Win The ‘Sure Things’ Or Find The Hidden Gems? What’s My Job As A VC?

This Has Been My Favorite Question Of Peers In 2021

“So, do you think your job is to win ‘consensus’ deals or find the ‘non-consensus’ opportunities?” This has been my favorite question to ask fellow seed investors over the last year, and the answers are telling. Some have very strong reactions, dismissing any alternate strategy to their own as imperfect. Others go back and forth in their own mind, realizing that their current execution, even if successful, is at odds with the words coming out of their mouths in response. Like most questions of this sort I don’t believe there’s an absolute correct answer but I do believe — now more than ever — one’s success as a seed VC depends on knowing *your* playbook and running it superbly.

SaaS investor Jason Lemkin noted this the other day in the above tweet. There’s a lot of capital chasing ‘consensus’ deals, but this doesn’t necessarily mean you should avoid them as an investor if you have a legitimate shot at picking and winning well among them. There’s a historically true 2×2 that suggested the real money is in non-consensus opportunities, but it turns out that given the growth is size of outcomes, that “right” and “consensus” is still a fund returner, sometimes many times over.

Several of the seed VCs I respect most, and would put my own money into, have told me they shifted to high ownership and consensus during the last few years. It doesn’t mean they just care about pattern matching or social proof. There are still plenty of ‘hot’ deals they pass on and other investments they make which aren’t necessarily as well understood by the industry at the point at which they invest, but the scale of winners (and the ease with which they have ability to raise ongoing capital), along with increased size of their own funds, have made these firms less reliant on the needle in the haystack.

We’ve also seen a number of startup attributes which used to be considered ‘non-consensus’ become less disqualifying. Location for example. Go back 10 years and a startup outside a major tech hub would be a ‘non-consensus’ investment for most seed funds. So I think part of the flight towards consensus is also a broadening of what consensus looks like in a way that’s good for founders.

How would I describe Homebrew’s answer to this question? I believe we need to win our share of consensus deals in our core verticals (fintech, SaaS/FoW, etc) and when we know the founders already, but not let the volume of consensus dealflow overwhelm our ability to find and back non-consensus startups. One ‘trap’ is once you’ve earned your way into consensus-world, just living there. Unlike some of our peers I don’t think we can be successful deploying this model because our funds are (purposefully) too small to win every shootout. Also it’s a question of where your personal energy and motivation comes from. We get a lot of joy from working with non-consensus founders, even if it can be more effort, take longer, and possess greater funding risk.

Via Screendoor I’ve been looking at a lot of emerging managers from different backgrounds and I’m heartened to see a mix of consensus and non-consensus strategies. It would be wrong for underrepresented VCs to cede the ‘consensus’ deals to the establishment. They can fight and win their place on these cap tables and are doing so.

Consensus vs non-consensus strategies sort of reminds me of concentrated vs ‘spray and pray’ models. There’s a desire sometimes to assume one is fundamentally better or more pure than the other (I mean, spray and pray is really an index strategy, not a dartboard), but in actuality being very good at either model is a winning approach to venture. It’s not knowing which you are, or playing a game you’re not well-suited to win, that’s going to cause you trouble.

Celebrating 10 Years of Therapy

How My Attitude Towards Mental Health Changed From My 20s to 30s to 40s

2011 and I was at a low point. Most alarmingly, it wasn’t clear that I could get out of my situation by myself. The mental stress and overwork at my job helped catalyze a physical disability of repetitive strain which created a vicious cycle. The bottoming occurred over the summer when I was supposed to be healing during a sabbatical. Being a proactive problem solver I tossed all sorts of Eastern and Western approaches to diagnosing and solving the pain in my hands and arms. Instead of finding a cure, I was losing trust in my own body’s ability to recoup and imagining a life of marginal productivity. This fed into my failure tiger fear, which was already heightened by the impending birth of my daughter. The beginnings of anxiety and depression convinced me that I needed to abandon my belief that only *I* could help myself and seek a therapist. I’ve now been seeing him for 10 years.

In my 20s I wasn’t prepared to embrace therapy. I’d been exposed to it via friends and family members but generally felt that I could solve my own problems by myself. That unless one’s situation was severe and verging on physical self-harm, therapy was unnecessary for me — I was better off thinking and working my way out of my anxiety. Others, they might need this help, but not me.

In my 30s I occasionally saw a therapist, but used it to treat symptoms rather than root causes. It made me feel better in the moment but I wasn’t ready to embrace the idea that ongoing commitment to analysis was going to be productive. It seemed time-consuming, expensive and transactional. Obviously this person only cared about me because I was paying them, and most of these therapists couldn’t keep up with me anyway. I’d offer my own self-analysis for them, looking to be commended for how intelligent, introspective and articulate I was. This wasn’t help, it was performance.

Then 2011 hit and in my late 30s the emotional infrastructure I’d constructed to protect myself was no longer sufficient. To try and preserve it would, at best, keep me surviving but not the version of husband, father, friend or human which I aspired to become. Although we sometimes have to fall back to a phone call, the best therapy for me happens 1:1 in-person. I know there are a variety of choices today for virtual or distanced therapy, and despite my concerns about the practical stability of these businesses, I’m incredibly glad they are growing and operating to the benefit of their customers.

Within my closest communities it feels as if being attentive to mental health and wellness is largely destigmatized. Even before this post I’ve discussed my own participation frequently and consider it to be an important ongoing commitment. But I’m sure my own experiences don’t necessarily extend universally, maybe not even to everyone reading this post. So if you’re considering therapy for yourself, let me encourage you to do try. And if someone you care about needs some help, support them. And if it’s even just a topic that comes up in discussions among people you know well or not as well, look at it with kind eyes and don’t create a more difficult decision for someone who needs some help. It’s the most human thing we can do.

“We Don’t Consider This a Conflicting Investment”

VCs With Multiple Stage-Specific Funds Are Likely To Rewrite The Existing Etiquette. And What This Means For Founders.

Let’s start out by admitting that the question of ‘competitive conflict’ has always been more of a situational dynamic than industry standard. In some ways it’s ALWAYS to an investor’s benefit to suggest a potential new investment wouldn’t be competitive to an existing portfolio company, and it’s ALWAYS to the current portfolio company’s benefit to suggest it might be.

While a norm of ‘we don’t invest in directly competitive companies’ is likely the median response if you asked a bunch of investors, in truth there’s always an asterisk. Sometimes this applies only to lead investors, and if they consider the investment ‘active’ (eg on the board, still doing their pro rata, etc). Or they’ll give a portfolio startup a window of exclusivity of a few years before considering more companies in the vertical. Maybe restrict the conflict to what a company is currently doing now, not what the founder says is on their roadmap five years down the road. And of course there’s the “unless we’re going to make a lot of money [on the conflicting investment]” asterisk. But in the years since we started Homebrew, I’ve observed the breadth of investor positions to be both more fluid and less restrictive than ever, often to the confusion (and annoyance) of founders. A major driver of this has been the growth of venture firms into cross-stage investing using different funds.

Historically most large venture firms were basic single fund operating vehicles — they raised from their LPs every three years or so, and a firm then invested the capital. Then rinse-wash-repeat. You made initial investments out of the next fund, while making pro rata decisions in the previous fund(s), and each fund had a 10–12 year lifecycle. Then some of these firms began raising their own Growth funds, a mix of extending their pro rata into existing portfolio company’s later rounds but also entering into new investments at later stages of their evolution. Almost every major VC now has at least an “early stage” and “growth/opportunity” vehicle. And most recently, several firms have also created separate substantial seed vehicles to lead those rounds.

How does the expansion of firm mandate change incentives for its individual partners? In some firms the partnership spans one or more of these funds (ie GPs float across the seed and early stage vehicles based upon the investment, not their org chart), while in others, a GP is tied to a specific fund. Some firms are equal partnerships in terms of economics but most have carry tied to a combination of seniority, performance of the fund you’re a partner in, and your own investment outcomes. Every firm has their own logic behind its compensation structure and it’s almost always opaque to founders.

Why do I care about how investors at other firms get paid? Well, because I think it has implications for how our industry rethinks what competitive overlap looks like within a portfolio. Specifically, I’ll posit that the ‘new normal’ is going to be “we don’t make competitive investments within a FUND, but we will make competitive investments within a FIRM.”

Simply, a firm with a seed fund, an early stage fund and a growth fund might choose to have broadly competitive companies spread across each of these vehicles and not consider it a conflict. They will make the case (often credibly) that these companies will be indirect, not direct, competitors, and that there will likely be different GPs working on each deal. This approach will allow GPs in different vehicles to not have their performance handicapped by their partnership. Imagine you’re a Growth GP for a multibillion dollar fund and you couldn’t back a bunch of different fintech companies because your Seed GP colleague made a handful of $4m investments in similar companies just getting started. It’s just unsustainable to run a cross-fund competitive conflict policy at scale.

Now, to get back to my opening line of this post, this will *still* be art more than science. Portfolio founders with lots of power can play their hand to “block” new investments by their lead investors they believe could be competitive down the road. And certain GPs will be more, or less, consistent (some might even say ethical), on working with their colleagues and current portfolio to avoid sticky situations.

So what’s a founder to do? Here’s my advice:

Don’t Overthink This Dynamic Early On: If you’re raising a seed or A round and engaging with a multistage investor, it’s fair to ask them about their conflict policies, etc but I wouldn’t disqualify someone just because they *might* make a competitive investment out of a different fund. I’d just bundle this into the general bucket of “do I trust this investor to be a good partner/co-owner of my company” diligence. If for some reason you really don’t like the idea of a conflict arising then restrict your seed fundraise to firms that don’t have multiple vehicles.

Stay Close To Your GP, And Other GPs At The Firm In Your Vertical: In general, continue to pitch/sell/communicate with your investors. If you’ve taken money from a firm with cross-stage funds, I’d spend time with the GPs who might make competitive investments. The more they are convinced that you will be the winning investment in your space, the less likely they are to compete with you. Of course there’s the risk that you are educating them about a vertical that they’ll then go to market on, but play it as you want. Also never underestimate the personal relationship aspect — let them get to know you so they don’t screw you 🙂

Understand When Your Investor’s Pro Rata Shifts From The Fund They Invested In You From To Their Next Stage Fund: This is subtle but I’ve seen it firsthand. A firm might have a strategy to do an initial check (and potentially first pro rata round) out of its stage specific fund (eg a Series A from its Early Stage fund) but then at a certain point the pro rata decision might pass to the next stage fund (eg the company’s Series A and B done from Early Stage fund but the Series C would be the Growth Fund’s decision). If the sequential manager has a conflicting investment they will use that grounds to not do the pro rata, trying to be consistent with the commitments they made to the founder *they* sponsored. The danger to the founder sponsored by the previous fund is to the outside market it can look like their VC is no longer supporting the company, because we all know, dollars are the strongest vote of confidence an investor has. This can be really tricky for everyone to manage. All I can suggest is conversations in advance and to not let one of your existing VCs lead an inside round right if the next round would be decided by a different partner at their firm. Or if it’s a new investor with multiple funds, to ask this question in advance of when does the pro rata changeover happen. Within a fund and within a firm pro rata discussions are always competitive to one another and always about scarcity of follow-on dollars.

If You Have Leverage, Use It: This is a more complicated strategy which can backfire if you overplay your hand but let’s not ignore the option. I have seen termsheets which include pro rata rights so long as a firm doesn’t make a competitive investment, after which case they lose the pro rata. I have seen Board seats contingent upon a firm not making competitive investments. And other agreements to this effect which are handshakes.

What do we do at Homebrew? Our business is a single stage, single fund strategy so it’s pretty easy: when we lead or co-lead a round that founder is our priority and we defer to their definition of competition for at least the first 3–5 years of the company. That feels right for us and the trust we want to build with the teams we back.

As a co-investor, what I really want from a multi-stage venture fund is just consistent and honest communication regarding their competitive practices, even if their firm biases towards more ruthless behavior. And of course the easiest ‘advice’ to a founder is Don’t Worry About Any of This, Just Win And It’ll Solve Itself, but for me at least, understanding the rules of the game mitigate surprises and misunderstandings. Or at least turn them into subtweets instead of lawsuits.

Most Startup ‘Pivots’ Aren’t Really Pivots, They’re Just What Startups Are Supposed To Do

Don’t Freak Out When Part Of Your Original Hypothesis Was Wrong

If you showed me a bunch of random early stage startups and asked me to select the ones disproportionately likely to be successful, I’d bet on the teams which are able to turn a hypothesis into a test and a test into learnings with the greatest compounding velocity. This is not to be understood as suggesting great startups are the byproduct of sequential A/B tests. No, quite the opposite. But they do know where and when an intuitive insight should be pressure tested by reality. Or they uniquely understand the problem to be solved but use the first year of the company to chart the most effective path through.

And you know what often comes out of these virtuous cycles? Changes. Because that’s what startups do, they change. Adding people. Reconstituting the org chart. Abandoning one customer channel for another. Constantly changing during the early years.

When we fund a company it usually has just three things: a problem to be solved, a customer segment who has that problem and a notion of the product to be built. Then the team takes the funding and ramps up the work. And almost always they come back after a month, or three, or six and say “I think we need to pivot because one of those three things [problem, customer, product] weren’t correct.”

I say, GREAT! And it’s not a pivot. If you’re changing only one of these three aspects it’s definitely not a pivot. If you’re maintaining the problem statement but changing the customer and the product, I still think it’s NOT A PIVOT. A pivot is when you are shifting completely. Moving to a completely different set of problems, customers and product, not merely processing the learnings from your most recent efforts.

So you might ask me, Hunter, even if we buy into your definition, aren’t you being a bit pedantic? I mean who cares at the end of the day how a ‘pivot’ is defined by our industry. And I’d say… TWO REASONS. IT MATTERS FOR TWO REASONS.

Calling normal startup iteration a ‘pivot’ creates a psychological barrier to change

Even though we all work hard to remove any notion of shame or failure from ‘pivoting’ it doesn’t help to over-apply it. I don’t want founders to think that making changes to a roadmap is ‘pivoting’ because true pivots require a different playbook. The small but meaningful alterations to ones’ strategy should be done without delay, deliberation.

Pivots shouldn’t be cavalier decisions but ones which are accompanied by a vote of continued confidence among major investors and cofounders together

True early stage pivots shouldn’t be done cavalierly or just because the startup has some money in the bank and the current plan isn’t working. I’ve seen companies handicap themselves by pivoting into a completely unrelated business that, as a result of the journey, is underfunded, overdiluted and without the right investors for the journey. Sometimes an orderly shutdown (or offer to return capital) and a restart are actually better for everyone involved. More often than not if the investors have faith in the team they’ll agree to play it out. And if they don’t? Well, I’m not sure it benefits the founders to pull along a group of unwilling investors just because the wire transfer has already been completed. I think of pivots as ‘refounding’ where the cofounders should step back and honestly assess their collective interest in a new idea. Sometimes one cofounder will choose to step back because it’s heading in a direction that they’re not as passionate about. That’s fine and the self-awareness should be celebrated, not punished.

So that’s my rant on ‘pivots’…..

If You’re Not Sure Whether Your Current Investors Would Give You More Money, The Answer Is Likely “No”

Startup CEOs Should Test Strength of Cap Table Every ~6 Months To Know Where They Stand

I really liked Jason Lemkin’s “Do You Have a Weak Investor Syndicate” blog post from earlier in the summer. Go read it and then come back here….

Ok, so there are two different types of ‘weakness’ that Lemkin mentions — one has to do with lack of credibility in your cap table (“Can’t Bring You Good Leads For The Next Round”) which I’ll generally lump into the bucket of ‘you have B-tier investors.’ I’m not going to address this issue here because I think it’s largely a binary attribute of an investor and not as often situational[1] — “punching above the weight of your cap table as a CEO” would be a good post, but separate from the point I want to stress.

Instead I want to focus on Jason’s discussion of bridges and pro rata, because it’s an area which is dynamic in every deal and often misunderstood by founders. Let me do some basic level-setting of how it typically works in a venture deal:

  1. A venture fund invests an amount of money into a round. I give you $1m for 10% ownership (to make the math simple). And I probably also have pro rata which simply means the right (but not obligation) to put more capital into your next round equal to my current ownership. If your next round is $10m, and I still own 10% of your company, I would maintain the ability to do $1m of your $10m round.
  2. As a venture fund I might have a strategy which says “for every dollar I invest into companies, I will hold one dollar in reserve for additional financings.” If I have a $100m fund, $50m into initial investments and $50m into follow on. Each fund has its own strategy about reserves, follow on and so forth. There’s no industry standard other than most large multistage firms will be interested in pro rata for their successful companies.
  3. Now here’s where it gets complicated: follow on decisions are highly dynamic. Reserves are fluid concepts based on what companies are coming up for funding when, how they’re doing at the time, the size/stage/terms of the round and so on. No founder should assume their pro rata from insiders is in the bag, let alone a bridge check, only because the cost of being wrong (to the company) is so high. 99.9% of venture funds do not have enough capital to do their full pro rata in every investment for every round subsequent to their initial commitment.

Jason suggests asking direct questions like:

And I agree, those are great questions. The one point I want to emphasize is don’t ask these just when you’re closing the initial round or actively fund raising the next. Instead my recommendation is to ask every ~6 months or so in-between financings. Have a real discussion 1:1 with your major investors about how they’re thinking about this investment.

If you’re on-track to the next financing, you can couch it as “hey, as I start to think about the next round — and knowing sometimes preemptive rounds can happen these days — I want to check in on how you’re thinking about us. If you had opportunity to buy up, would you want to? If I can make sure you have your full pro rata available would you take it? If we’ve got an oversupply of demand, is this the round your firm usually starts stepping back from pro rata?”

If you’re not yet on-track, then it’s a variety of “hey, per our operating plan, I think we can get to the next round milestones but, so I have this in pocket, how does your firm think about inside rounds, especially if we want to raise a little more from current investors to get even further before going to market.”

Healthy founder <> VC relationships should always have open discussions about capital. One way I like to do it to be clear when I’m putting my “Homebrew” hat on versus just advising the company what’s best for them. I’ll give you an example of a conversation I had with a current portfolio company just this week.

It’s a seed stage company that has demand from insiders and new investors to do a ‘top-off’ in order to delay going out for a Series A. Since things are going well, our collective belief is that a few more milestones will be rewarded by the market, so let’s push further. I gave them an offer to do super pro rata at a post money of X (where X is above the seed round post money we previously led) while also offering to do ‘just’ our pro rata if they price above X (since there’s momentum from others to do the round ~10–20% higher than X). When we were talking it through I emphasized that the difference in check size I’d write had nothing to do with difference in confidence in the company or commitment to them as people (we already own close to 15% of the company as their largest outside investor). And I told them, they should probably do the higher price round even if it meant a ‘worse’ deal for us! Why? Because it’s better for the company overall IMO. I rather see the difference in dilution be used to continue hiring amazing team members going forward than add a few more basis points to my ownership. Long term greedy!!!! Now I’m just waiting for confirmation on what they want to do 🙂

Every situation is specific to the company, the investor and the moment in time. I’m sure there are examples where I needed to play ‘hardball’ or provide less flexibility in optionality, but I think it just goes to show that the best outcomes come from real discussions.

Lastly, Jason has a single very practical suggestion on what to do if your cap table is tapped out. I’m not going to repeat it here because you should give him the click 🙂

Thanks Jason for writing one of the posts I know I’ll be sharing with founders!

[1] Some situational examples do occur though: when a firm (or more specifically a GP at a firm) is rising or falling in stature; when a firm is investing in an industry outside of its wheelhouse and lacks relationships with appropriate downstream investors for the company.

Future of Work Software That Focuses on EQ Not Just IQ

Why The Move to Remote Has Accelerated The Need for New Tools

The first generation of SaaS was about single player workflows and data. The second generation added collaboration (aka multiplayer). And the third generation added ML/AI to reorganize/optimize those workflows based upon the intelligence of the computer, not the habits of the user. Not every industry and not every profession has moved through these generations in sync. Early adopter verticals — such as software development and tech sales — is mostly in Gen 3. Some of the largest markets including construction, health care, finance and agriculture are moving into Gen 1 and 2, with specific toes dipped carefully into 3. And my framework here also applies mostly to the US, with other part of the world ahead and behind the pacing I’ve suggested above.

Homebrew has invested into all three generations of SaaS mentioned here, and continues to do so with the previous 12 months including undisclosed seed rounds into promising teams working on agriculture fintech, health care backoffice automation and salesperson performance. But I also wanted to suggest there’s a coming Gen 4 of SaaS leaning heavily into EQ instead of IQ because I truly believe the Future of Work involves understanding emotions not just data.

When friends ask me to reflect on the impact of 2020–21 on startups one of the observations I shared is how dramatically the urgency increased around conversations that were more about culture, behavior and values than just strategy, financing and product. Especially during the second half of last year the convergence of the COVID pandemic, US political race and societal outrage over George Floyd’s murder, resulted in CEOs confronting a host of situations that weren’t on their roadmap.

In some cases these leaders wanted to be proactive in the moment. Other times it was their teams, customers or reporters probing for their POV. And regardless they wanted to be thoughtful, deliberate and consistent in how they, and their companies, engaged. So my conversations with these CEOs wasn’t about pushing my particular opinion on these matters or rushing them into a conclusion, but rather helping them focus what they were hoping to accomplish with their internal and external positions. I’m proud at the range of outcomes since they were honest and authentic, not performative.

Throughout these months one thing became very clear with all the leaders and managers I spoke with — they didn’t have the software tools to engage and understand their teams, their customers and other constituents at a deep emotional level. They had plenty of communication utilities which made conversations virtual but they didn’t have modern tools built with EQ in mind. So you had “Zoom Fatigue” and burnout and HRIS platforms designed for compliance not engagement. Thankfully I knew there were better options in development. How? Because we’d invested in them 🙂

Over the past 12–18 months another theme had started to coalesce in the Homebrew portfolio — Future of Work tools that were built with a combination of IQ *and* EQ. Gatheround in the teambuilding, education and collaboration space; Humu, smartly bridging the gap between strategy and action for your teams; Ethena for modern compliance training and behavior change; and Assembly in the lowcode HRIS market. Ahead of the extraordinary circumstances of the past year and a half, these founders had intuitively sensed and previously experienced the limitations of Generation 1, 2 and 3 tools. And while I don’t think they all agree with this market positioning, to me they represent the next wave we’re going to see in Future of Work tools, designed with tangible and intangible sense of how people are left feeling by the software they use, not just how productive they were. It’s still very early in this cycle but hybrid and remote work is pulling us forward with new types of communication, virtual HQs, and socialization needs. And software that remembers humans are the endpoints.

‘Inside Rounds’ Used to Be Bad. Sequoia & WhatsApp Changed Venture Forever

Why Their Multibillion Dollar Outcome Flipped The Script

Pre-2014: Insider Rounds Are The Funding of Last Resort

Post-2014: Why Are Insiders Letting This One Get Out?

When WhatsApp took $19 billion and joined Facebook, the industry headlines moved quickly from the buyout itself to Sequoia’s masterful funding strategy of the startup. After publicly leading a Series A, the firm put another $50m+ into the startup in two subsequent insider rounds, neither of which were disclosed publicly prior to the acquisition. Collectively a lot of other VCs closed their laptops after reading the news, put on their Patagonia vests and took a brisk walk down Sand Hill Road while wondering how to deal with this new reality.

What was the big change? A firm had led two successive ventures rounds into a portfolio company. And they were Offensive rounds, not Defensive ones!

Up until this point the idea that your previous round’s investors did the funding on your next round was pretty verboten and when it did happen, it was capital of last resort. Like, the startup couldn’t get a new investor to lead around at terms that everyone liked so insiders decided to do the round themselves — writing the termsheet and supplying some to all of the capital. This was typically a signal of company weakness, not strength. And the investors didn’t like to do it because besides the risk of doubling down on a company instead of spreading the risk to other new investors, it meant repricing the company that you had previously invested in. An insider mark was considered to be a less reliable estimate of actual value than a new investor offering to price the round (so LPs looked sideways at it, etc).

To be clear I’m not saying Sequoia/WhatsApp was the very first time inside rounds occurred that ended up benefitting the investors and the company so the VCs reading this can save their DMs to me about how they actually led an insider round prior to 2014. Nor am I suggesting that Sequoia was the first firm to lead multiple rounds for the same startup. But I am saying it was the biggest and baddest example of the game changing. There’s a reason that for a while after the deal, trying to do an inside round was called “pulling a WhatsApp.”

Now in 2021 we have a very different landscape. The larger multistage funds don’t hesitate to lead back-to-back rounds (or in recent cases like a16z/Clubhouse, back-to-back-to-back). And it’s not just a change in norms and increased fund sizes which has supported this transformation, it’s also the Opportunity/Growth fund phenomena.

Now so many multistage firms also have some sort of growth/late stage vehicle it’s also possible to split an investment over time between those funds. Basically you’re doing the Series A and or B out of the core fund and then the C or D out of the growth fund (more of less, round nomenclature across different situations is less consistent than ever). So the risk/reward profile of the earlier investment is in a fund aimed at those bets, and the theoretically less risky, but also lower returning (on a multiple basis) later stage investment is in its appropriate vehicle. This also often means that although you have the same firm leading multiple rounds it’s a different GP — the early GP prices the first round and the growth GP prices the second one. While it’s still under the same umbrella, you can imagine that these two individuals at least serve as a check and balance on each other. If the growth fund GP is simply marking up the deals of her colleague, to her disadvantage in the growth fund’s returns, she’d be working against herself.

There’s a lot of differences between VC 2021 and VC 2001, and the nature of inside rounds is one significant change that I rarely see discussed structurally. But it’s important!

Tech Reporters, You’re Being Played By Using “Oversubscribed” To Describe Successful Funding Rounds

Why I Cringe Every Time I Read This Word

I recognize this is an overreaction. But humans have their quirks and one of mine is I cannot stand when the tech biz press uses “oversubscribed” to characterize a startup’s funding round or a venture fund’s raise. Before I share why, let me just explain what it means and is intended to convey in a financial context.

When a founder or a VC claims their round was oversubscribed they’re signaling to you that they had way more investors competing to give them money than they wanted to raise. It has nothing to do with the size or terms of the actual raise, just the presence of greater supply than demand.

Ok so why is it foolish for tech reporters to repeat this somewhat cliche talking point?

  • It Leads To A Prisoner’s Dilemma/Race to the Bottom of Hyperbole: Well if every other company is saying they were oversubscribed then we should say it too. No, even better, let’s be specific and say something like “we were 5x oversubscribed for this round.” Yeah, that’ll show em. Until 10x oversubscribed is claimed by the next startup. And so on, and so on.
  • Counterintuitively, It’s True of Most Reported Rounds: If a startup or a fund can reach its targeted amount, it can be ‘oversubscribed’ with the next dollar of interest. In fact, at that point it gets easier to raise the incremental capital, not harder, because you’ve solved the social signaling issue by attracting all the previous investors. In a single raise, getting your first investor is harder than getting your 101st. This is especially true when the quality of previous investors is high. There hasn’t been a seed round Homebrew participated in that wasn’t ‘oversubscribed,’ especially after we committed and signaled to other investors it was, at least in our minds, a startup to back. And I’d reckon same is true of every other peer fund of ours. And every Homebrew fund has had excess demand as well.
  • It’s Easy to Manufacture By Playing Cute With Figures: “We set out to raise $10 million and raised $10 million” = not oversubscribed. “We set out to raise $8 million and there was so much demand we raised $10 million” = oversubscribed. They are the exact same fundraise and the press will cover them differently. Which is nuts! Especially since most VCs will tell a startup to not price themselves out of a round prematurely. That is, go in with a figure that’s slightly below the total you’d like to raise, or a range, and let the market move you up. If you want to raise a $15m Series A and you’re doing well, but not knock it down great? Pitch people on a $10–12m round and then as folks bite, move the round up a bit. Sometimes you won’t be able to take all the additional dollars without incremental dilution but you’ll still have a much better chance of getting to $15m without scaring away potential investors.

I don’t mean to pick on any publications or specific reporters. In Googling for examples of this trope I happened upon some of my favorite journalists, who write amazing and insightful stuff. I believe though that this is one of the areas that being on the other side of the fence provides clarity on just how silly a term it is. So let’s put a stake through the heart of “oversubscribed” and just let a fundraise be a fundraise.

“I Can Really See Us Leading This Funding Round” Isn’t a Term Sheet

Why VCs Are Always ‘Very Excited’ About Your Progress But That Doesn’t Mean Anything Until They Make an Offer

My job as an early stage investor includes translation services, specifically helping startup founders take what they are hearing from potential investors and providing a read on whether that VC is actually ready to make an offer. Quite often a CEO will share all sorts of positive comments and praise they heard from an investor, and I’ll remind them these statements aren’t termsheets. Simply put, only a termsheet is a termsheet.

This reminder tweet set off a few good discussion threads that I wanted to capture and expand upon here.

Even experienced founders get ‘happy ears,’ not just first time founders

I definitely don’t blame founders for underestimating the distance between enthusiasm and a concrete commitment. VCs live in that world and have repeated experience. To the extent you trust your current investors’ feedback, you should *really* trust them when it comes to basic fundraising advice. Note: I understand that there are reasons to assume your investors are giving you advice based on their interests, not yours, but let me tell you, for the best VCs this isn’t the case. That’s not to say we’re always correct, but I will specifically tell a founder ‘and now I’m putting on my Homebrew hat’ when I have a POV that’s informed by my own needs as their capital partner versus what I generally think should be the company’s strategy. And I don’t take paths off the table for discussion that wouldn’t necessarily be my preferred choice.

Others VCs definitely know what I’m talking about

Everyone has experienced a termsheet that came with hidden surprises

Differences between the verbal offer and the provided termsheet; unacceptable clauses added; lots of noncommittal language ‘pending due diligence’ etc. We all have stories of a termsheet that didn’t pan out — either it never arrived even after it was promised. Or it was pulled for no reason. Or the investor didn’t have the money to close the commitment. And so on. This rarely occurs with established investors, because they know breaking their word is a reputation killer around our community. But it still does.

One of the benefits of working with someone like us, or Ed Sim at Boldstart, or one of dozens of other firms I’d recommend, is that you have some insurance against new investors fucking around.

Are VCs being duplicitous by always being ‘excited?’

I value coinvestors who run quick, direct processes with our founders, but I expect a certain amount of interest that doesn’t convert, especially early in a process. Ahead of having to make a decision, it’s always in the interest of an investor to stay in the game. This isn’t unique to the dynamics of fundraising, but a ton of person to person interactions. Whether it’s a hiring manager holding some candidates at bay while they continue interviewing. Or simply me telling someone I’ll “try to attend their afternoon BBQ” as opposed to just saying no right away. I don’t generally hold any ill will towards these types of responses, especially when it’s ahead of, or during, a first meeting with a founder.

Can someone develop a reputation for being a Mr or Ms Maybe or overpromising and underdelivering? Sure. Satya and I have a list in our heads of GPs who we think do this and help our founders manage those conversations accordingly. But I really don’t think it’s outright duplicitousness, just the incentive gap between two parties: a founder wants to raise a round within a certain time frame and align all bidders, while an investor often wants as much information as possible and barring high conviction or a forcing function, will often move slower than the founder. The phases of fundraising, how to get to a first term sheet, and what to do once you’ve got an initial offer is probably a blog series of its own.

But end of the day, if you screw a founder, they’ll never forget

Addendum: When is a verbal or email offer as good as a termsheet?

My friends Keith (Founders Fund) and Sam (Slow) pointed out that founders can rely on their offers without it being in a formal termsheet. I agree with Keith that an email from a Managing Partner at a Tier 1 fund with all major term components written out is 99% as good as a termsheet. I do not like verbals only — there’s too much potential for confusion is what was said, even in good faith conversations. The best practice I’ve seen is follow-up your call with an email that says something like, “per our discussion, we’re thrilled to offer ….” and include the major terms like Keith suggests.

When would I prefer a termsheet to an email, even with a Tier 1 fund?

A. When it’s a junior partner. Sorry, but if you’re just getting your feet wet at a fund, I want to know that there’s a managing/senior partner behind the offer.

B. When a founder is going to stop most of their other conversations as a result of the offer. Again, just good hygiene to have a termsheet in hand before you start slow rolling/canceling/opting out of other meetings. It’s company specific too. When I believe a startup is a slamdunk in its funding, we’ll use the first acceptable termsheet to eliminate 75% or more of the open conversations and really narrow down to a handful of firms the team is considering.

C. When there’s something non-standard the founders and GP have agreed to outside of the primary terms Keith mentions. This could include anything around board seats, secondary sales, and so on. Again, not because I don’t trust the GP but rather because it’s helpful to see it spelled out in legal language rather than short-hand intent. Maybe if your GP went to law school (again, hi Keith), I’ll be ok with just the email and its phrasing.

We Don’t Talk Enough About Money In Silicon Valley, Revisited

Things to Remember As You and Your Friends Get Wealthy

“Giraffe money.” That’s the phrase which stuck with me from Erin Griffith’s NYTimes article this spring about the latest set of wealth creating events in the tech community. To quote,

For Palantir, a data analytics company that went public in September, Feb. 18 was “giraffe money” day. That was the first day that current and former employees could cash out all of their shares after the company went public.

In a Slack channel for former employees called Giraffe Money — an apparent reference to wealth that can support casual giraffe ownership — many anticipated their windfalls by sharing links, mostly in jest, to absurdly expensive home listings and boats, one former employee said.

I never heard about giraffes after Google’s IPO, although reportedly one early engineer did buy a carnival-size ferris wheel. But that was back in 2004 and the trillions of dollars of wealth created since in startups, big tech companies and crypto makes earlier questions of extravagance seem quaint.

We are truly in a k-shaped economy and for those fortunate enough to be in the top arm of the K, it’s easy to benefit from being in the right place at the right time.

So I wanted to reshare a post I wrote suggesting that we actually don’t talk about money enough in Silicon Valley, at least not in the transparent and healthy ways that allow us to consider its impact.

https://hunterwalk.medium.com/we-dont-talk-enough-about-money-in-silicon-valley-no-really-e9335367e733

Reading it back 3 1/2 years later it still rings true for me personally. We are well-off and happy, those resources having played a significant role in mitigating the risks of the pandemic and the anxiety of a disrupted world. I still worry about the tension between wanting to provide my daughter more experiences and luxuries than I had access to as a child, but not distorting her values or work ethic. Some of the founders we backed in Homebrew’s first fund have realized — or will soon realize — outcomes that will net them hundreds of millions and perhaps even billions of dollars. And I’m thrilled for them and their teams.

More recently we launched an effort called Screendoor to help fund new emerging venture capitalists from underrepresented populations. The idea being that there’s economic opportunity in this segment that’s not being captured today, and there’s a chance to start a virtuous cycle where the investments they make will likely include folks in their networks, who will also hire people in *their* networks, and everyone succeeds together. Those of us who’ve had access to the right hiring manager, or cap table, or referral network have already put ourselves in a position to capitalize, but the pie can be expanded. It’s not about scarcity, it’s about abundance.

Ok, please read my earlier blog post and tell me what you think. I’m off to research how much it actually costs to privately own a giraffe….