We opened our own public library this week. On our lawn. It’s modest in size but made us part of a worldwide network called Little Free Libraries. Books have played a huge role in my life – always an enthusiastic reader and my first jobs were at a hometown public library and then a local indie bookstore. So when my daughter noticed these curious boxes on people’s lawns all over SF filled with books, we leapt to support her curiosity.
Turns out Little Free Library is nearly 11 years old and started with one guy in Wisconsin! Now there’s a global network of people who buy or build their own, for installation at their home or business. You fill it with books and encourage people to take or leave their own. Some folks are very creative with their designs (Instagram).
Decentralized communities supported by technology – I spent much of my product management years helping to strengthen platforms that encouraged these types of relationships. In an era of political tribalism and ‘glass half empty’ views of the Internet (yes there are some very real problems but…) I find great optimism and hope in observing and participating in these efforts. And now I finally have somewhere to put those copies of Sapiens and Ray Dalio’s book that I never actually read.
2019 didn’t herald any major innovations in how early startup employees receive equity. Which is a shame since, on the margins, the most talented hires deserve more of it. On the positive front, I did encounter more founders making early exercise available to their teams and much less resistance overall to the idea of a 10-15% pool (perhaps because valuations continued to increase so founders themselves were taking less dilution in financings). A subset of startups we worked with also made changes to their equity plans which allowed for longer exercise windows in the case of an exiting employee in good standing (usually who have stayed a minimum of two years at the company).
Perhaps I’m just not looking in the right place for changes – it’s more likely the non-venture backed companies that will explore dividends, profit-sharing and other mechanisms for rewarding teams in building an enduring business. For startups like Carta, this looks more like structured secondary programs.
It’s the second time founders – especially solo founders – who often think most deliberately about these issues. They saw how previous outcomes did – or didn’t – reward teams proportionately. They have people in mind they want to pull into their new venture and know often these folks will be leaving money on the table from current gigs. They are often more aware of what their role requires as CEO (and sometimes their own strengths vs weaknesses). And as they’ve articulated to me, rather than have a single cofounder, they’ll take 20% of the company’s equity and provide real incentive to the founding team and early executives.
For all of my 20s and much of my 30s there was a failure tiger nipping at my heels. No matter how fast I ran, it was still there – hot breath, sharp teeth and a whispered growl promising a bleak future. The beast was born from a mix of personal insecurities and childhood trauma. An idea that I had opted into an industry that was waiting to spit me out as soon as I messed up. And that as I reached my mid 40s, the fall would be inevitable based on hitting irrelevance in an industry that valued youth and code. The stories of similar knocking down of men in other industries, including my own father.
Into grad school, a startup and then Google, I was sure the tiger existed. It drove and motivated me, but also poisoned the accomplishments; played a role in anxiety, sadness and physical ailments. Insidiously, the tiger was able to convince me that its existence was also the only reason I was succeeding. Satisfaction and happiness would become complacency. And complacency would result in failure.
I write to you at the end of 2019, having been free of the tiger for seven years or so. What did it? Becoming a parent and the support of my wife; therapy; and the very material realization that I had saved enough money to create a safety net for my family. [Side note, that’s one reason I support detaching health care from employment and other public sector benefits which give Americans security apart from their work].
If you’re being chased by a tiger, or a dragon, or whatever symbolic metaphor your fear manifests itself as, know that you’re not alone and that it’s a state of being, not a destiny. And if the holiday season is especially hard on you, or 2019 has just been a shit year, you can always email me [hunterwalk gmail] and I’ll try my best to share any useful details of my experiences.
“Hey Satya, should I write a post about the most influential VCs of the decade?”
“Sure, expect a lot of opinions :)”
We’re just a few weeks from the end of the 2010’s. Now the calendar-truthers will tell you that the switchover from 2020 to 2021 is more significant because that’s the *actual* beginning of the new decade, but come on, time is a flat circle and we all know moving from a —9 to —0 is a bigger deal. So as reporters and pundits start their “Best of the Decade” lists, I’m turning the gaze inward and asking the question, “Who Were the Most Influential VCs of the 2010s?”
NOW, this isn’t the “best” VCs of the decade. Or the most famous. Or the nicest. Instead it’s just my hot take on who were the handful that had the biggest impact on my industry. This doesn’t even necessarily mean they had the biggest impact on tech (let’s stop thinking that venture capitalists are the butterflies whose wings cause typhoons). But their actions, choices and words did, in my opinion, create changes that cascaded over the investment class. Sometimes in ways they intended and perhaps in some other cases, in ways they couldn’t have even anticipated!
[Deep breathe] In alphabetical order, here are the MOST INFLUENTIAL VENTURE CAPITALISTS OF THE 2010s
a16z played disrupter, launching their first fund in 2009, based on a bold set of statements which, even if they were not individually unique, had never been combined before into a firm. They’d offer services like recruiting, sales and BD help, and marketing to their startups, building out an agency-like model and employing well over 100 team members. All of their partners had to be former founders (since relaxed), sounding the bell that not just operators, but founders, would make the best investors. And since there were only a handful of companies which truly mattered each cycle, you couldn’t “overpay” to get into them, you had to be in them – thus capital and brand would be weapons, pushing other VCs to raising the magical “billion dollar fund” or be left without the dry powder to stare down Marc and Ben.
Now as we enter the 2020s, the majority of large firms have some operating support, core + opportunity funds that tip well past $1b and promote themselves with content and conversation. The message to them was clear – you don’t have to play a16z’s game but you can’t ignore them.
Over the course of the 2010s, seed investing went from a clubby handful of individuals and “micro VCs” to an outpouring of capital and multi GP firms. The institutionalizing of seed financing was driven by the aptly-named First Round Capital which Josh co-founded and for a long while, was clearly the visible frontman of the group. First Round went deep on “platform” far ahead of anyone else in this stage. They are also the first of the early stage seed funds to really plunge into a generational transition, as the initial GPs have started to step back. Will seed VC be a multigenerational game? Remains to be seen industry-wide, but LPs and other firms are looking to FRC as bellwether of how to do it.
The money cannon currently being shot at early stage companies (and funds like mine) owes a lot of its success to Josh’s vision and now the big multistage funds have come down market as well to try and get a piece…
Aileen could be on here as an example of large fund GP breaking away to start their own firm – which is clearly another trend of the 2010s – but I’m actually including her for coining the term ‘unicorn’ (companies which have hit $1b threshold in private valuations). In doing so, Aileen didn’t just give a name to a phenomena transpiring, she played a role in catalyzing an aspirational target for companies and investors to hit — “unicorn status.” Funding rounds, press headlines, even recruiting pitches, all sought to declare “XYZ is a unicorn.” The observation of unicorn inflation caused more unicorns to be created! Talk about unintended consequences.
The next few years – maybe even the next decade – are going to be about these highwater valuation marks being tested — by the public markets, by potential acquirers, by common shares under a preference stack. And without a doubt, Aileen’s smart analysis influenced years of investing behavior.
Ellen’s might have lost her lawsuit but the filing itself started an avalanche. Whisper networks became real conversations and firms up and down Silicon Valley started addressing their “women problems” – basically, that they didn’t have many among the managing and senior partners of their firms. While we’re nowhere near parity – and female entrepreneurs are still dramatically suffering as a percentage of venture-backed dollars – the landscape looks very different than it did before Ellen stepped up. And I can’t imagine it going back.
Hopefully the work of Project Include, All Raise and other groups make the term “underrepresented community” an anachronism before the next decade is up.
“Hey, I want to pick your brain about a new opportunity I’m considering. Can you grab a coffee next week?” My recoil when receiving these emails isn’t because I don’t want to help – I love aiding talented folks find the roles and cultures in which they can thrive! Rather it’s attributable to my concern they’re asking the wrong people for advice. And this may cause them to make a poor decision.
Here’s what I believe: when considering a specific career path decision or evaluating an offer with a particular company, I’ve found people tend to concentrate mostly on the opinions and inputs of two groups: their friends in similar jobs and the most “successful” people they know within the industry. Seems like a reasonable strategy, right? Depends.
Industry friends and luminaries tend to tell you what *they* would do given your situation, but often aren’t able to see the choice and the trade-offs through your eyes. “If I were you….” is the common opening of a response, which says “I’m not thinking about you, I’m reacting based on my own values and interests.” It’s not that these groups are useless conversations but with them I’d focus on two pieces of information: across both groups is there consistency in the recommendations they make and, especially for the latter group, what questions did they tend to ask themselves when making similar decisions?
Ok, so who do advice seekers usually *undervalue*? (A) People who know you very deeply regardless of expertise in your specific professional work and (B) individuals who have direct experience with the company, role and people you’re considering.
The people who know you well are more readily able to actually see the opportunity through your own eyes and challenge (or confirm) your sense of self. I don’t believe they actually need to understand the specifics of the career, they just need to hear you describe it – what’s interesting about it, what concerns you, and so on. “Knowing what you know about me, am I thinking about these opportunities in a manner which makes sense to you? Am I correct about when I’m happiest and doing my best work? Are there things I’m afraid of which cause me to overestimate or underestimate the risks?” Pick the right people and it’s like holding a truth mirror up to yourself.
As for the individuals with specific experience, but who might not even know you – what you’re seeking there is confirming or disconfirming information about how you’re understanding the role. Let’s say you’re considering a Google PM offer. What you want to do is find some Google PMs and ask “hey, what intrigues me about this opportunity is that I’m interested in learning how a large company runs itself and even though I know it might take longer to ship a product, I want to know that product will have a big impact. Does this correlate with how you experience the role day-to-day?” With this information you can get very specific around the pros and cons of the opportunity — ensure that you are seeing it with realistic eyes to confirm that it’s what you believe it to be.
And that’s it – if you have people who know you and can validate your thinking given who you are as an individual, and if you have people who understand the job deeply and can validate your understanding of the work, the culture, the company, well, you should be in a position to make a good decision.
There was a time when far less written about – or by – venture capitalists. But I seem to recall “we won’t invest in two competing companies” was an oft-stated principle even in these more opaque days. To me, it seemed sensible, even from just a strategic framework, let alone ethical. Part of being an insider meant you needed to be trusted by entrepreneurs with early looks at their businesses. And if your reputation’s present value was the sum total of all future startups brought to you, well, putting that dealflow at risk was an expensive proposition.
While these “sorry, we’re conflicted out” decisions often didn’t get headlines – who writes about the deals they didn’t do? – there was a great 2012 blog post by a16z’s Ben Horowitz providing inside baseball on why they didn’t double down on Instagram after making an early investment in the now hugely successful app. At its root was they didn’t want to violate a commitment they’d made to another CEO in the portfolio. I didn’t know Ben at the time – and we’ve really only met casually a few times since – but it was one of those moments of operational clarity that gave him evergreen cred in my mind. Maybe for some VCs the “competitive conflict” issue was more about virtue signaling than actual virtue, but I knew if I ever went into the profession, I wanted to honor my founder relationships the same way.
And seven years into Homebrew I believe we have. We invest at the seed stage so companies are still very embryonic. Especially over their first 12-24 months prior to a Series A, Satya and I will often opt-out of investing even in adjacencies, because we want to give Homebrew-backed founders a wide berth to find themselves. There’s definitely been some short-term pain associated with these decisions – I can think of at least two times that we explicitly passed on companies related to current investments (despite there not necessarily being objections from the CEOs) and in both cases, the startup we passed on has outperformed the portfolio company!
But this post isn’t about us, it’s about anticipating that we’re at the start of a pretty significant change and challenge to these assumptions – that is, MORE venture firms are going to be investing in competing companies, sometimes to the dismay of the initial portfolio CEO. For three structural reasons:
The “But It’s In a Different Fund” Explanation: The majority of venture firms traditionally had a single fund they would invest out of. Now almost every one also has a “growth/opportunity” fund and some others are separating their seed investments into still another. I’m hearing – but haven’t directly observed – that for purposes of competitive conflict, many firms believe that there can be a “firewall” between these funds, even if they’re all under the same firm umbrella and overlap in deployment timeframes. Funds have also gotten larger in general which mean you need more ownership and more outsized winners.
Downstream Impact of Firms Investing Earlier: For a variety of reasons, the billion dollar venture firms are increasingly making their initial investments seed and A rounds, vs traditionally waiting for the A or B. One downside to this strategy is they are committing to a company before its reached breakout velocity -and- at the same time, giving it enough capital to operate for several years. I’m very interested to see what happens 12-36 months down the road when firms realize that one of their GPs has essentially blocked them out of a category with a seed bet. Can they afford to miss out on the winners in a vertical just because they made a smaller, earlier investment in a related company? The pressure for the earlier founders to sell, or wind down their company, or not make a stink about the firm investing in one of their competitors will be real.
Companies Staying Private Longer: It’s just math – more companies in the portfolio for longer periods of time results in more potential for conflicts (although to be fair, at some point CEOs need to be comfortable with a firm making investments in the next generation of innovation).
Now it’s not just about VCs. Founders don’t get to speculate about products their startup *might* build 10 years down the road and block their current investors from entering those areas. Founders also should understand that if they choose to pivot into ideas totally different than the path they were going down when the investment was made, they might not automatically get “exclusive” ownership of that industry within a backer’s portfolio. But I do strongly believe startups CEOs deserve clarity on what principles and practices a VC firm employs when it comes to evaluating potentially conflicting investments. While their answer might be frustratingly subjective (if you’re a prized portfolio company you will always have more influence than if your startup is struggling) it’s one of things you might want to ask when evaluating competing term sheets.
There’s an expression in venture capital called “returning the fund.” It simply means that an outcome in the fund (out of say 20-30 investments in that specific fund) makes enough money to return 100% of the principal. For example, in a $100 million fund, an investment which makes you back $100m “returns the fund.” $200m would be “2x the fund.” And so on. Of course the assumption in calling this a positive outcome is that you invest much less capital to achieve this return – putting $100m into a single company and getting that amount back wouldn’t be a good investment. That’s why you’ll hear something more like “yeah, we made 50x on that investment and it returned 2x the fund.”
Historical industry data suggests it’s very difficult to meet performance targets for this asset class without having at least one 20x+ investment per fund. And often that one will also be a “fund returner” (or better). This is what is also drives discussions of power law outcomes and getting more capital into your winners.
But the other day I was doing some math for fun – what would a Homebrew investment need to pay out in order to not just return the fund it was in, but return the firm? By that I mean earn back every dollar our LPs have committed to us across our multiple funds ($210 million). And wondering how many firms have experienced a “firm returner” and what’s the latest in a firm’s lifecycle this has occurred (obviously it gets more difficult as you have more AUM. A multi-decade firm would need to likely make billions in a single investment to “return the firm.”)
As I thought about it more I realized it was likely more common than I’d originally speculated since we all know firms that have had a 5-9x fund within their first few several raised. So likely more of a vanity metric and one that’s already associated with high performing firms rather than a “once in a lifetime” occurrence.
One of the interesting things about getting into venture via your own fund versus coming up through a larger firm is that when “this is always the way it’s been done” comes up as a rationale, you get to shrug and say “not any more.”
Another area we try to neutralize are aspects of the founder <> investor relationship which utilize asymmetrical power to make it difficult for a founder to build their values into their company. The Jeffrey Epstein horror of his money being tied into so many institutions that hid their eyes brought to mind the background checks that our LPs performed on us as part of making their investments. And how venture funds will often perform similar ones on founders as a condition of investment. The basic ones are only really about surfacing adult criminal convictions, verifying employment history and so on.
But when I recently asked a few venture GPs whether a founder ever requested to background check *them* as a condition of investment and joining their company board, it had never been asked (although also none objected to the idea). Did it not occur to any founders? Did they assume their VC was vetted by their partners already for these issues? Or is the request something that’s perceived as a friction to getting the deal done, one which might offend the venture investor?
Even more complex, what do you do with the information? What if you discover a potential investor has a criminal conviction. Maybe it can be explained in a way which doesn’t cause the founders to question the ethics and morality of the investor — there are certainly types of criminal convictions that wouldn’t phase me. Or what if the background check does turn up something notable and disturbing – do you have a responsibility to share this information with other founders? Not easy right?
BUT I feel like current practices don’t even give founders that right because while it’s standard for VCs to ask founders for this permission, it doesn’t seem to be exercised equally in reverse. So that’s why I’m writing this blog post — to pierce the “is it appropriate” membrane and see what happens.
Here’s our promise – founders, if we offer you a termsheet to invest in your company and you want to review the recent background checks that our LPs have performed on us, we have copies and will walk you through them. They’re pretty boring.
And if you’re working with another investor, maybe it’s not crazy to ask them to reciprocate (although if there’s someone who tingles your “spidey sense” from a behavior standpoint, a background check might not be sufficient). And hey, if they object, you can always send them this post 🙂
God bless Gené Teare for now I have something which explains what I do all day in a format my parents can grok. As part of Seed Series for Crunchbase News, Gené wrote up an extended interview with me and Satya. She told us we were the first time in the series that two partners were interviewed together. That’s really emblematic of what Homebrew is – not one of us plus the other, but the combination of us both – and hopefully in a “sum greater than its parts” type of way.
So much capital is coming into the seed stage. There’s no capital gap structurally at the seed stage. Maybe there was 15 years ago. That doesn’t mean that fundraising is equitable or easy. That’s a whole other discussion. But there’s lots of capital.
All companies at this stage really have to do three things well. They have to build a product, distribute that product, and build a team. So that’s where we spent a lot of time.
We always co-invest. We’re big believers that syndicates of real value at the seed stage to get various skills, experiences, and relationships.
I hope when we turn off the lights, years and years from now, one of the things we can say is we were the best version of who we wanted to be. We don’t want to be a junior version of Andreessen Horowitz, we don’t want to be First Round 2.0. We don’t want to be an incubator, accelerator, crypto, or whatever flavor of the month is.