Conventional wisdom says that you follow on in your winners in venture capital, but I'm not sure you can always accomplish that so cleanly.
In hindsight, if you were an Etsy investor, you would have wished you participated in every single round the company ever did, putting as much as you could in.
But what if you had done the same thing with Fab?
Did those companies look so different in the first few rounds? In fact, didn't Fab look like much more of a $3 billion IPO after those first couple of follow ons than Etsy did?
If you're making investments in seed stage companies, I'd argue that if you don't have a very big fund, you're much better off just writing one check for each company, and not following on. The multiples of return you get in a winner when you're in at single digits are more than enough to make up for missed follow on opportunities, and the truth is, the Series A guys want as much of the next round as possible anyway. You actually make things easier for the entrepreneur--because once things "take off", they can't fit everyone in.
The funny thing, though, is that "take off" these days usually just means "raises money." It's not clear whether the metrics of pre-sales, downloads, or customers acquired with venture dollars are really predictive of great outcomes. Yet, companies are able to raise tens to hundreds of millions of dollars before you can really confidently say you've got a winner. I question whether or not seed funds leaning into Series A and B deals really know that they have a winner on their hands just a year to 18 months into the life of the company. If that were true, why is the average Series A fund such a mediocre performer?
Plus, the idea of leaning into your winners makes it sound like these funds are really being selective about their follow ons. When's the last time you saw a seed fund not participate in a next round because they thought the price was too high or because they still weren't sure if the risk was off the table enough to call something a winner? If you're just doing all the follow ons available, in a market like this it almost means you're following on in every deal.
Is every deal going to be a winner just because their Series A came so easily at such a high price? What happens with this Merry-go-round stops?
Not to mention the prices at which you're being asked to follow on at. When the average IPO market is a bit flat from last year and 9 out of 10 M&A transactions are $100mm or less, does it really make sense to lean into Series A valuations of $25, 30, even $50mm?
At minimum you have to call traditional thinking into question in times like this if you're a small seed or angel investor without a large pool of capital that you're trying to return.
A while back, a larger fund courted one of my portfolio companies heavily. I wasn't sure if this firm was the best partner for the company, so I reached out to an experienced founder who had been through lots of rounds as both an entrepreneur and an angel investor.
He told me the following:
There are maybe two or three VCs on the face of the earth that add any value to the eventual outcome of a company, so there's really just a few criteria that matter...
- They should do no harm.
- They should be able to close the round quickly and without too much distraction.
- You should like them enough to have them on your board.
- They should hit your bogey in terms of price.
He said if you could check off all four of those boxes, you should just do the deal and move on. I was so surprised because he had taken money from investors who had a tremendous reputation for adding value to their companies.
When you look at venture returns, however, the reality in most circumstances is that you're either in the big deal or you're not. If you're in a billion dollar outcome, it overshadows anything else you do as an investor.
Sometimes, the "best" firms are in the best deals, but often times, they're not, or they're joined by a lot of randos. That top tier VC firm might be the lead on the Series A for unicorn you've heard of, but the seed round might be filled with lots of other firms who don't do squat for their companies--except take credit for their success.
Sometimes, firms get into deals not because they're highly sought after--but because the team pivoted several times. Dumb luck dictates that the firm who got the deal just happened to be the eighth firm down the list for a pitch after the game-changing pivot. The first seven firms--the ones the entrepreneur really wanted, got the first business model pitch--the one that didn't have a chance of working out.
Way to go, 8th best seed fund!
Other than having the guts to keep writing checks, it's not clear that any VC has ever done anything to enable a company to get to a billion dollar plus exit where the entrepreneur couldn't have done it with any other check writer. Don't get me wrong--writing checks in the face of uncertainty, especially when you're basically the only one doing it, is a very difficult thing to do, but most VCs portray themselves to be doing a lot more than that, including me.
I know that I do a lot of things to help my companies--but I also know that the founding team is responsible for 99.999% of the outcome. If I didn't help them make that developer hire, would they have made one on their own? Sure. If I didn't get them some PR, could they have gotten it anyway? Probably.
Do I know how to do this any other way?
Like tigers with tuna fish sandwiches, I suppose I'm kind of stupid that way. I certainly ask myself whether it matters that I take the time to meet with my companies every four weeks, when others just say "Let me know when you need me."
And the best ones certainly are there when you call them--so why not just leave it at that and be an open phone line?
a) I just don't know how to work any other way. I don't like idely sitting by. I'm always trying--and I know I would have been better off with more feedback as an entrepreneur. Would I have had a billion dollar exit with the world's greatest investor behind me? No. I probably still would have failed, but I would have gotten a lot closer to success.
b) On the margin, when you're dealing with a sub-$20mm fund, it can matter. When you've got hundreds of million dollars of investors behind you, it only matters if you're in a unicorn or not. With a small fund, turning a couple of zeros into break evens, and helping a small win become a bigger one do make a difference. That's why I'd encourage entrepreneurs to think about the fund size of the folks who back you. The bigger their fund, the more they're just going to encourage you to raise lots of money to go big or go home. The smaller the fund, the more likely they'll focus you on the little things that add up incrementally, because it adds up for them, too.
c) Starting a company is the hardest thing you'll ever do (maybe besides having a kid), and the least I can do is make you feel like I've got your back and I'm there with you along the way. If not feeling alone gives you any comfort, I'm doing my job.
It will probably be eight to ten years before what I do now for companies ever sees the light of day, before we find out whether or was all worth it, but I'll stay the path regardless.
I don't need to remind you of the widening gap between the rich and the poor, but if I were to be more accurate, I'd say it's the widening gap between the mega rich and everyone else. When you've already got tens and hundreds of millions of dollars, a whole world of moneymaking opportunities are available to you that the rest of the world can't access.
Take venture capital, for example.
To benefit from the explosive growth of companies like Uber, Airbnb, Dropbox, etc, you had to fit in either one of two categories: be an angel investor already in an inner circle of experienced angels and entrepreneurs, largely located in Silicon Valley, or be an investor in a venture capital fund that backed those companies.
Very few are ever going to wind up in the former category--so the most accessible option for most investors would have to be a venture capital fund. Only, that's not such an accessible option as it turns out either.
The SEC, in an effort to "protect the little guy" has all sorts of regulations. First, you have to be an accredited investor--someone with a few hundred grand in income or a million to your name. Below that and they need to keep you from investing in really risky stuff, like venture capital.
Of course, they don't prevent you from putting your whole savings into penny stocks, but that's another story.
Even just being accredited though doesn't mean you're in. One regulation has effectively kept the most investors from participating in the most recent tech boom--namely the 99 investor limit in a limited partnership. That's how most venture capital funds are structured. While the "accredited investor" requirements for being allowed into these funds aren't so onerous , they make it really unattractive for funds to take smaller checks.
You see, if you're trying to raise a $50mm fund and keep it to one legal entity, you can only have 99 underlying investors. Math dictates that they'd have to each commit a little more than half a million dollars to the fund--and that's if they each only count for one beneficial owner. Family offices, for example, often have many beneficial owners. Even if they're pooled into one fund for investment purposes, each member still hogs up a slot towards that 99.
If you've got $5mm net worth, you can fit into another type of fund for "Qualified Purchasers". You can have up to 500 of those. Think about it, though. If you've got a fund full of QPs, why bother accepting the 99 little guys in a dinky sidecar fund? They won't add up to much, relatively, speaking.
That makes the fund investor beneficiaries of the Uber ride, for example, from a single digit million dollar seed valuation all the way on up to $80 billion mostly people who already have at least $5mm, family offices that have multi-generational wealth, or college endowments large enough to have venture programs (typically Ivy Leagues).
In an age where technology enables fund managers to onboard, update, and organize large amounts of investors--why is there a limit at all? Why can't my parents put $5k into the next Brooklyn Bridge Ventures fund--a diversified pool of 30 something investments? These rules wind up making it easier for accredited individuals to make one angel bet, but make it really hard to get into a portfolio of 30 bets.
In the late 90's, when dot coms went public, even though the sector didn't do well as a whole, there were still opportunities to make significant returns as an individual investor. Public market fans of Google, Apple, Amazon, Yahoo, etc who held on did quite well, while the IPOs of today are leaving little upside for today's investors. Companies are staying private at higher and higher valuations for a host of reasons, so if you're not in a venture capital fund, you're largely missing out on the tech boom because there isn't as much upside left anymore once a company goes public.
Because Brooklyn Bridge Ventures manages smaller funds, it can get away with one entity and be fine--even though a few of my family office investors count for multiple underlying beneficiaries. However, I've decided that involving a wider community of investors is beneficial to the founders that I back--and honestly makes for a more interesting experience for me as well. I value the feedback and insight I get from my Limited Partners and the community we've built.
Therefore, in future funds, I'll be moving my family offices and institutions into their own QP fund to make a bit of extra room for accredited individuals. Unfortunately, I can't allow all 10,000 people on my weekly newsletter to toss a grand in, because I'd be thrilled to have it be such a community effort, but happy to speak with investors who are excited about getting access to the NYC innovation community and can commit a couple hundred grand over the next four years. This, of course, isn't a solicitation to invest in any specific investment vehicle. I'm just saying that I'm open to conversations with accredited investors who are supportive of tech entrepreneurs who might not have considered themselves fund investors before because of size constraints.
I've known Hunter Walk for almost a decade. He found me through my blog and I didn't think he was real. Hunter Walk can't be any blog commenters real name, can it?
Turns out that not only is he real, but he's one of the most genuine, thoughtful, and egoless people I've met in the startup world--a real breath of fresh air. I look forward to connecting with him when he's in NYC and when I head out his way. He approached me recently with an idea for cross interviewing each other and I thought it was a good way to have my writing be a little more collaborative with my audience. I wasn't sure whether his answers would wind up here or vice versa, but when I thought about it, it turned out I was pretty adamant that my blog is for my voice. So, if you want to read what I wanted to know about Hunter, you can check it my interview of him here, on his blog.
I liked this exercise so much that I think I'd really like to make #MondayMailbag a tradition with other people. I don't know what the criteria will be or how we'll work it out, but maybe we could just start with a Twitter hashtag and go from there. What questions do you want me to answer next Monday?
1. BBV has talked proudly about its large number of female founders. When you think back to your time at USV, FRC and BBV, can you identify a time you passed on a founder because of a blind spot or unconscious bias you possessed at the time and if so, what did you do going forward to not make the mistake again?
I think other people have talked more about the fact that I've funded female founders than I have. I talk proudly about all my founders, but not necessarily because they're female. I'm just trying to invest in the best opportunities.
There are two parts to regretting a pass. One is passing for the wrong reasons and the other is having it turn out to be a missed financial gain. Normally, unless you realize the latter occurred, you don't think much about your passes. Maybe I passed on someone because they're kind of quiet and I didn't feel like they could be a public champion for their business--and I could have been wrong about that, or wrong about quiet people in general, but if they failed for some other reason, I wouldn't see my bias.
We all have biases--and not all bias is bad. I'm probably biased against just out of school hackers who think that just because they built a thing, they're going to disrupt an industry they don't care about understanding. Am I wrong to have that? Perhaps. Do I want to change that? I'm not sure because I don't know if I would ever get along with someone who doesn't at least appreciate the way something works now and why it has worked that way for so long, even if you want to change it.
I can definitely think of a few people I met with and said, "Well, that person was kind of a jerk" or they just had a bad personality--and they went on to build seemingly successful businesses. I'm not sure I think of that as a "mistake" to be fixed.
In short, you need to be able to get along with a founder--and if there are people types you don't jive with, you need to make sure it's not just because they're different than you, but because they genuinely lack the values you see as important. I think I've been good about that so far.
2. You've been in VC long enough to see lots of different funds, partners and deals. Do you think the average investor is a generally ethical and collaborative person, or is this an industry of sharp elbows and grey areas?
I think humans are generally programed to look out for themselves first. They don't intentionally seek to harm others, but they're not inclined to do you any favors either. That doesn't make them unethical, though. I'd say there's a lot of "me first" and a lot of it is predictable, with money as the main motivator. I don't, however, see a lot of unethical behavior--but maybe that's because of the answer to the above question of trying not to work with jerks. You get a lot of choice as a VC as to who you want to spend your time with.
3. Five years from now, will we have more, fewer or the same number of seed funds here in the US. I think the guys at First Republic Bank counted nearly 200 sub $100m funds (not all necessarily seed).
There are two types of seed investors: people who are doing it as a stepping stone to doing something bigger and people who actually like doing seed. Many investors start out doing seed and move up the ladder in terms of assets under management. Few stay down here, for a few reasons. There aren't a lot of fees, so you really don't get much in the way of current income and nice offices, or non-partner help. You wind up working really hard for not a lot of near term cash. That's just not attractive to most people--so they'll move up. Some other people just won't make it.
What I hope to see is the creation of new Series A investors who are willing to do the old school Series A deals of $3-5 million dollars. I fear that in the race to show that your companies can raise $20mm Series A's, we're mistaking good ideas for big ideas, and people are raising bigger and bigger funds off of valuations inflated by big funding rounds.
Some companies have a natural terminal exit value of $250mm and we should all be able to make darn good money off of that--and that means financing them responsibly, with reasonable expectations.
4. I think we originally connected via your blog - it's great and you've been one of the longest running VC bloggers (as far as I can recall). Who are some of the other investors that you think should be mentioned among the best VC bloggers but aren't as well known?
Thanks! It's been over 11 years now! Hard to believe.
I'll be honest, I don't read too many VC blogs with much loyalty anymore--but I think that Mattermark is doing wonders for under the radar blogs with their newsletter. Medium is also a big part of the resurgence of VC blogging--because now you don't worry too much about updating regularly. Your site doesn't look barren if you haven't posted on Medium in a while.
What I enjoy much more is Instagram. Blogging is a great place to find best practices and I feel fortunate that I have a network where I can go straight to the source and talk to people 1:1. It isn't a good place to get to know people, however. That's where Instagram comes in. I wish IG had better discovery tools because I really want to get to know the people behind the best practices--the dad, the mom, the cyclist, and not necessarily the 5 tips for growing MRR.
5. Are there existing larger VC funds that you'd consider joining, or are you BBV for life? (Don't have to name specific funds - just whether there are circumstances that would cause you to join one)
The only way I'd ever consider joining another fund is in retirement mode--to mentor other VCs, far far in the future when I've learned a lot more than I know now. I think that's something that's really lacking in the VC world. There are accelerators for companies, which can be especially helpful to first time founders, but what if you're a VC raising a first time fund. There's literally nothing. There's next to no content available to help you think about fund economics in depth. There's no where to find interested and willing VCs at the other end of their career willing to help you think about issues and opportunities. I'd be very interested in doing something like that later on.
For now, I love the current model. I have zero interest in firm building. I'm not a great manager or delegator (but I'm vastly improved on the latter as of recently) and it's not clear to me that VC firm capability scales with the number of partners. Just like how raising too much money can be a rabbit hole for startups, the same goes for VCs. If you add partners, you have to raise more, which means you can only do certain deals at certain stages, which also means there's less value add because the companies are more mature. It's a slippery slope. I'd rather stick to early, impactful, and local.
I've said before that I wouldn't take on a partner.
I didn't think I needed one, and I'm happy to say that it seems that I've done just fine without one. I've had the good fortune of investing in standout companies like Canary, Tinybop, Floored, Orchard, and Ringly, just to name a few. The fund is performing really well and we've had lots of inbound offers to invest in the second fund, which was being rounded up until recently.
That's when I got an offer I couldn't refuse.
Someone called me up that I hadn't met in person before but that I had interacted with over Twitter. This person had built a hugely successful firm that grew in size from fund to fund--and was now a major brand in the space.
Right off the bat, we hit it off. It was like we were talking to mirror images of each other. And that's when it happened...
Marc Andreessen asked to join Brooklyn Bridge Ventures.
Yeah, I wouldn't have believed it either, but he said he wanted to get back to the roots of investing in pre-seed and seed deals, of focusing on some hands on work with lots of first time entrepreneurs.
Turns out, he's also in love with New York the way I am--and believes that the diversity of industry, culture, and talent here is the best place to start the next big thing. He'll be moving to the Big Apple at the end of this month.
Still reeling from the offer, I sunk back down to earth when I realized that I had priorities. While I was well on my way to raising my $15 million dollar second fund, I wasn't quite finished with that process yet. When I told him about my concern of adding a new partner in the middle of a fundraise, he asked me how big the target was. After I told him, he joked that he'd shake out his couch cushions and make it happen.
I said, "What do you mean 'make it happen'?"
That's when Marc offered to be the sole investor in the fund--putting up the whole $15 million. He said it wasn't about the money for him--but that he just wanted to work with someone who hustles like an entrepreneur and is willing to make investments in teams in the most formative of stages, when they really don't have a lot to show the world quite yet. It was more about an interesting challenge for him--and that the day to day of running a huge machine like A16Z had grown a bit boring. That's why he had been tweeting so much and why he wanted to really sink his teeth into something new.
So, unfortunately for everyone else, including my existing investors in Fund I, there is no opportunity for anyone else to invest in my second fund. Marc really wants to be all in and that was the minimum he would accept having at stake. We might strategically take a few checks from larger accredited investors, but only ones we really like.
I'm excited about this new chapter in the history of Brooklyn Bridge Ventures and am still in disbelief that I was able to sell this bridge to such an successful industry leader. And if you believe this, I've sold you that bridge as well.