Can a VC Think Like a Startup? That’s Part of Homebrew’s Goal in Switching to Our Own Capital.

Why Investing Our Savings Instead of Other People’s Money Let Us Rethink What Venture Capital PMF Looks Like in the Decade Ahead. [Part Two]

a group of happy bees, digital art [DALLE-E]

According to the physical rules of aviation, there is no way that a bee should be able to fly, but it doesn’t know that, so it does. The same can be said of startups and their founders, in the sense that so many things can go wrong in the building of a company to an exit, that success almost seems to be a statistical anomaly [more on how bees fly]. Homebrew has invested in well over 100 seed stage startups this past decade, in most of them working closely with the founders and early team during their first several years. In other words, we’ve seen lots of bees fly. But, and I’m really belaboring the metaphor here, we also saw the venture industry move from bespoke beekeeping where the two parties are lovingly tied to one another, to industrial scale honey production.

an entire city constructed from bee hives, digital art [DALL-E]

Confronted with this evolution we made a decision to change Homebrew. Pushing aside, for the time being, ownership targets, institutional venture models and other people’s money.

In other words, Satya and I wanted to maximize our time with the bees themselves, not the size of our beehive and support systems necessary to prioritize scale.

We announced this change publicly (aka Homebrew Forever) in February and spent all of 2022 in this mode, revisiting, and in some cases revising, our core assumptions about venture capital. In other words, we started revisiting what PMF looked like after a proactive pivot. There’s lots and lots of institutional capital out there, much participating in its own self-commoditization (a whole separate post). There’s also many wonderful angel/operators and smaller supporting funds with large portfolio strategies.

What there isn’t a whole lot of: Early stage investors with institutional lead check experience (and a small support team, large networks, etc), who are investing their own capital, in a flexible manner, and then working post-investment to provide additional ongoing support. This is Homebrew Forever.

Why aren’t there many of these? Because like the bee, it breaks knows rules. If you’re good at this job you want to get more and more AUM under management (probably even more true if you’re bad at this job! 🙂 ) . If you’re good at this job, when you stop doing it at a firm, you shift into lifestyle mode, or become a solo angel. But no one told us we couldn’t do this, so we’re doing it! Go go MF’ing flying bee!

So how is it going? Encouraging, and working at a ‘first principles’ level but to be honest, still in evolution. If you think of venture capital is an oversimplified “See” -> “Pick” -> “Win” -> “Support” model, this would be my snapshot for HB♾️ (how I lovingly abbreviate Homebrew Forever)

See: Best summarized by the following list of ‘referral sources’

Cold Inbound: Steady (which is good — we see a lot)

Cold Outbound: Slight increase (we’re trying to do more of this now but still retuning our processes)

Angels: Steady, but we need to continue creating relationships with new angels

Seed Funds that write non-lead checks: Down by ~50%. We still see a ton of collaboration with the funds we’re closest with, but others have definitely taken us off their list with our model change. Not for competitive reasons (I don’t believe) but because they are primarily trying to help a startup find a lead investor, and we used to be that for them, but now rarely lead seed rounds. So they might like us, think we’re useful to companies, etc but their ‘job to be done’ is to find a lead because that closes the round -AND- helps secure their allocation.

Previously ‘Competitive’ Seed Funds and Multistage Funds: Up by 100%. So this is the other side of the coin from above. The funds we were always friends with but where our shared ownership goals made co-leading seed rounds fairly unlikely are now much more likely to share opportunities with us (and us with them). And the larger multistage funds who would normally lead A rounds for our portfolio but where there wasn’t much collaboration with their seed practices, well, that’s switched too. What I’ll emphasize here is that we don’t seek out FIRMS, we seek our GPs. That’s to say, there are ~24 or so GPs spread across an almost equal number of firms that I just LOVE to work with on cap tables, and I’m targeting them like a thirsty multichannel marketer.

Overall I’m happy with 2022 opportunity flow but we’re not even close to the performance ceiling and have a bunch of work in 2023 to improve.

Pick: Obviously it will be many years before we know the financial outcomes of our ‘picks’ but if the goal of HB♾️ was to be 100% focused on the simplicity of ‘do we want to work with these founders,’ I’m happy with our picking. We didn’t become too cautious using our own capital, nor did we become too undisciplined. We ended up making 11 investments in 2022, which historically has been our average independent of strategy.

Win: 11 offers made, 11 offers accepted. The ‘sacrifice’ we made to achieve this win rate is of course we’re now predominantly deploying six figure checks instead of seven figure ones (we did one new investment greater than $1m and brought in some friends on that one for a seed SPV), but that’s the goal here anyway. Bespoke beekeeping instead of agribusiness, remember?

Side note: I did get ghosted by an entrepreneur on a potential personal angel deal and that stung (bee pun!) because it was someone I’ve lightly known for a while, he asked me early for help/advice, acknowledged that when he raised money I’d like to angel, then stopped returning communications once the round finalized. See, it happens to investors too, not just founders.

Support: Homebrew tries to be a force multiplier for founders, which compounds over time, improving their probability of building the best version of what their company could become. Neither Satya or I would continue doing this work if we were turned into passive investors, no matter the financial success.

As now a non-lead investor we have to simultaneously remind the founders (and lead VC) that we can be quite useful to them, while also not creating additional management overhead. In our move to HB♾️ we re-wrote our onboarding guide and process, and made other tactical changes to how we build trust and context with the founders we back. I’d call it a work-in-progress — we’re almost certainly ‘hitting above our ownership weight’ but that’s enough for us, and not yet reliably reached quickly and uniformly across the new portfolio. Another place for experiments and improvements in 2023.

so tldr, we’re happy at the day-to-day level but working on the higher level product and go-to-market with a sense of urgency to turn ‘good’ to ‘great.’ Just like many of the startups we’re fortunate to support!