VC Value add: Why it probably doesn't matter, but I try anyway.

A while back, a larger fund courted one of my portfolio companies heavily.  I wasn't sure if this firm was the best partner for the company, so I reached out to an experienced founder who had been through lots of rounds as both an entrepreneur and an angel investor.  

He told me the following:

There are maybe two or three VCs on the face of the earth that add any value to the eventual outcome of a company, so there's really just a few criteria that matter...

- They should do no harm.

- They should be able to close the round quickly and without too much distraction.

- You should like them enough to have them on your board.

- They should hit your bogey in terms of price.

He said if you could check off all four of those boxes, you should just do the deal and move on.  I was so surprised because he had taken money from investors who had a tremendous reputation for adding value to their companies.

When you look at venture returns, however, the reality in most circumstances is that you're either in the big deal or you're not.  If you're in a billion dollar outcome, it overshadows anything else you do as an investor. 

Sometimes, the "best" firms are in the best deals, but often times, they're not, or they're joined by a lot of randos.  That top tier VC firm might be the lead on the Series A for unicorn you've heard of, but the seed round might be filled with lots of other firms who don't do squat for their companies--except take credit for their success.

Sometimes, firms get into deals not because they're highly sought after--but because the team pivoted several times.  Dumb luck dictates that the firm who got the deal just happened to be the eighth firm down the list for a pitch after the  game-changing pivot.  The first seven firms--the ones the entrepreneur really wanted, got the first business model pitch--the one that didn't have a chance of working out.  

Way to go, 8th best seed fund!  

Other than having the guts to keep writing checks, it's not clear that any VC has ever done anything to enable a company to get to a billion dollar plus exit where the entrepreneur couldn't have done it with any other check writer.  Don't get me wrong--writing checks in the face of uncertainty, especially when you're basically the only one doing it, is a very difficult thing to do, but most VCs portray themselves to be doing a lot more than that, including me.

I know that I do a lot of things to help my companies--but I also know that the founding team is responsible for 99.999% of the outcome.  If I didn't help them make that developer hire, would they have made one on their own?  Sure.  If I didn't get them some PR, could they have gotten it anyway?  Probably.

Do I know how to do this any other way? 

Nope. 

Like tigers with tuna fish sandwiches, I suppose I'm kind of stupid that way.  I certainly ask myself whether it matters that I take the time to meet with my companies every four weeks, when others just say "Let me know when you need me."

And the best ones certainly are there when you call them--so why not just leave it at that and be an open phone line?  

Three reasons:

a) I just don't know how to work any other way.  I don't like idely sitting by.  I'm always trying--and I know I would have been better off with more feedback as an entrepreneur.  Would I have had a billion dollar exit with the world's greatest investor behind me?  No.  I probably still would have failed, but I would have gotten a lot closer to success.

b) On the margin, when you're dealing with a sub-$20mm fund, it can matter.  When you've got hundreds of million dollars of investors behind you, it only matters if you're in a unicorn or not.  With a small fund, turning a couple of zeros into break evens, and helping a small win become a bigger one do make a difference.  That's why I'd encourage entrepreneurs to think about the fund size of the folks who back you.  The bigger their fund, the more they're just going to encourage you to raise lots of money to go big or go home.  The smaller the fund, the more likely they'll focus you on the little things that add up incrementally, because it adds up for them, too.

c) Starting a company is the hardest thing you'll ever do (maybe besides having a kid), and the least I can do is make you feel like I've got your back and I'm there with you along the way.  If not feeling alone gives you any comfort, I'm doing my job.

It will probably be eight to ten years before what I do now for companies ever sees the light of day, before we find out whether or was all worth it, but I'll stay the path regardless.   

The 99: How the SEC protects you from venture capital returns.

I don't need to remind you of the widening gap between the rich and the poor, but if I were to be more accurate, I'd say it's the widening gap between the mega rich and everyone else.  When you've already got tens and hundreds of millions of dollars, a whole world of moneymaking opportunities are available to you that the rest of the world can't access.

Take venture capital, for example.  

To benefit from the explosive growth of companies like Uber, Airbnb, Dropbox, etc, you had to fit in either one of two categories: be an angel investor already in an inner circle of experienced angels and entrepreneurs, largely located in Silicon Valley, or be an investor in a venture capital fund that backed those companies.

Very few are ever going to wind up in the former category--so the most accessible option for most investors would have to be a venture capital fund.  Only, that's not such an accessible option as it turns out either.

The SEC, in an effort to "protect the little guy" has all sorts of regulations.  First, you have to be an accredited investor--someone with a few hundred grand in income or a million to your name.  Below that and they need to keep you from investing in really risky stuff, like venture capital.  

Of course, they don't prevent you from putting your whole savings into penny stocks, but that's another story.  

Even just being accredited though doesn't mean you're in.  One regulation has effectively kept the most investors from  participating in the most recent tech boom--namely the 99 investor limit in a limited partnership.  That's how most venture capital funds are structured.  While the "accredited investor" requirements for being allowed into these funds aren't so onerous , they make it really unattractive for funds to take smaller checks.  

You see, if you're trying to raise a $50mm fund and keep it to one legal entity, you can only have 99 underlying investors.  Math dictates that they'd have to each commit a little more than half a million dollars to the fund--and that's if they each only count for one beneficial owner.  Family offices, for example, often have many beneficial owners.  Even if they're pooled into one fund for investment purposes, each member still hogs up a slot towards that 99.

If you've got $5mm net worth, you can fit into another type of fund for "Qualified Purchasers".  You can have up to 500 of those.  Think about it, though.  If you've got a fund full of QPs, why bother accepting the 99 little guys in a dinky sidecar fund?  They won't add up to much, relatively, speaking.

That makes the fund investor beneficiaries of the Uber ride, for example, from a single digit million dollar seed valuation all the way on up to $80 billion mostly people who already have at least $5mm, family offices that have multi-generational wealth, or college endowments large enough to have venture programs (typically Ivy Leagues).  

In an age where technology enables fund managers to onboard, update, and organize large amounts of investors--why is there a limit at all?  Why can't my parents put $5k into the next Brooklyn Bridge Ventures fund--a diversified pool of 30 something investments?  These rules wind up making it easier for accredited individuals to make one angel bet, but make it really hard to get into a portfolio of 30 bets.  

In the late 90's, when dot coms went public, even though the sector didn't do well as a whole, there were still opportunities to make significant returns as an individual investor.  Public market fans of Google, Apple, Amazon, Yahoo, etc who held on did quite well, while the IPOs of today are leaving little upside for today's investors.  Companies are staying private at higher and higher valuations for a host of reasons, so if you're not in a venture capital fund, you're largely missing out on the tech boom because there isn't as much upside left anymore once a company goes public.

Because Brooklyn Bridge Ventures manages smaller funds, it can get away with one entity and be fine--even though a few of my family office investors count for multiple underlying beneficiaries.  However, I've decided that involving a wider community of investors is beneficial to the founders that I back--and honestly makes for a more interesting experience for me as well.  I value the feedback and insight I get from my Limited Partners and the community we've built.

Therefore, in future funds, I'll be moving my family offices and institutions into their own QP fund to make a bit of extra room for accredited individuals.   Unfortunately, I can't allow all 10,000 people on my weekly newsletter to toss a grand in, because I'd be thrilled to have it be such a community effort, but happy to speak with investors who are excited about getting access to the NYC innovation community and can commit a couple hundred grand over the next four years.  This, of course, isn't a solicitation to invest in any specific investment vehicle.  I'm just saying that I'm open to conversations with accredited investors who are supportive of tech entrepreneurs who might not have considered themselves fund investors before because of size constraints.

Questions from Hunter #MondayMailbag

I've known Hunter Walk for almost a decade.  He found me through my blog and I didn't think he was real.  Hunter Walk can't be any blog commenters real name, can it?

Turns out that not only is he real, but he's one of the most genuine, thoughtful, and egoless people I've met in the startup world--a real breath of fresh air.  I look forward to connecting with him when he's in NYC and when I head out his way.  He approached me recently with an idea for cross interviewing each other and I thought it was a good way to have my writing be a little more collaborative with my audience.  I wasn't sure whether his answers would wind up here or vice versa, but when I thought about it, it turned out I was pretty adamant that my blog is for my voice.  So, if you want to read what I wanted to know about Hunter, you can check it my interview of him here, on his blog.

I liked this exercise so much that I think I'd really like to make #MondayMailbag a tradition with other people.  I don't know what the criteria will be or how we'll work it out, but maybe we could just start with a Twitter hashtag and go from there.  What questions do you want me to answer next Monday?

1. BBV has talked proudly about its large number of female founders. When you think back to your time at USV, FRC and BBV, can you identify a time you passed on a founder because of a blind spot or unconscious bias you possessed at the time and if so, what did you do going forward to not make the mistake again?

I think other people have talked more about the fact that I've funded female founders than I have. I talk proudly about all my founders, but not necessarily because they're female.  I'm just trying to invest in the best opportunities.

There are two parts to regretting a pass.  One is passing for the wrong reasons and the other is having it turn out to be a missed financial gain.  Normally, unless you realize the latter occurred, you don't think much about your passes.  Maybe I passed on someone because they're kind of quiet and I didn't feel like they could be a public champion for their business--and I could have been wrong about that, or wrong about quiet people in general, but if they failed for some other reason, I wouldn't see my bias.

We all have biases--and not all bias is bad.  I'm probably biased against just out of school hackers who think that just because they built a thing, they're going to disrupt an industry they don't care about understanding.  Am I wrong to have that?  Perhaps.  Do I want to change that?  I'm not sure because I don't know if I would ever get along with someone who doesn't at least appreciate the way something works now and why it has worked that way for so long, even if you want to change it.  

I can definitely think of a few people I met with and said, "Well, that person was kind of a jerk" or they just had a bad personality--and they went on to build seemingly successful businesses.  I'm not sure I think of that as a "mistake" to be fixed.

In short, you need to be able to get along with a founder--and if there are people types you don't jive with, you need to make sure it's not just because they're different than you, but because they genuinely lack the values you see as important.  I think I've been good about that so far.


2. You've been in VC long enough to see lots of different funds, partners and deals. Do you think the average investor is a generally ethical and collaborative person, or is this an industry of sharp elbows and grey areas?

I think humans are generally programed to look out for themselves first.  They don't intentionally seek to harm others, but they're not inclined to do you any favors either.  That doesn't make them unethical, though.  I'd say there's a lot of "me first" and a lot of it is predictable, with money as the main motivator.  I don't, however, see a lot of unethical behavior--but maybe that's because of the answer to the above question of trying not to work with jerks.  You get a lot of choice as a VC as to who you want to spend your time with.   


3. Five years from now, will we have more, fewer or the same number of seed funds here in the US. I think the guys at First Republic Bank counted nearly 200 sub $100m funds (not all necessarily seed).

There are two types of seed investors: people who are doing it as a stepping stone to doing something bigger and people who actually like doing seed.  Many investors start out doing seed and move up the ladder in terms of assets under management.  Few stay down here, for a few reasons.  There aren't a lot of fees, so you really don't get much in the way of current income and nice offices, or non-partner help.  You wind up working really hard for not a lot of near term cash.  That's just not attractive to most people--so they'll move up.  Some other people just won't make it.  

What I hope to see is the creation of new Series A investors who are willing to do the old school Series A deals of $3-5 million dollars.  I fear that in the race to show that your companies can raise $20mm Series A's, we're mistaking good ideas for big ideas, and people are raising bigger and bigger funds off of valuations inflated by big funding rounds.  

Some companies have a natural terminal exit value of $250mm and we should all be able to make darn good money off of that--and that means financing them responsibly, with reasonable expectations.  

4. I think we originally connected via your blog - it's great and you've been one of the longest running VC bloggers (as far as I can recall). Who are some of the other investors that you think should be mentioned among the best VC bloggers but aren't as well known?

Thanks!  It's been over 11 years now!  Hard to believe.  

I'll be honest, I don't read too many VC blogs with much loyalty anymore--but I think that Mattermark is doing wonders for under the radar blogs with their newsletter.  Medium is also a big part of the resurgence of VC blogging--because now you don't worry too much about updating regularly.  Your site doesn't look barren if you haven't posted on Medium in a while.  

What I enjoy much more is Instagram.  Blogging is a great place to find best practices and I feel fortunate that I have a network where I can go straight to the source and talk to people 1:1.  It isn't a good place to get to know people, however.  That's where Instagram comes in.  I wish IG had better discovery tools because I really want to get to know the people behind the best practices--the dad, the mom, the cyclist, and not necessarily the 5 tips for growing MRR.  


5. Are there existing larger VC funds that you'd consider joining, or are you BBV for life? (Don't have to name specific funds - just whether there are circumstances that would cause you to join one)

The only way I'd ever consider joining another fund is in retirement mode--to mentor other VCs, far far in the future when I've learned a lot more than I know now.  I think that's something that's really lacking in the VC world.  There are accelerators for companies, which can be especially helpful to first time founders, but what if you're a VC raising a first time fund.  There's literally nothing.  There's next to no content available to help you think about fund economics in depth.  There's no where to find interested and willing VCs at the other end of their career willing to help you think about issues and opportunities.  I'd be very interested in doing something like that later on.

For now, I love the current model.  I have zero interest in firm building.  I'm not a great manager or delegator (but I'm vastly improved on the latter as of recently) and it's not clear to me that VC firm capability scales with the number of partners.  Just like how raising too much money can be a rabbit hole for startups, the same goes for VCs.  If you add partners, you have to raise more, which means you can only do certain deals at certain stages, which also means there's less value add because the companies are more mature.  It's a slippery slope.  I'd rather stick to early, impactful, and local.  

Announcing a new strategic investor and partner at Brooklyn Bridge Ventures

I've said before that I wouldn't take on a partner.  

I didn't think I needed one, and I'm happy to say that it seems that I've done just fine without one.  I've had the good fortune of investing in standout companies like Canary, Tinybop, Floored, Orchard, and Ringly, just to name a few.  The fund is performing really well and we've had lots of inbound offers to invest in the second fund, which was being rounded up until recently.  

That's when I got an offer I couldn't refuse.

Someone called me up that I hadn't met in person before but that I had interacted with over Twitter.  This person had built a hugely successful firm that grew in size from fund to fund--and was now a major brand in the space.  

Right off the bat, we hit it off.  It was like we were talking to mirror images of each other.  And that's when it happened...

Marc Andreessen asked to join Brooklyn Bridge Ventures.  

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Yeah, I wouldn't have believed it either, but he said he wanted to get back to the roots of investing in pre-seed and seed deals, of focusing on some hands on work with lots of first time entrepreneurs.

Turns out, he's also in love with New York the way I am--and believes that the diversity of industry, culture, and talent here is the best place to start the next big thing.  He'll be moving to the Big Apple at the end of this month.  

Still reeling from the offer, I sunk back down to earth when I realized that I had priorities.  While I was well on my way to raising my $15 million dollar second fund, I wasn't quite finished with that process yet.  When I told him about my concern of adding a new partner in the middle of a fundraise, he asked me how big the target was.  After I told him, he joked that he'd shake out his couch cushions and make it happen. 

I said, "What do you mean 'make it happen'?"

That's when Marc offered to be the sole investor in the fund--putting up the whole $15 million.  He said it wasn't about the money for him--but that he just wanted to work with someone who hustles like an entrepreneur and is willing to make investments in teams in the most formative of stages, when they really don't have a lot to show the world quite yet.  It was more about an interesting challenge for him--and that the day to day of running a huge machine like A16Z had grown a bit boring.  That's why he had been tweeting so much and why he wanted to really sink his teeth into something new.  

So, unfortunately for everyone else, including my existing investors in Fund I, there is no opportunity for anyone else to invest in my second fund.  Marc really wants to be all in and that was the minimum he would accept having at stake.  We might strategically take a few checks from larger accredited investors, but only ones we really like.  

I'm excited about this new chapter in the history of Brooklyn Bridge Ventures and am still in disbelief that I was able to sell this bridge to such an successful industry leader.  And if you believe this, I've sold you that bridge as well.

The Coming Zombie Startup Apocalypse

Are we in a bubble?

And if so, when will it burst?

Everyone likes to debate it, and statistically, almost no one gets it right.  Not only is it notoriously difficult to time the market, but even if you did, you'd miss out on individual winners.  Sam Altman of YC recently pointed out that pulling back during the downturn in 2008 would result in several big misses:

In October of 2008, Sequoia Capital—arguably the best-ever in the business—gave the famous “RIP Good Times” presentation (I was there).  A few months later, we funded Airbnb. A few months after that, a company called UberCab got started.

Those companies would have not only returned any fund that invested in them, but would likely return an entire career's worth of investing over the course of several funds.  

Still, no one wants to be the one holding the back when things do pop--and they will, right?  Doesn't every good run have to come to an end?  Will this bubble also end in a blaze of glory with companies shutting down left and right in a massive startup apocalypse?

Probably not, since that's not exactly what happened the first time around.

Would you be surprised to know that almost half of the dot com companies founded when the boom started in 1996 were still around in 2004--four years after the peak of the NASDAQ?

A paper by two University of Maryland researchers who arrived at that number concluded the following:

"...Observed financial losses did not, in fact, equate with firm failure...tectonic changes in the
underlying entrepreneurial landscape were obscured by the financial bust. Against a
highly salient backdrop of destroyed market value, we interpret the high survival rate of
Dot Com firms to mean that many of the business ideas that flowered during the Dot
Com era were basically sound. In other words, good ideas were oversold as big ideas.
Most internet opportunities were of modest scale – often worth pursuing – but not usually
worth taking public. Because most internet business concepts were not capable of
productively employing tens of millions of dollars of venture capital does not mean they
were bad ideas."

Another way to look at it is to track how companies wound up leaving the NASDAQ Composite.

These companies were, even in the worst times, worth sometime to someone. 

So if you think what's going on today is a repeat of what happened 15 years ago, you may be right--but I think what you'd be right about is that "good ideas were oversold as big ideas".

There are lots of those around.  I have a feeling that a lot of these "on demand" companies aren't going to be as gamechanging as we think--and will come back down to earth with valuations that look more like temp agencies than the next big thing.  

So where does that leave us? 

I have no doubt that companies like Uber, Airbnb, Dropbox, Slack, Snapchat, Pinterest, Stripe, Square, etc are real businesses.  They're not going out of business, nor are 100's of other new companies created during this time.  They'll be around 10 years from now.

But at what valuation?  That is the real question.

It took the NASDAQ fifteen years to get back to it's March 2000 peak--and I think that it's possible we're looking ahead at the same kind of period, but one without the huge trough.  Why?  Because companies today have way more revenues than the companies that went public or had huge up rounds back then.  And, they aren't necessarily revenues from other dot coms.  They're consumer, SMB and enterprise revenues--maybe not enough to justify their valuation, but much much further from zero than companies in the past.  They're real businesses that would have had great outcomes if not for the go go growth round unicorn creation machine we've got going.

My own personal prediction is a long period of market stagnation at the top end.  At some point, the music stops, the greater fool theory fails to find a greater fool, and companies start a mad dash to break even.

Enter the Zombie Startup Apocalypse.  

What happens if you can't grow enough to sustain your multi-billion dollar valuation and there aren't any more growth funds or hedge funds willing to give you another up round?  That's when the heads start rolling.

Any one of these unicorns could be profitable right now.  All they would have to do is cut a few hundred people or two, and stop buying growth with venture dollars.  That would actually be pretty good for the talent market--it would bring salaries back down to normal.

Instead of paid acquisition fueling an up and to the right hockey stick, these companies would grow organically.  Retention, referral and growth hacking experts would be in high demand, asked to squeeze blood from a stone in order to grow a userbase without paid acquisition.  All of the sudden, Facebook ad pricing would become reasonable enough again for startups to start using it.  

With growth rates reduced, IPOs would be even tougher to come by--but companies would survive.  They might even find themselves operating more efficiently than they ever had been--newly focused on core metrics.  

Each month, they'd tick up just a little bit.  Tick.  Tick.  Tick.

Eventually, they might be worth what they're valued at now to the public market or to an acquirer, but not for a very long time.  Meanwhile, they'd just continue to go somewhat sideways and maybe a little bit up.  

Founding teams, bored of a decade of being tied to one company, would start to churn out.  

Seed and early investors might get bought out--perhaps by the growth funds that were fueling the valuation growth.  Why invest at top dollar in the last round, when you can offer liquidity to early investors at a huge discount to the last round?  It would still make for a huge return to the early investors.  The later stage guys would just have to wait longer for the company to grow into its valuation.

If you're a long term investor, you'll realize that the market for new technology continues to grow.  Innovation continues to disrupt older industries, create opportunities, and create new streams of revenue.  These sound fundamentals drive the venture capital market over the long term.

In the short term, the sector is susceptible to a lot of hype and valuation volatility.  Financial fortunes around hype cycles are made and lost, but the underlying idea that new technologies are worth investing in at reasonable valuations remains sound.