Five Questions for Vetting an Investment in a New or Emerging VC Fund

While most of the money that goes into VC funds comes from institutions that are highly experienced in the asset class, some family offices and high net worth individuals also invest in VC. They’re trying to get exposure and diversification at the same time, while potentially seeing co-investment deal flow.

A lot of VC fund pitches—and I know this because I used to vet VCs for a living as an institutional limited partner at a pension fund—sound the same. They all have great networks, above market performance and some special sauce that sounds nice but you’re not 100% clear it makes sense as a way to boost returns or get access to deals.

Here are five questions I would ask any new or emerging VC fund:

  1. In the five years before you had this fund (in case they have a short track record) what deals could you have legitimately gotten into that fit your strategy that would have been winners?

  2. Could you have led any of these deals?

  3. If every single fund at your size/stage/geography/strategy said yes to a deal, where are you in the order of preference for founders to accept a check from? (i.e. If you’re a Series A fund in NYC, and you, USV, Firstmark, RRE, etc all submit term sheets, who gets in and in what order?)

  4. Explain the math that gets you to a 2-3x net (after fees) return—how many deals, how much in each deal, at what valuation, what exit expectations, follow on or not, etc. If they haven’t done this math, they shouldn’t be managing your money.

  5. What risks have you taken that others haven’t—and why did you think they were worth taking?

If you want to learn more about how VC funds get evaluated and you’re either an accredited investor, a non-partner at a VC fund, or work on behalf of a family office, check out this event tomorrow. We are especially focused on bringing diverse attendees into the room. If you’re not sure if you qualify, e-mail me. No current non-accredited founders, please.

The Tech Issue that Matters Most in NYC

The headlines in the tech and startup world have not been good over the last couple of years. As it turns out, the “move fast in break things” culture was itself pretty broken—full of discrimination and harassment. On top of that, the rise of tech is exacerbating wealth inequality, creating some serious data privacy issues, and allowing hate and misinformation to grow rampant on its platforms.

For all its promise of moving humanity up and to the right, the tech industry boom has had some nasty side effects, and as we saw in Amazon’s HQ2 fight in NYC, a lot of people aren’t taking it anymore.

It’s not surprising. When wealthy tech leaders seem, at best, disconnected from the rest of the world’s issues and at worst totally unsympathetic and wrapped up in their privileged little bubbles—it’s easy to be against them.

I hope we can take a different path in New York City. As the local ecosystem matures and gets more and more politically active, I hope our activities coalesce around the following single issue:

How can the technology community make life in NYC better for everyone?

That’s it.

I don’t ever want to hear any issue ever brought up by anyone in NYC tech unless it has that as its lens. No more “How can my company get faster internet?” It should be “How can everyone get faster internet?”

Imagine if it wasn’t “Should we have Airbnb or not?” but instead Airbnb was seen as an active proponent of expanded affordable housing construction. Imagine if WeWork refused to take more space with a commercial landlord unless that landlord was seen as friendly to small retail businesses.

The New York City tech community has the opportunity to be seen as a very public and influential champion of fairness and equality within our city—and it’s in the community’s best interest as well. If NYC was a place of access to affordable healthcare, childcare, working transportation and fair wages, as well as the kind of place where you could grow up and not get displaced when the economy performs well, every single company would want to be here.

So, while we’re debating the best way to get kids coding in school—which I do think is important—let’s make sure no one ever gets arrested for marijuana possession in New York ever again and thrown into the incarceration cycle. When we’re writing up the scooter regulations, let’s make sure renters have adequate protections against increases and harassment by landlords looking to clear buildings. As we’re busy building a world class educational institution using public land, let’s make sure everyone in the city has a home to call their own.

New York City residents will get on our side when we get on theirs first.

Lessons from a Diverse Venture Capital Portfolio

Brooklyn Bridge Ventures, the pre-seed and seed stage VC fund I run in NYC, has invested in 64 companies in the last six and a half years.

Twenty-five of them have at least one female co-founder.

Fifteen had co-founders over 40.

Five have LGBTQ+ founders.

Three teams have African-American founders.

Three of the founding teams are married couples.

All were backed based on the sole criteria that they had the potential to make my limited partners a lot of money. The diversity is the direct result of our mission—to build the most accessible venture capital fund in NY. I don’t require warm intros. I will back a wide variety of types of companies—everything from The Wing to Imagen.

Surrounding yourself with diverse teams means being exposed to a lot of different perspectives and creates learning opportunities not possible when everyone you deal with professionally looks and acts like you do.

Here are just a few things I’ve been exposed to that I think if you’re not surrounding yourself with diversity in your professional world, that you’re missing out on:

  1. There is a difference between intention and effect—and if I care about others, effect is what should count. Just because you didn’t intend for something to get taken a certain way doesn’t mean the conversation stops there. People are different—and your conversational and language norms, particularly when you are in a privileged group, aren’t the “norm”. Anyone who doesn’t want to hear how their words and actions were received lacks empathy.

  2. My individual interactions are part of a series of lived experiences for others. I was reminded of this from one of my founders of non-white descent. He mentioned what it felt like to have someone ask you where you were from. The person asking experiences it once, but when it happens everyday across multiple people, it’s a pattern making the receiver feel like an outsider and an other. This happens in lots of other situations. It brought to mind industry interactions that lacked clarity in their intent. I know I had previously given very little thought to the emotional drain it causes when conversations turn social all the time for women in the industry—when one-off asks or comments form a constant stream of experiences to be on guard against. When you back women and you’re trying to encourage the expansion of their network and the building of their personal brand, you cannot help but review all of your own actions after listening to the compounding emotional effects of their professional experiences.

  3. Different groups communicate differently—and it’s important to find objective common ground around language, goals, and risks. If everyone gets measured based on one set of shared norms around pitching, professional reviews, and updates—the language of straight white men—you’re going to wind up with a lot of mismeasurement of what’s actually happening and likely to happen in these companies. Groups that lack privilege tend to be more measured in their commentary—because they are subject to more scrutiny. When you conflate hyperbole for ambition and realism for lack of aggressiveness, you will ultimately wind up shutting out a lot of groups from the game of risk seeking capital and opportunity.

  4. Trust is the first thing you have to establish in every professional relationship for it to be successful. When groups are homogeneous, trust is often assumed. When you look, talk and act alike, you can assume others are on the same page. You feel like these people will have your back—and this is a form of privilege when the group dominates your industry. As an investor, it’s easy to come into a board meeting asking probing questions, demanding information, and sharing your opinion without first having built up a base of trust. That comes from a shared understanding of why you’re there, your goals and objectives, and understanding how a founder thinks you can be most helpful to their company.

  5. There is strength and support in numbers. When you can introduce diverse founders to a diverse network of professionals, it makes their professional experience orders of magnitude better. Everyone needs peers, mentors, and champions and it’s helpful when those people come from a shared perspective. Creating this community doesn’t only mean backing diverse founders, but also surrounding yourself with a community of other diverse professionals to help your portfolio.

I feel incredibly lucky to be surrounded by a diverse community of founders, in the most diverse tech and startup city in the world. It allows me to learn more, be better, and checks my comfort level and privilege in unexpected, but positive ways.

The Potential for Fraud Caused by the Unnecessary Mystery of the Family Office World

About a year ago, I received a LinkedIn connection from Richard Briggs—a Brooklyn Law Grad who spend 25 successful years at Lehman and was operating his own family office. He knew a bunch of other VCs in NYC and seemed like a great potential Limited Partner connection.

There was only one problem. Richard Briggs didn’t exist.

No Richard Briggs ever attended Brooklyn Law and none of our mutual connections had ever met him or interacted with him. He was a completely invented person—and no one connected to him on LinkedIn ever bothered to check.

I guess it’s pretty easy to get VCs to think that you’re a rich person interested in investing in their fund.

Just the other day, I got the following note:

Dear Mr. O'Donnell,

I am writing to you on behalf of Mr. SM Karabel (Chairman) of “Karabel Family office” which is a large Palm Beach based single Family Office with $1.9 billion under management plus real estate in NYC/Cal and 5 operating companies. Mr. Karabel would be delighted to meet with you for breakfast/lunch or drinks at The University Club in NYC during his upcoming visit to (NYC/CT Feb 26 - March 1st) or in south Florida (Palm Beach/Boca/Miami) area.

The office will shortly sell one of its large operating companies and plans to allocate all of the proceeds to investments. The Family Office has 20 employees does all of its allocations in house. I kindly await your feedback and look forward to hearing from you.

It’s possible that this is legitimate—that there’s some guy down in Florida who made over a billion dollars completely under the radar who wants to allocate all his new cash to “investments”. But, what are the chances that he also shares the same name and schools as a person in the same geographic area who lives in this lovely but somewhat understated house for a billionaire:

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Anything is possible.

It’s also really possible that the person who reached out to me is, in fact, a stock photography model whose LinkedIn photo also appears in this ad for gut bacteria improvement:

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Putting her name into Google, one of these ID landing page sites like Spokeo or Zoominfo ties her to the Family Office Club—an event company catering to ultra high net worth individuals located above a liquor store in a Florida strip mall.

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It’s certainly a very nice strip mall—but is it really the epicenter of investment activity for billions of dollars of family office wealth? Anyone who has ever attended any of these “family office” conferences will tell you probably not.

And trust me, I can tell the difference between a real family office and a fake one. I have an investor from a huge multi-generational Bolivian shipping family and they’d never attend anything like this.

Actually, I’m completely making that up. (Of course I am—Bolivia is a landlocked country.)

But how would you know?

How would you know if I showed up to an investor conference, took meetings with startups, and acted serious about putting money to work in venture on behalf of a family office whether I was telling the truth?

For the most part, you’d have no idea. Real family offices are pretty shrouded in mystery. They’re not setup to take inbound, so they don’t put up websites or participate much on social media—so it’s nearly impossible to tell who from the family office world is legitimate.

You know this leads to a lot of fraud. Some of it is probably pretty harmless—people getting into conferences, taking some free lunches, etc., but undoubtedly there’s some real harm being done by people who are telling people they work for family offices that actually aren’t. Most times, investors don’t actually invest in any given deal—so it’s not like someone is automatically a fraud if you don’t know anyone they invested in. You could ask 500 founders in NYC whether I’ve invested in them and still not hit any of the 60 that I have written a check to.

On the other side, trying to invest in venture capital funds on behalf of a family office must be a bit like being a legitimate Nigerian businessman trying to cold e-mail people. You probably spend half your time trying to convince people you’re for real. Plus, anyone that does actually find your e-mail is probably spamming you with deals that aren’t in your sweet spot, because you don’t put any criteria out there.

In the VC world, it’s hard to fake a job. Venture funds put up websites with bios of their professionals. They list portfolio companies—companies whose investors you can see listed on Crunchbase and other sites. I couldn’t go around telling people I work for Accel or that I’ve invested in Mulesoft, because it’s pretty easily diligenced.

Until family offices do the same thing—and transparency becomes the norm—you’re going to get lots of grifters and schemers, at best, ripping off people’s time and conference ticket money, and worse perpetrating actual fraud. It’s a simple industry fix—one that would save everyone else, including legitimate family offices, a ton of time. It would be in their best interest to be transparent about whose money they’re managing, what kind of investments they’re looking for (and not looking for) and who actually works for them. They’d cut down on spam and force the frauds to give up their game—because anyone without a easily referenced connection to real money would just go away.

Its possible that Mr. Karabel really does want to meet me—despite his employee not even mentioning anything specific about my fund or about venture capital, and perhaps I blew a big opportunity here.

But can you blame me for being skeptical as to whether it would be worth putting on a jacket and ditching my jeans to meet a complete stranger who doesn’t seem to have any specific interest in what I’m up to or knowledge of me?

I guess it doesn’t matter, because the person who sent this to me told me that “white trash does not get past security at the University Club” when I questioned the legitimacy of the cold e-mail she sent to info@brooklynbridge.vc—an e-mail address that truth be told I didn’t even realize I had.

I have a feeling that even if there’s a real billionaire here that I missed, these aren’t the kinds of folks I want to work with anyway.

Sevens Don't Get Funded

Ask any VC how excited on a scale of one to ten they are about their latest deal, and they’ll tell you eleven out of ten. Veterans will probably be a little more cautious and tell you they’re at a ten out of ten—but despite knowing all the risks, a VC simply isn’t going to get over the line unless they’re pretty blown away by an idea.

That’s because of the simple math of competition. I get 2000 things passing through my inbox in any given year, and I make about ten investments per year.

How excited do you think I am if I’m only picking the top 10 out of 2000? Do you think any of those handful of deals are seven out of ten? I see TONS of sevens—and they’re often the hardest ones to pass on. They’re nothing necessarily wrong with them. The team is good. The idea is good. It’s just—good. Nothing particularly striking that makes you think about it days and nights after the meeting.

I’m sure it’s incredibly frustrating for a founder to know that you have something workable and to not get any particular negative feedback, but not to get any traction in fundraising. You’re probably left scratching your head as to why.

It might be that your company is a seven—a perfectly acceptable, but not particularly exciting seven.

If you’re trying to be one of the best ten things I see in a year—that I’m willing to risk my investors money on knowing how hard it is to build a company, then a seven just isn’t going to make it.

That’s where the fundraising strategy comes in where you need to decide what you can do to really put your company over the top early. Maybe it means giving extra equity to a standout hire that really takes your team to the next level. Perhaps it means getting a bunch of customer LOIs even before you have the product ready—leaving VCs to wonder how you even got a meeting having so little built.

Think about asking investors what would make your pitch a ten—what crazy accomplishment that they could imagine would be gamechanging for your pitch, especially if you’re feeling like you’re not getting negative feedback. If you’re not getting negative feedback, but you’re not getting a check, you need to find out what you’re missing to move from a seven to a ten.

Reminder—this week I’m hosting another charity pitch workshop session. If you want me to go really in depth on fixing your story and presentation, while supporting some good causes, check out Fix Your Pitch for Good.