rex it was clear that a common theme is the importance of people - both in business and in our personal lives. Rich relationships lead to rich outcomes. I have a feeling that insight will age well.
Thank you, Rex!
-Erik