In my post recently titled Does VC Fund Differentiation Matter? several people commented on some variation of “people” as the key to everything.
I don’t view people as differentiation. I view them as the price of admission. Amy just walked by, read this over my shoulder, and said: “I don’t know what that means.” Hopefully, by the end of this post, it’ll be clearer …
Yesterday I talked to several VCs or entrepreneurs considering becoming a VC. I didn’t know any of them – these were random intros from different people that I knew. I didn’t have an agenda for each call. I was just curious and felt like meeting a few new people yesterday.
In each call, the person gave me their background and what they were exploring. Then they asked me a few questions. These questions were different versions of “what is your investment strategy” and “how do you decide what to fund?”
I went through my usual riff on this, which I should probably just put up on Youtube so I can point people at it rather than spend five minutes saying it over and over again. While I was doing this, a background process in my mind linked me back to the post I wrote on VC Fund Differentiation (or lack thereof). If you’ve heard this riff before, the next bit will be redundant to you.
<riff>
We have a set of filters. For an early stage investment, we only invest in our themes. We only invest in the US. We don’t have to be the first money in a company, but if the company has raised more than $5m, it’s too late for us. Our goal with this filter is to say no to almost everything within 60 seconds.
Assuming something passes through this filter, we then focus on three things.
</riff>Ok – riff over.
Underlying item two and three is obviously the people. But it’s a characteristic of the people. It’s a characteristic that, at least for us, that has worked over a long period of investing.
When I was a kid, my dad used to say to me “people are the price of admission.” He meant that if I was interested in getting involved in something, I should evaluate the people first.
If we did this before applying our filter, we’d never get anything done because we’d spend too little time looking at too many things. But, by applying the filter first, we can put most of our energy into evaluating the people involved and whether they want us to be involved.
I’ve met and emailed with many pre-seed and seed GPs in the past year. Over sushi last night with two of them, who are also long-time friends, one of them asked me “Brad, how do you think we are differentiated?” This generated a rant from me that went something like this.
There are over 500 seed funds in the market right now. Maybe there’s a thousand. Many of them are angels raising a VC fund. Others are entrepreneurs / operators raising a VC fund. A few are existing VCs who are starting a new firm. I don’t even know what differentiation means anymore as it all blurs together. The operators say we know how to run businesses and help the CEOs that way. The angels say look at the deals we’ve done and the networks we have. Everyone describes the expertise they have around whatever the current hot new technologies are. Regional funds are trendy again. Differentiation is bullshit at this point – the only thing that matters is strategy and returns. And many of these funds / GPs have no realized returns, so all that really matters is strategy.
It wasn’t an angry rant, but it resulted in 15 seconds of awkward silence as we each reached for a piece of sushi.
There are words that get overused to the point of not meaning anything. Differentiation is one of them. It’s now part of a cliche, as in “how are you differentiated?” I no longer care about this. I expect you can create a set of slides or a story about your differentiation, but if I dig in and try to understand what you mean, I expect I’ll feel pretty hollow at the end of it.
I suggested to my friends that we talk about the fund strategy. I know what they are investing in (stage, types of companies) and I know what they do (seed, one or two checks, no board seat but available to the founders for anything at any time, not concerned about ball control on the deal), but this is just the surface strategy.
I realized they were looking at me funny, not because they didn’t understand, but because I probably had some wasabi on my chin. So I went on another rant.
Your fund size is X. How many investments are you going to make? Over what time period? At what pace? How are you going to decide what not to invest in? How are you going to respond to the range of paths a seed deal goes down? Are you going to do your pro-rata or are you one check and done? Are you going to try to have any impact on the VCs who lead the next round? How do you want downstream VCs to think about you, or do you even care? At what point do you flip from being a buyer of equity to a seller of equity? If I give you $1, are you going to invest $0.85, $1 (meaning you recycle), or $1.10 (meaning you recycle 110%)? Are you going to only invest from the fund, or are you going to create SPVs on deals in later stages?
I paused to eat another piece of sushi. We then had a healthy conversation that extended the strategy into ways they worked with CEOs and founders, how they wanted these founders to talk about them to other founders and VCs, and how they thought of themselves in the context of the other 500 seed funds floating around.
As I walked back to my car after saying goodnight to my friends, I felt unsatisfied with my answer to the question of “how are we differentiated?” I thought if I slept on it, my subconscious might do something magical and help me out. But as I sit here in the light of a new day, I’m still feeling the same way I did last night about the complete lack of differentiation among the landscape of seed funds. And, as a result, the relative unimportance of differentiation when compared to other things.