Six years ago this week Satya and I took our Homebrew deck on the road (as far south as the Rosewood!) and began raising Fund I. Despite now being on our third fund, we still approach our work with a beginner’s mind, working hard to get better at what we do every day. But there are some things we’ve learned and frequently new/aspiring managers hit us up for advice.
Each firm is its own special animal, adopting some industry best practices when there’s no reason to reinvent, but also trying a handful of new approaches that make them who they are. This is certainly the case with Homebrew. That said, there are two portfolio modeling/management tips that I do think are valuable exercises for every Fund I. And since I find myself repeating them frequently on advice calls or coffees, let’s jot them down here so I can send a URL over instead of a meeting invite 🙂 Note: The two points below are most applicable for, say, funds under $25m where you’re trying to prove yourself in order to raise a larger, institutional second fund.
If Your Portfolio Model Assumes Outperformance Across Multiple Metrics, I Don’t Believe It: Every VC fundraise has an Excel sheet that forecasts the performance of the fund. It’s pretty basic but is meant to give managers (and their potential LPs) a sense of how many companies will be in the fund, ownership targets, dilution assumptions, reserves strategy, exit expectations and ultimately, a target return for the fund. This exercise is also known as “let me show you how we get to 3-5x net.”
Often I see the forecast models constructed with a bunch of assumptions that are totally out of whack with historical norms and current trends – often dramatically underestimated dilution pre-exit, zero failure rate in the investments or outcome modeling suggesting every one in 10 backed startups will be a $1b+ exit. Sometimes new VCs think this conveys confidence and high standards for themselves but in reality it shows sophisticated LPs that you don’t really understand venture. Or at the very least, you have a model requiring a high degree of difficulty to succeed. It’s better to show a reasonable way to get to expected returns and then if there’s upside surprises from there, fantastic. I think you can get away with forecasting *one* factor being better than average, so long as that is backed up by a hypothesis as to why you can achieve it relative to your peer managers.
For Fund I, It Is Better To Get Into Great Companies With Less Ownership Than You’d Want (Or Without Reserves To Protect Pro Rata) Than It Is To Be In Mediocre Companies: Unless your strategy is to show you can lead rounds, in which case you should really have a larger fund anyway, I’m going to advocate something perhaps controversial here: focus more on company quality than ownership targets. Better to have a range – say 2-5% (and get as much as you can in each deal you do), than have a min (5%) and walk away from deals where you can’t get that much.
Why do I say this, especially since our own fund strategy is fewer investment with concentrated ownership? Because I think it’s easier to make the case to future LPs that a larger fund means you’d be able to get, for example, 4-8% of ownership in these great companies you backed in Fund 1, and/or protect ownership in your winners, than it is to convince LPs that a larger second fund is going to make you a better picker.
The one caveat here – it’s hard to jump more than one weight class per fund. What I mean is, if you were writing $50k checks in Fund I and then tell LPs you intend to write $1m checks in Fund II, they’re going to be skeptical that you will get the same access. Your competitive set changes, your operational support expectations change, your follow-on strategy changes, etc. Too much. But if you show adeptness at writing $50-$100k checks and do right by those founders, an LP will believe that, with more dry powder, you can write $250k checks into those companies initially and then use another $500k to protect your ownership in the best ones. That’s how you ladder from a $20m fund to a $50m fund responsibly IMO.
Anyways, your mileage may vary, and we’re still very much in a “prove it out” ourselves phase, but I believe these two things to be true and hope they help you out!
I love podcasts. Basically they’ve replaced satellite radio in my car and airpods + apple watch combo make it near frictionless to listen while walking between meetings. I’m also a believer that there’s money to be made in podcast businesses – most of it not “venture scale” but lots and lots of opportunities for founders to build meaningful SMBs here. And undoubtedly some will prove me wrong and break through to levels of success I didn’t expect [disclosure: we’re investors in Anchor, which I believe is one of these examples]. However, let me tell you about a problem that founders occasionally tell me is the basis for their startup: podcast discovery.
The startup usually pitches something like this: There are lots of great podcasts and most people can’t find the best ones for them so we’re building an app that solves this for them. How? Insert one of the following: bootstrap from social graph, bootstrap from interest graph, bootstrap from what they’re currently listening to, etc etc etc
These are all wonderful ideas but they are at best features, not products or companies. It’s true that at any given time there’s probably a podcast (or at least podcast episode) that I don’t know about and would enjoy. But while it’s a persistent problem (true of almost EVERY media type), it’s not an especially valuable one in a standalone business. You’re not going to get to a critical mass of users and if you do, trying to sell Promoted Pod slots (or other ads) around the recommendations isn’t substantial enough to build a business. And people won’t switch their podcast client to your just because you do discovery “better.” Inertia is too strong and companies like Spotify, which solve this via search, curation and personalization, are increasing their share of podcast market.
So what are some businesses to be built here if you are passionate about this challenge? You could try a theSkimm for podcasts – newsletter based summary and recommendations for target demographic or content vertical. There’s an app called Wilson that some folks have recommended to me which does podcast curation, almost magazine style. Oh, and I do think podcast discovery is problem for CREATORS and there are some interesting business models there, but that’s another post 🙂
If you think I’m wrong about all this, I’d love to hear why (@hunterwalk on twitter).
“Rising to your level of misery” is how Arthur Brooks puts it. The first 20 minutes or so of his podcast with Ezra Klein [link – play button at bottom of page] is one of the most well-articulated descriptions of an affliction which hits many tech leaders, especially those in product/design/engineering.
Brooks describes the “trap” of being good enough at your job to continue taking on new responsibilities, eventually leading to significant management tasks. Along the way you picked up material gains (salary) and emotional ones (power), so you never said “no, I don’t want the promotion” but eventually you find yourself doing a job that you no longer enjoy. Unable to imagine giving up the place in the organization (who proactively moves downward in American culture?) you end up miserable and unproductive.
This was an ALL THE FEELS discussion because I experienced my own version of this at Google. What I loved most about working in product was being on a whiteboard with teammates, but my job eventually became dominated by resource planning and managing upward. However I had (have?) too much ego and control-orientation to step backwards into an IC role, even if day-to-day it would have likely made me happier.
Anyway, worth a listen IMO, especially if you’re someone who aspires for “leadership roles” because of what they represent and not what they are.
I’m going to be throwing 30m and 60m “writing times” on a shared calendar as an experiment to see if it helps other people find time/inspiration to write, knowing that they’ll be part of a group doing the same thing. “Writing” can be anything you’d like – a blog post, letters to friends, book proposal, journaling, etc.
There are a whole bunch of features that I can think of to make this more effective, but here’s the MVP:
When you do, you’ll get notices about new writing sessions scheduled and see them pop up on your calendar like so —
I’m Pacific Time Zone but will try to spread Writing Sessions around at various times/days, but apologies in advance for the California-bias.
Depending on how this goes and whether others want to help out, I can imagine a post-MVP future involving knowing how many other people RSVP’ed for a session, group chat via Discord/Slack/other, a place for people to link to what they wrote during the session and so on. Just didn’t want to deal with abuse or trolls, etc right away and give the group a chance to gel.
Note: If you’re one of the people who signed up when I tweeted in December, I’m adding you to the group, but can only do 100/day (Google Group spam limits). If you haven’t received a Welcome Note from the Group, feel free to add yourself. Otherwise I’ll have you added by ~Wed.
If you have ideas or comments, please tweet them to me @hunterwalk
Oh, and I wrote this during our first session Sunday night 9pm Pacific 🙂
If you are a man and intend to procreate at any time in your life, you should get your sperm checked out. It’s non-invasive and quite easy (some might even say pleasurable). Just as women are freezing their eggs and getting a baseline on their reproductive health ahead of having a child, so too should us guys. The fact we don’t talk about this more openly and often is a disservice to our gender and perpetuates the myth/stigma of a fertility burden on women.
Let me tell you a personal story – we have a lovely daughter who was the byproduct of a successful IVF. My wife and I were trying naturally for about a year but it wasn’t working out. Not the “timing cycles and rushing home at 12:04pm to bop” trying but still, trying. So we went to our respective fertility doctors. The wife discovered she had the eggs of a woman a decade or more younger than her actual age – ie fertile as heck. I had a normal sperm count but lower than average motility (ie slow swimmers). The doc told me we could try for another year and perhaps it would work or we would be excellent candidates for IVF. And we were!
It was a great outcome but I still ask myself why I didn’t get checked out at 20 and every few years after (we conceived at 37)? If the motility issue was known at the very least I could have reduced any concern my wife had during the “year of trying” that it might be “her” issue.
So dudes, do yourself a favor. Get your reproductive health checked out in 2019 – whether you’re planning on fatherhood this year, or 10 years down the road.
Slackenfreude – the joy in knowing that as a Slack group grows, the likelihood of a new member searching their name and finding they’ve been slagged on in earlier conversations reaches 99.9%
There’s increasing punditry consensus that “small group” products will be one of the beneficiaries of the backlash to public, scale social media. There’s a design constraint in these products that I’m curious about how people would approach: how does a participant make decisions around “appropriateness” of topics/comments (and privacy) if the group composition isn’t static? That’s to say, imagine you’re added to a 10-person group to chat about startups. And then you slag on a particular company in a way that you might not do publicly, but then as the group grows to 100 people in size, someone from that company joins and is pissed off at you?
Some product attributes that one would take into play to determine how they use these “smaller, private groups:”
Group composition and process for adding new members – is it static from point of creation, or can it change, and how?
Default visibility/relationships of any two members in the group – does every group member automatically have the same system-specified relationship with each other or do bidirectional relationships need to be approved
Discoverability, persistence of content – is old content available for new members, visible to all members?
“Solving” for this can escalate quickly into complexity that no group wants to deal with so my guess is that different spaces will have consistent, easy to understand rulesets and that users will manage their voices in these spaces accordingly.
For example, there can be products that with persistent, fully visible content to all in the group, but where no new group members can be added after initial creation. Or spaces where, as a new member, you can never see archives, only the content created from the moment you join (these systems would also need to “announce” new members in some way).
Basically I’m interested in how different designers have thought through this issue across different enterprise, consumer products.
BuildingConnected, a leading construction tech SaaS startup, was acquired for $275m as part of Autodesk’s push into the vertical. I strongly believe the detailed story of the company’s success is the founders’ one to tell if they choose to do so, but at the risk of excessive inside baseball, I’ll share my perspectives from the cap table.
Solid Example of Why We Picked Concentrated Seed as Our Model For Homebrew: This acquisition is our largest return thus far (on a total cash basis – Cruise Automation’s acquisition by GM beats it on multiple of return). BC sits in Homebrew I, a 20 company fund of $35m with initial investments made 2013 – 2015. We concentrate our time with companies, entering at seed stage and working with them most proactively until ~Series B – in this case that’s when I stepped off of BC’s Board into an Observer role. We tend to spend less 1:1 time with the CEO after this point but continue to lean in and do whatever we can to support the company.
Because we focus our time, we also focus our dollars, typically taking a 10-15% ownership stake during seed and then investing into subsequent rounds, which we did here into BC’s Series A (Crosslink) and Series B (Lightspeed). The combination of a modest fund size and meaningful ownership means we stay very aligned with founders for the formative years of their company and can have great outcomes along a spectrum of outcomes (you can do the math).
The biggest risk to this model of course is that you are able to find great startups and that those founders want to work with you. Power laws drive venture fund outcomes, but your fund size and ownership targets influence how outsized the outliers need to be. While we don’t set a “lower bar” on what we hope a company can achieve (Homebrew I includes three companies with $1b+ valuations – Cruise [realized], Gusto [private], Plaid [private]), it does mirror reality, where “just” a $250-500m outcome can be a fund-mover for us.
So founders, please don’t let lack of existing relationships deter you from reaching out to us. Contact info is on our website.
Aligned Cap Tables Are a Godsend: Especially when the founders are considering an early acquisition, aligned cap tables are a godsend. Could an even bigger business been built here? Absolutely. But when an aggressive offer is on the table and for a variety of very legitimate reasons, the founders want to take it, our job is to help them.
Even more that just this single decision, the BuildingConnected cap table was trusting of one another and worked hard across the rounds to support the founders. That’s the way it should be! Thank you to Dave Samuel of Freestyle VC, Omar El-Ayat of Crosslink Capital and Nakul Mandan of Lightspeed Venture Partners. Also Darren Bechtel of Brick & Mortar Ventures was essential on this one.
I Can See Why VC Congrats Twitter Is Horrible: The day the deal was announced there were a lot of inbound and outbound “congrats” tweets. I’m totally guilty. Sorry.
Once Is Chance, Twice is Coincidence, Third Time Is Truth.
We’re fortunate enough to be working with some intriguing startups serving industries which pre-date the PC – construction, industrial maintenance, agriculture, nautical shipping & logistics. Across multiple independent conversations with these founders, one of the structural reasons they give for their success is a “generational transition” within a meaningful segment of customers.
Namely, privately-owned businesses that were in the hands of a family patriarch are now being passed down to the next generation. This group of 30-50’something men and women have smartphones in their pockets and are more eager to adopt technology than the previous owners. You don’t need to educate the market on why SaaS, sensors, machine learning and so on are good investments. Or why a spreadsheet might not be the most dynamic dashboard available to them in 2018.
Anecdotally we’re seeing an adjacent trend where, when the business isn’t handed down, it’s sold to private equity style buyers who are also very interested in technology as a cost cutting mechanism, so our companies are getting called into these situations as well.
This is all very consistent with my framework that favors problem size over market size. Is this problem large? Is this problem valuable? Is this problem urgent? Urgency catalyzed by a change in ownership structure and demographics is an interesting dynamic and one I hadn’t considered at scale until the past few years.
Cribbing from the Homebrew blog to just share some nice portfolio news:
“Proud to have supported this company since their earliest days” is how VCs coyly signal that they were in early before the rocketship company was off the launch pad. Well, three startups that we’re proud to have supported since their earliest days announced substantial financings recently. Yeah, we had conviction years ago. And yeah, they’re all looking like great, savvy picks. But the congrats goes to these teams, not us. From the CEOs on down, these teams have been working incredibly hard to build companies they’re proud of. Durable companies delivering real value to customers. And eventually, outcomes that will change the lives of their teams, not just their investors. Congrats to the teams at Bowery, Plaid and Weave!