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Bigger Funds, Larger Spotlight, Bigger Mistakes

spotlight, bigger mistakes

I was doomscrolling through Twitter when I stumbled on Samir Kaji‘s recent tweet:

I’ve written before that the difference between an emerged fund manager and an emerging manager is one’s raised a Fund III and the other hasn’t.

In Fund I, you’re selling a promise – a dream – to your LPs. That promise is often for angels, founders, and other GPs who write smaller checks. You’re split testing among various investments, trying to see what works and what doesn’t. More likely than not, you’re taking low to no management fees, and only carry. No reserve ratio either. And any follow-on checks you do via an SPV, with preference to your existing LPs. You’re focused on refining your thesis.

In Fund II, you’re pitching a strategy – the beginnings of pattern recognition of what works and what doesn’t. You’re thesis-driven.

Fund III, as Braughm Ricke says, “you’re selling the returns on Fund I.” On Fund III and up, many fund managers start deviating from their initial thesis – minimally at first. Each subsequent fundraise, which often scales in zeros, is a lagging indicator of your thesis and strategy. And across funds, the thesis becomes more of a guiding principle than the end all, be all of a fund. There are only a few firms out there that continue to exercise extreme fundraising discipline in. Which, to their credit, is often hard to do. ‘Cause if it’s working, your LPs want to put more money into you. And as your fund size scales, so does your strategy.

Subsequently, it becomes a race between the scalability of a fund’s strategy and fund size.

Softbank’s mistake

In 2017, Softbank’s Vision Fund I (SVF I) of $100B was by far the largest in the venture market. In fact, 50 times larger than the largest venture funds at the time. Yet, every time they made a bad bet, the media swarmed on them, calling them out. The reality is that, proportionally speaking, Softbank made as many successful versus unsuccessful bets as the average venture fund out there. To date, SVF I’s portfolio is valued at $146.5 billion, which doesn’t put it in the top quartile, but still performs better than half of the venture funds out there. But bigger numbers warrant more attention. Softbank has since course-corrected, opting to raise a smaller $40B Fund II (which is still massive by venture standards), with smaller checks.

While there are many interpretations of Softbank’s apparent failure with SVF I (while it could be still too early to tell), my take is it was too early for its time. Just like investors ask founders the “why now” question to determine the timing of the market, Softbank missed its “why now” moment.

Bigger funds make sense

I wrote a little over a month ago that we’re in a hype market right now. Startups are getting funded at greater valuations than ever before. Investors seem to have lost pricing discipline. $5 million rounds pre-product honestly scare me. But as Dell Technologies Capital‘s Frank told me, “VCs have been mispricing companies. We anchor ourselves on historical valuations. But these anchors could be wrong.” Most are vastly overvalued, yet future successes are grossly undervalued.

Allocating $152 billion into VC funds, LPs are excited about the market activity and that the timeline on returns are shorter. Namely:

  • Exits via SPAC,
  • Accelerated timelines because of the pandemic (i.e. healthcare, fintech, delivery, cloud computing, etc.)
  • And secondary markets providing liquidity.

We’ve also seen institutional LPs, like pension funds, foundations, and endowments, invest directly into startups.

Direct Investments by Pension Funds Foundations Endowments
Source: FactSet

Moreover, we’re seeing growth and private equity funds investing directly into early-stage startups. To be specific over 50 of them invested in over $1B into private companies in 2021 so far.

As a result of the market motions, the Q2 2021 hit a quarterly record in the number of unicorns minted. According to CB Insights, 136 unicorns just in Q2. And a 491% YoY increase. As Techcrunch’s Alex Wilhelm and Anna Heim puts it, “Global startups raised either as much, or very nearly as much, in the first two quarters of 2021 as they did in all of 2020.”

Hence, we see top-tier venture funds matching the market’s stride, (a) providing opportunity for their LPs to access their deal flow and (b) meeting the startup market’s needs for greater financing rounds. Andreessen recently raised their $400M seed fund. Greylock with their $500M. And most recently, NFX with their $450M pre-seed and seed Fund III.

In his analysis of a16z, writer Dror Poleg shares that “you are guaranteed to lose purchasing power if you keep your money in so-called safe assets, and a handful of extremely successful investments capture most of the available returns. Investors who try to stay safe or even take risks but miss out on the biggest winners end up far behind.” The a16z’s, the Greylocks and the NFXs are betting on that risk.

Fund returners are increasingly harder to come by

As more money is put into the private markets, with startups on higher and higher valuations, unicorns are no longer the sexiest things on the market. A unicorn exit only warrants Greylock with a 2x fund returner. With the best funds all performing at 5x multiples and up, you need a few more unicorn exits. In due course, the 2021 sexiest exits will be decacorns rather than unicorns. Whereas before the standard for a top performing fund was a 2.5%+ unicorn rate, now it’s a 2.5% decacorn rate.

The truth is that in the ever-evolving game of venture capital, there are really only a small handful of companies that really matter. A top-tier investor once told me last year that number was 20. And the goal is an investor is to get in one or some of those 20 companies. ‘Cause those are the fund returners. Take for example, Garry Tan at Initialized Capital, earlier this year. He invested $300K into Coinbase back in 2012. And when they went public, he returned $2B to the fund. That’s 6000x. For a $7M fund, that’s an incredible return! LPs are popping bottles with you. For a half-billion dollar fund, that’s only a 4x. Still good. But as a GP, you’ll need a few more of such wins to make your LPs really happy.

I also know I’m making a lot of assumptions here. Fees and expenses still to be paid back, which lowers overall return. And the fact that for a half-billion dollar seed fund, check sizes are in the millions rather than hundreds of thousands. But I digress.

There is more capital than ever in the markets, but less startups are getting funded. The second quarter of this year has been the biggest for seed stage activity ever, measured by dollars invested. Yet total deal volume went down.

Source: Crunchbase

Each of these startups will take a larger percentage of the public attention pie. Yet, most startups will still churn out of the market in the longer run. Some will break even. And some will make back 2-5x of investor’s money. Subsequently, there will still be the same distribution of fund returners for the funds that make it out of the hype market.

In closing

As funds scale as a lagging indicator of today’s market, the discipline to balance strategy and scale becomes ever the more prescient. We will see bigger flops. “Startup raises XX million dollars closes down.” They might get more attention in the near future from media. Similarly, venture capitalists who empirically took supporting cast roles will be “celebretized” in the same way.

The world is moving faster and faster. As Balaji Srinivasan tweeted yesterday:

But as the market itself scales over time, the wider public will get desensitized to dollars raised at the early stages. And possibly to the flops as well. Softbank’s investment in Zume Pizza and Brandless turned heads yesterday, but probably won’t five years from now. It’s still early to tell whether a16z, Greylock, NFX, among a few others’ decisions will generate significant alphas. I imagine these funds will have similar portfolio distributions as their smaller counterparts. The only difference, due to their magnitudes, is that they’re subject to greater scrutiny under the magnifying glass. And will continue to stay that way in the foreseeable future.

Nevertheless, I’m thrilled to see speed and fund size as a forcing function for innovation in the market. There’s been fairly little innovation at the top of the funnel in the venture market since the 1970s. VCs meet with X number of founders per week, go through several meetings, diligence, then invest. But during the pandemic, we’ve seen the digitization of venture dollars, regulations, and new fund structures:

Quoting a good friend of mine, “It’s a good time to be alive.” We live in a world where the lines between risk and the status quo are blurring. Where signal and noise are as well. The only difference is an investor’s ability to maintain discipline at scale. A form of discipline never before required in venture.

Photo by Ahmed Hasan on Unsplash

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The Hype Rorschach Test: How To Interpret Startup Hype When Everything’s Hyped

abstract, rorschach, hype, color

Not too long ago, I quoted Phil Libin, founder of All Turtles and mmhmm (which has been my favorite virtual camera in and most likely post-pandemic), who said: “I think the most important job of a CEO is to isolate the rest of the company from fluctuations of the hype cycle because the hype cycle will destroy a company. It’ll shake it apart. In tech the hype cycles tend to be pretty intense.”

Hype is the difference in expectation and reality. Or more specifically, the disproportionate surplus of expectation. A month ago, Sarah Tavel at Benchmark wrote: “Hype — the moment, either organic or manufactured, when the perception of a startup’s significance expands ahead of the startup’s lived reality — is an inevitability. And yet, it’s hard not to view hype with a mix of both awe and fear. Hype applied at the right moment can make a startup, while the wrong moment can doom it.”

Right now, we are in a hype market. And hype has taken the venture market by storm.

We’ve all been seeing this massive and increasing velocity and magnitude of capital deployment over the last few months. Startups are getting valued more and more. In the past, the pre-money valuations I was seeing ranged from 2-on-8 to 3-on-9. Or in not so esoteric VC jargon, $2M rounds on $8M pre-money valuations ($10M post-money) to $3M rounds on $9M pre-money valuations ($12M post-money). These days, I’ve been seeing 5-on-20 or 6-on-30. Some of which are still pre-traction, or even pre-product.

Founders love it. They’re getting capital on a discount. They’re getting greater sums of money for the same dilution. Investors who invested early love it. Their paper returns are going through the roof. When looking at IRR or TVPI (total value to paid-in capital – net measurement on realized and unrealized value), higher valuations in their portfolio companies are giving investors jet fuel to raise future funds. And greater exit values on acquisition or IPO mean great paydays for early investors. Elizabeth Yin of Hustle Fund says “this incentivizes investors to throw cash at hyped up companies, instead of less buzzy startups that may be better run.”

Sarah further elaborated, “In the reality distortion field of hype, consumers lean in and invest in a platform with their time and engagement ahead of when they otherwise might have. They pursue status-seeking-work, not because they necessarily get the reward for it relative to other uses of their time, but because they expect to be rewarded for it in the future, either because of the typical rich-get-richer effect of networks, or just in the status of being an early adopter in something that ends up being big.” The same is true for investors investing in hyped startups. It’s status-seeking work.

Frankly, if you’re a founder, this is a good time to be fundraising.

Why?

  1. Capital is increasingly digital.
  2. There is more than one vehicle of early stage capital.
  3. There are only two types of capital: Tactical capital and distribution capital.

1. Capital is increasingly digital.

Of the many things COVID did, the pandemic accelerated the timeline of the venture market. Pre-pandemic, when founders started fundraising, they’d book a week-long trip to the Bay Area to talk to investors sitting on Sand Hill Road. Most meetings that week would be intro meetings and coffee chats with a diverse cast of investors. Founders would then fly back to their home base and wait to hear back. And if they did, they would fly in once again. This process would inevitably repeat over and over, as the funnel grew tighter and tighter. And hopefully, at the end of a six-to-twelve month fundraise, they’d have one, maybe a few term sheets to choose from.

Over the past 18 months, every single investor took founder meetings over Zoom. And it caused many investors to realize that they can get deals done without ever having to meet founders in-person. Of course, the pandemic forced an overcorrection in investor habits. And now that we’re coming out of isolation, the future looks like: every intro meeting will now be over Zoom, but as founders get into the DD (due diligence) phases or in-depth conversations, then they’ll fly out to meet who they will marry.

  1. It saves founders so much time, so they can focus on actually building and delivering their product to their customers. And,
  2. VCs can meet many more founders than they previously thought possible.

This has enabled investors to invest across multiple geographies and build communities that breathe outside of their central hub or THE central hub – formerly the SF Bay Area. Rather, we’re seeing the growth of startup communities around the nation and around the world.

2. There is more than one vehicle for early stage capital.

While meetings have gone virtual, the past year has led to a proliferation of financing options in the market as well. Capital as jet fuel for your company is everywhere. Founders now have unprecedented optionality to fundraise on their terms. And that’s great!

Solo capitalists

Individual GPs who raise larger funds than angels and super angels, so that they can lead and price rounds. The best part is they make faster decisions that funds with multiple partners, which may require partner buy-in for investments.

Rolling funds

With their 506c general solicitation designation, emerging fund managers raise venture funds faster than ever and can start deploying capital sooner than traditional 506b funds.

Micro- and nano-VCs

Smaller venture funds with sub-ten million in fund size deploying strategic checks and often leverage deep GP expertise. No ownership targets, and can fill rounds fast after getting a lead investor.

Equity crowdfunding

Platforms, like Republic and SeedInvest, provide community-fueled capital to startups. Let your biggest fans and customers invest in the platform they want to see more of in the future. With recent regulations, you can also raise up to $5 million via non-accredited and accredited investors on these platforms.

Accelerators/incubators

Short three-month long programs, like Y Combinator, 500 Startups, and Techstars, that write small, fast checks (~$100K) to help you reach milestones. Little diligence and one to two interviews after the application. Often paired with an amazing investor and/or advisor network, workshops, powerful communities, and some, even opportunity funds to invest in your next round.

Syndicates/SPVs

Created for the purpose of making one investment into a company a syndicate lead loves, syndicates are another ad hoc way of raising capital from accredited investor fans, leveraging the brand of syndicate leads and deploying through SPVs. Or special purpose vehicles. I know… people in venture are really creative with their naming conventions. In turn, this increases discoverability and market awareness for your product.

SPACs and privates are going public again

Companies going public mean early employees have turned into overnight millionaires. In other words, accredited investors who are looking to grow their net worth further by investing in different asset classes. Because of the hype, investing in venture-scale businesses tend to be extremely lucrative. These investors also happen to have deep vertical expertise, high-value networks, as well as hiring networks to help startups grow faster. More investors, more early stage capital.

Growth and private equity are going upstream

Big players who usually sat downstream are moving earlier and earlier, raising or investing in venture funds and acceleration programs to capture venture returns. And as a function of such, LPs have increased percent distributions into the venture asset classes, just under different names.

Pipe

Pipe‘s existed before the pandemic, but founders have turned their eye towards different financing options, like Pipe. They turn your recurring revenue into upfront capital. Say a customer has an annual contract locked in with you, but is billed monthly. With Pipe, you can get all that promised revenue now to finance your startup’s growth, instead of having only bits and pieces of cash as your customers pay you monthly. Non-dilutive capital and low risk.

3. There are only two types of capital: Tactical capital and distribution capital.

There’s an increasingly barbell distribution in the market. Scott Kupor once told Mark Suster that: “The industry’s gonna bifurcate. You’re going to end up with the mega VCs. Let’s call them the Goldman Sachs of venture capital. Or the Blackrock of venture capital. And on the other end, you’re going to end up with niche. Little, small people who own some neighborhood whether it’s video, or payments, or physical security, cybersecurity, physical products, whatever. And people in the middle are going to get caught.”

Those “little, small” players have deep product and go-to-market expertise and networks. Their checks may be small. But for an early stage company still trying to figure out product-market fit, the resources, advice, and connections are invaluable to a startup’s growth. They’re often in the weeds with you. They check your blind side. And they genuinely empathize with the problems and frustrations you experience, having gone through them not too long ago themselves. Admittedly, many happen to be former or active operators and/or entrepreneurs.

On the flip side, you have the a16z’s and Sequoias on their 15th or 20th fund. Tried and true. Brilliant track record with funds consistently north of 25% IRR. Internal rate of return, or how fast their cash is appreciating annually. LPs love them because they know these funds are going to make them money. And as any investor knows, double down on your winners. More money for the same multiples means bigger returns.

The same is true for historical players, like Tiger, Coatue, and Insight, who wire you cash to scale. They assume far less risk. Which admittedly means a smaller multiple. And to compensate for a lower multiple, they invest large injections of capital. By the time you hit scale, you already know what strategies work. All you need is just more money in your winning strategies.

You find product-market fit with tactical capital. You find scale with distribution capital.

Product-market fit is the process of finding hype. When you stop pushing and start finding the pull in the market. Scale is the process of manufacturing hype.

The bear case

But there are downsides to hype. Last month, Nikhil, founding partner at Footwork, put it better than I ever could.

Source: Nikhil Basu Trivedi on next big thing

If I could add an 8th point to Nikhil’s analysis, it’d be that investors in today’s market are incentivized to “pump and dump” their investments. Early stage investors spike up the valuations, which leads to downstream investors like Tiger Global, Coatue, Insight, and Softbank doubling down on valuation bets. Once there’s a secondary market for private shares, early stage investors then liquidate their equity to growth investors who are seeking ownership targets, or just to get a slice of the pie. This creates an ecosystem of misaligned incentives, where early stage investors are no longer in it for the long run with founders. Great fund strategy that’ll make LPs happy campers, but it leaves founders with uncommitted, temporary partners.

Sundeep Peechu of Felicis Ventures has an amazing thread on how getting the right founder-investor fit right is a huge value add. And getting founder-investor fit takes time, and sometimes a trial by fire as well. After all, it’s a long-term marriage, rather than a one-night stand. Those who don’t spend enough time “dating” before “marriage” may find a rocky road ahead when things go south.

On a 9th point, underrepresented and underestimated founders are often swept under the rug. In a hype market, VCs are forced to make faster decisions, partly due to FOMO. With faster decisions, investors do less diligence before investing. Which to the earlier point of misaligned incentives, has amplified the already-existing notion of buyer’s remorse.

When VCs go back to habits of pattern recognition, they optimize for founder/startup traits they are already familiar with. And often times, their investment track record don’t include underrepresented populations. To play devil’s advocate, the good news is that there is also a simultaneous, but comparatively slow proliferation of diverse fund managers, who are more likely to take a deeper look at the problems that underestimated founders are tackling.

What kind of curve are we on?

When many others seem to think that this hype market will end soon, last week, I heard a very interesting take on the current venture market in a chat with Frank Wang, investor at Dell Technologies Capital. “VCs have been mispricing companies. We anchor ourselves on historical valuations. But these anchors could be wrong.

“We’re at the beginning of the hype and I don’t see it slowing down. VC has been so stagnant, and there hasn’t been any innovation in venture in a long time. Growth hasn’t slowed. And Tiger [Global] and Insight [Partners] is doing venture right. Hypothetically speaking, if you invest in everything, the IRR should be zero. They are returning 20% IRR because they seem to have found that VC rounds are mispriced. So, there can be an arbitrage.

“There will be a 20% market correction in the future, but we don’t know if that’s going to happen after 100% growth, or correct then grow again. The current hype is just another set of growing pains.”

Part of me is scared for the market correction. When many founders will be forced to raise flat or down rounds. The fact is we haven’t had a serious market correction since 2009. It’s going to happen. It’s not a question of “if” but rather “when” and “how much”, as Frank acutely points out.

Investors who deploy capital fast win on growing markets – on bull markets. Or investors who deploy across several years, or what the afore-mentioned Mark Suster defines as having “time diversity“, who win on correcting markets – bear markets. Think of the former as putting all your eggs in one basket. And if it’s the winning basket, you’re seen as an oracle. If not, well, you disappear into obscurity. Think of the latter as diversifying your risk appetite – a hedging strategy. More specifically, (1) being able to dollar-cost average, and (2) having exposure to multiple emerging trends and platforms. You’re not gonna lose massive amounts of capital even in a bear market, but you also will be losing out on the outsized returns on a bull market.

Only time will tell how seriously the market will correct and when. As well as who the “oracles” are.

In closing

At the end of the day, there are really smart capital allocators arguing for both sides of the hype market. Like with all progress, the windshield is often cloudier and more muddled than the rearview mirror. As Tim Urban once wrote, “You have to remember something about what it’s like to stand on a time graph: you can’t see what’s to your right.“

Edge
Source: Tim Urban’s “The AI Revolution: The Road to Superintelligence“

And as founders are going to some great term sheets from amazing investors, I love the way Ashmeet Sidana of Engineering Capital frames it earlier this year. “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.”

Whether you, the founder, can live up to the hype or not depends on your ability to find distribution before your competitors do and before your incumbents find innovation. Unfortunately, great investors might help you get there with capital, but having them on your cap table doesn’t guarantee success.

Nevertheless, the interpretation of hype is always an interesting one. There will continue to be debates if a market, product, or trend is overhyped or underhyped. The former assumes that we are on track for a near-term logarithmic curve. The latter assumes an immediate future looking like an exponential curve. The interpretation is, in many ways, a Rorschach test of our perception of the future.

Over the course of human civilization, rather than an absolutely smooth distribution, we live something closer to what Tim Urban describes as:

S-Curves
Source: Tim Urban’s “The AI Revolution: The Road to Superintelligence“

If the regression line is the mean, then we’d see the ebbs and flows of hype looking something like a sinusoidal function. As Mark Twain once said, “History doesn’t repeat itself, but it often rhymes.”

It won’t be a smooth ride. The world never is. But that’s what makes the now worth living through.

Photo by Jené Stephaniuk on Unsplash

Thank you Frank for looking over earlier drafts.

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Think like an LP to Get a Job in VC

I want to preface this piece by first saying, though I have LP (limited partner) friends, I’ve never been an LP. So take everything with a grain of salt. For that matter, even I have been an LP, still take this with a grain of salt. After all it’s just my one perspective on the world. Nevertheless, I hope this perspective helps to provide some context around the venture space. As it did for me.

For years, I’ve recommended my friends who were looking at startup job opportunities to think like a VC. And having chatted a number of firms over the years about scout, associate/analyst, venture partner roles, I’ve come to a new revelation. Or rather one that I’ve practiced for a while, but haven’t connected the dots until recently.

When you’re looking for VC job opportunities, think like an LP. I’ve written about the LP calculus a few times before, like:

Here are some questions I usually consider:

  • How have you thought about your own differentiation that gets you access to some of the uniquely fund-defining opportunities you have?
  • What are the startups in your anti-portfolio? And what have you learned since from them?
  • [if their funds are wildly different in fund size (i.e. Fund I – $20M, Fund II – $100M)] How do you think about fund strategy now versus Fund [t_now-1]?
    • For context, usually each subsequent fund doubles in size. i.e. Fund I $20M, Fund II $40-50M, Fund III $80-100M
  • [If they have fund advisors, EIRs, and/or scouts] How do you pick advisors? What is your mental model for picking scouts?
    • Or one of my favorite phrasings: How do you differentiate the good from the great [advisors/scouts]?

Over the weekend, my friend sent me a great podcast for me to unwind. In it, I found an unlikely hero soundbite. “Your library holds a lot of value that you may not know until the story arrives. […] No one’s selling characters ’cause they’re one story away from this character becoming a hit.” While its context is related to why Marvel won’t sell any of its superheroes, Alex Segura‘s, co-president of Archie Comic Publications, anecdote proves just as insightful to the world of venture.

Discovering first-time early-stage founders is hard. The same is true for finding the next killer GP or venture firm. AngelList’s Rolling Funds are democratizing access to capital, lowering the barrier to entry for emerging fund managers. And really the success of a fund is determined by its MOIC – multiple on invested capital. 5x and up would be ideal. And that, like I mentioned in my last blogpost, boils down to the fund’s top one or two winners. Loosely analogized to a fund’s unicorn rate (percent of portfolio that are unicorns). In other words, the “one [investment] away from this [fund] becoming a hit.”

To see if a fund can consistently find those stories boils down to its systems. Often times, you’re joining a fund that has yet to have a runaway success. Or a fund that has a fund returner. So, instead, you’re looking at their thesis and if their thesis allows them to be:

  1. The best dollar on the cap table of a startup in their scope
  2. Forward-thinking enough to see where the market is heading, rather than where it’s been
    • And by definition of being forward-thinking, taking bets/risks that few other VCs would, yet calculated enough to make logical sense given the trajectory of the market. In other words, is the thesis grounded on first principles, yet able to capture their second-order effects?
    • That, in turn, requires you as a VC applicant to have decent literacy in the market the firm is betting in.

As James Clear, author of Atomic Habits, wrote, “You do not rise to the level of your goals. You fall to the level of your systems.” What are their mental models? Fund strategy? How do they think about portfolio construction? About capital allocation? And more importantly, time allocation?

If you’re looking to learn more about GP-LP dynamics, I highly recommend Samir Kaji’s Venture Unlocked podcast and Notation Capital’s Origins podcast.

Photo by Micheile Henderson on Unsplash

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Should you take VC money or just money money?

Not too long ago, I came across a question on Quora that I had to double click on: Why should founders care about VC brand? Money is money, isn’t it? While the question itself seemed to have a come from a less-informed perspective, I found it to be a useful exercise to once again go through the checklist of founder-investor fit.

Money, frankly, is just money. A Benjamin will look the same and work the same as any other Benjamin out there. Assuming you don’t need anything else other than money, I’d recommend other sources of funding other than venture funding, i.e.:

  • (Equity) crowdfunding,
  • Rev share,
  • Angels – high net-worth individuals who write checks in the 1000s to 10s of 1000s of dollars;
    • Also worth looking into, but are representative of the VC model, are super angels and solo capitalists. Many of whom might be leading their own rolling funds (more context) now;
  • SBA Loans;
  • Friends/family – small sums of money, unless your dad is Chamath Palihapitiya;
  • ICO;
  • Government (public) and private grants – really small sums of money, but money nonetheless;
  • Accelerators/incubators – less upfront capital. But the partnerships they have with other startup services save you a lot of money (i.e. AWS, Adobe Suite, etc.);
  • Selling domain names (yes, I have a friend who initially funded his business by doing that, but other than that, I’m kidding);
  • And I’m sure I missed some others out there.

On the other hand, most founders who raise VC funding want something more than just monetary capital, including, but not limited to:

  • Mentorship/advisorship –
    • Ex-operators who can give you tactical advice,
    • Former founders who can empathize with you,
    • VCs who can check your blind side and had previous portfolio founders who have gone through what you’re going through now,
    • People who have access to resources that will aid you on the founding journey (ideally not distract you),
    • And frankly, people who’ll be there for you when you have to make the tough calls,
    • Highly recommend Harry Hurst’s tweet about the CS:H ratio (check size: helpfulness, which I elaborate on here) as a mental model to figure out which VCs depending on fund size/check size can help you the founder the most at the stage you’re at.
  • Network – downstream investors, sales pipeline, potential hires (eng, executives, growth, product, marketing, etc)
  • Brand/PR –
    • If you’re trying to fill up a round, a brand name investor can easily help you fill in the rest of the round with their network and their participation alone. They’ll also help you raise downstream capital – directly or indirectly.
    • It’ll be easier to find customers. With a brand name VC, you also get quite a bit of media attention from Forbes, TC, NY Times, and so on. Customers are more likely to trust you knowing that you’re backed by a recognizable brand, especially the folks on the other side of the chasm on the adoption curve.
    • It’ll be easier to hire world-class talent. Your business, in their mind, is less likely to go out of business tomorrow. And while you’re not looking for candidates who seek stability, it does give the candidates you do want to hire a peace of mind and confidence that you have external validation.

There’s a saying that the difference between a hallucination and a vision is that other people can see the latter. It’s really a chicken and egg problem. I’m not saying a VC’s brand will guarantee the success of your startup, but I do believe it will help, with the underlying assumption that you pick the right VC. Whereas it used to be a differentiator a decade ago, all VCs these days say they’re founder-first or founder-friendly. But unfortunately not all are. They might be if things are going well. But the true tells are what happens when things don’t go well. Here are some of my favorite questions to ask portfolio founders before you work with a VC. And how to find founder-investor fit.

Photo by Luca Bravo on Unsplash

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Rolling Funds and the Emerging Fund Manager

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In the past few months, Rolling Funds by AngelList have been the talk of the town. Instead of having to raise a new fund every 2-3 years, fund managers can now continuously accept capital on a quarterly basis, where LPs (limited partners, like family offices or endowments or fund of funds (FoF)) typically invest with 1-2 year minimum commitments. Under the 506c designation, you can also publicly talk about your fundraise as a fund manager. Whereas the traditional Fund I typically took 11 months to fundraise for a single GP (general partner of a VC fund), 11.9 if multiple GPs, now with Rolling Funds, a fund manager can raise and invest out of a fund within a month – and as quick as starting with a tweet. AngelList will also:

  • Help you set up a website,
  • Verify accredited investors,
  • Help set up the fund (reducing legal fees),
  • And with rolling funds, you can invest as soon as the capital is committed per quarter, instead of waiting before a certain percentage of the whole fund is committed as per the usual 506b traditional funds.

Moreover, Rolling Funds, under the same 506c general solicitation rules, are built to scale. Both for the emerging fund manager playing the positive sum game of investing upstream as a participating investor, and for the experienced fund manager who’s leading Series A rounds. In the former example with the emerging fund manager, say a solo GP investing out of a $10M initial fund size, 20 checks of $250K, and 1:1 reserves. Or the latter, $50-100M/partner, writing $2-3M checks. Maybe up to $7-10M for a “hot deal“, which by its nature, are rare and few in between. In the words of Avlok Kohli, CEO of AngelList Venture, Rolling Funds are what funds would have looked like if they “were created in an age of software”.

I’m not gonna lie, Rolling Funds really are amazing. Given the bull case, what is the bear case? And how will that impact both emerging and experienced fund managers?

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