I do a lot of random podcasts and especially like to be an early guest on new ones to help get them started.
The first five episodes are with me, David Cohen, Susan Conover, Amos Schwartzfarb, and Charlie O’Donnell.
Andrew Waine is the producer. He’s currently a senior at the University of Florida finishing his Bachelor’s degree in the Summer of 2020.
He reminds me of a young Harry Stebbings of the 20 Minute VC who reached out to me early (I was on Harry’s 65th episode in 2015), hustled, and did a fun interview with me where we cover the following topics.
You will even find out where I learned that “even pigs can fly in a hurricane” around minute six.
Harry Stebbings just released a new episode with me on the 20 Minute VC. I love how Harry uses all caps to title the episodes.
I adore Harry. I did an interview with him early on (#65) so it’s particularly fun to do an interview number that is great than this year.
We cover the following topics, among others. Plus, there is a special book giveaway and a few other gems buried in the episode.
1.) How Brad made his way into the world of venture following 40 angel checks and how that led to his co-founding Foundry Group? Why did Brad find the transition from angel to VC in the early days such a challenge? What 2 core things did he focus on when writing angel checks? How has that changed now as a VC?
2.) How did seeing the boom and bust of the dot com impact Brad’s investing mindset today? How does Brad think about investing through market cycles and the right way to think about investment cadence? Why does Brad believe that to be successful as a VC you have to be fundamentally optimistic?
3.) Where does Brad believe we are today in the cycle? Does he agree with Bill Gurley on the biggest challenge being the “oversupply of capital”? What must entrepreneurs understand with regards to market cycle dynamics and how they can and need to future-proof their business?
4.) From analysing his best investments, why has Brad come to the conclusion that TAM in the early days is really not helpful? What are the commonalities in how Brad’s most successful companies approach experimentation?
5.) What does Brad mean when he says, “don’t have fake CEO or fake VC days”? What does he mean when he often says, “run your fucking business”? What in Brad’s mind would constitute a “fake day” vs moving the needle for your business? What does Brad think is the best way for VCs to truly get to know one another? Why is, “hey let’s do a deal together one of the most hollow and fake statements in venture?”
6.) Brad has sat on some of the most meaningful boards of the last 2 decades, what have been Brad’s biggest learnings on what it takes to be a great board member? How does that change with the progression of your career? What advice would Brad give to me, having just gained my first board seat? If the VC does not support the CEO, what is the right process? Why does Brad believe the VC should work for the CEO?
7.) What is Brad’s biggest advice when it comes to learning how to say no? What advice does Brad hear most often that he commonly disagrees with? Why does Brad feel we are in a moment of peak noise in the ecosystem today? To be a great leader, what 2 skills does Brad believe you need to have?
There are some blog posts that every entrepreneur should read.
He covers three cases:
The real gold in this post is in the Too Early To Tell category. Hunter has a great lead in:
“Here’s where I think founders and cap tables
shouldbe more proactive. The default is to let the firm assign another person at the fund (hopefully a GP) and then just keep working on the plan of record as if nothing changed. My experience suggests this will be neutral to negative long term,unless you end up in the “killing it” camp by next fundraise.”
Hunter’s notion that founders and the CEO should be proactive here is right on the money.
At Foundry, we periodically load balance our boards. This is a different phenomenon than the one Hunter is talking about, although we’ve learned to be clearer about what we are doing when we are doing it. I recall a personal low point when a founder/CEO who is a close friend asked to go for a walk and started the conversation with “You could have told me that you were leaving my board in a more graceful way than a one paragraph email.” Very true.
The lesson once again is things change, communicate clearly, and be proactive.
My partner Seth Levine has written several posts over the years on the
His 2019 post, titled creatively How To Get A Job In Venture Capital is excellent. Things have changed in the last decade since his 2008 post titled How to get a job in venture capital (revisited), which was an update from his 2005 post titled How to become a venture capitalist. All three posts are worth reading.
Following is a teaser for each of the key points Seth makes.
If you are interested in a job in venture capital, go read Seth’s posts How To Get A Job In Venture Capital (2019). And How to get a job in venture capital (revisited – 2008). And How to become a venture capitalist (2005).
Several years ago, I wrote a post titled Why VCs Should Recycle Their Management Fees.
From the start of Foundry Group in 2007, we have felt strongly about this. We feel that if an LP gives us a $1 to invest, we should invest at least that $1, not $0.85 (the average fee load over a decade for a typical VC fund is 15%.) Our goal for each fund is actually to invest closer to 110%, which means if an LP gives us a $1 to invest, we are actually investing $1.10.
Our long-time friends and LPs at Greenspring recently wrote a great post titled Creating GP-LP Alignment: Why Terms Matter. The post specifically discussed three items: Management Fees, Recycling, and Carried Interest.
The entire post is worth reading, but I especially liked their section on Recycling which includes a handy chart showing that recycling means that you only need to generate a 3.65x gross multiple to achieve a 3.00x net multiple to your LPs, vs. a 4.10x gross multiple if you don’t recycle. The section from their post follows:
In addition to management fees, the process of reinvesting realized proceeds into new investments, or recycling, can also meaningfully impact net returns and alignment. While management fees cut into the dollars available for investment, recycling can have the opposite effect, increasing the investable pool of capital while offsetting a proportion of management fees. To illustrate this point, we revisit our $100 million fund example, and in this case show how recycling $15 million, equivalent to the fund’s management fee, positively impacts the fund.
The fund that chooses to recycle fees requires a 3.65x gross multiple to achieve a 3.00x net multiple, whereas the fund that does not recycle proceeds to offset management fees requires a 4.10x gross multiple to achieve a 3.00x target net multiple. As long as re-invested capital is prudently deployed into opportunities capable of generating strong results, recycling is an impactful way for GPs to increase net returns, which ultimately benefits investors and themselves.
Now, imagine if you recycled 110%. Your investable capital would be $110m. You now require a 3.45x gross multiple to achieve a 3.00x multiple. Plus, as a bonus, you get $56m of carry (vs. $50m of carry in the case where you don’t recycle proceeds.)
Many fund agreements, including ours, require us to pay back all fees and expenses before taking carried interest. We think this is another element of GP-LP alignment and have supported this from our first fund. As a result, if you recycle at least 100%, it is more realistic to think of your management fee as a risk-free, interest-free loan against future carried interest, instead of additional compensation.
As a result, our goal is to generate as much of a return on the dollars invested, and get as many dollars invested as we can in each fund. Recycling allows us to do this and brings the gross and net returns closer together, reducing the spread to the carried interest from profits on investments.
While many GPs focus on their gross numbers, in the end the only numbers that really matter to LPs over time are the net multiples.
That’s worth remembering.
I’m a recent conversation with Eric Paley, he gave me an amazingly wonderful analogy for how the career of a VC unfolds. He said:
“Being a VC is like taking a walk from Boston to San Francisco”
I’d never heard that before so I said: “tell me more.” He went on an awesome ramble, which I’ll try to capture below.
You start out on a sunny day in Boston. You put on your new, clean walking shoes. It’s just walking. It’s fun, fresh, and exciting. It’s a new experience, with lots of hopes and expectations in front of you. You get tons of support and encouragement from all of your friends. You meet plenty of new and interesting people. It’s just walking.
After a few days, you feel like you are getting into a rhythm. You feel you are good at this. It’s still easy and exciting, but now you know what to expect each day.
At some point, you find yourself in the middle of Ohio. It’s raining. Your shoes are worn out. You’ve got blisters and a sore ankle. Your backpack smells – a lot. While it’s still just walking, it’s not much fun anymore. But you grind through it, buoyed by the occasional sunny day, even though it’s now cold outside.
By the time you get to Chicago, you can’t remember why you are walking San Francisco. But you keep walking.
I’ve been doing this for 25 years. While it’s just walking, I’ve crisscrossed the country a bunch of times. And I keep walking.
In addition to our own funds, we are investors in a number of other early-stage VC funds as part of our Foundry Group Next strategy. Yesterday, in one of the quarterly updates that we get, I saw the following paragraph.
“Historically, the $10 million valuation mark has been somewhat of a ceiling for seed stage startups. But so far this year, we’ve seen that a number of companies, often times with nothing more than a team and a Powerpoint presentation, have had great success raising capital north of that $10 million level. Furthermore, round sizes continue to tick up, with many seed rounds now in the $2.5 million to $4.0 million range.”
We are seeing this also and have been talking about it internally, so it prompted me to say something about it.
I view this is a significant negative indicator.
It has happened only one other time in my investing career – in 1999. I remember when, in a period of about six months, the ceiling on seed financings vanished. It wasn’t the uncapped note phenomenon (which seems to have come and gone for the most part), but instead, it was seed rounds of $5m – $10m at $40m pre-money.
In some cases, these rounds were with experienced founders who had previously had a success and could dictate terms. VCs rationalized it as “skipping the seed round” even though there literally was nothing to show yet except an idea.
In this six month period, the need for an experienced founder vanished. Suddenly every company was raising a seed financing of at least $5m, regardless of the experience of the team. In many cases, these rounds were pre-vaporware – just an assertion about what business they were going to create.
For anyone that remembers 2000-2003, this obviously ended badly. By 2002 investments at the seed level had evaporated (there were almost no seed financings happening). In 2003 the angels started to reappear (some of the best angel deals of all time were done between 2004 and 2007) and the super angel language started to be used around 2007.
All the experienced finance people I know talk regularly about cycles. If you believe in cycles, this one feels pretty predictable. Of course, there is an opportunity in every part of the cycle. But, be careful out there.
Recently, Beezer Clarkson at Saphirre Ventures wrote a post titled Raising A Fund? 9 Questions That Help Get You To GP/LP Fit. If you are a GP raising a fund, you should go read this post right now. In it, Beezer goes through, in depth, the top questions she recommends you ask an LP to determine GP/LP fit.
Seriously, go read Beezer’s post.
There’s an interesting graph in the post, which shows that a typical LP is going to add less than five new managers a year to their portfolio (and, on average, only two or three.) While an LP takes a lot of meetings, they don’t do a lot of investments.
GPs – does that sound familiar?
One of the things humans are bad at is remembering the past and incorporating the lessons they learned from difficult experiences. I’m sure there’s a philosophical word for this, but I’ve now heard the phrase “this time it is different” so many times that it doesn’t register with me as a valid input.
I woke up this morning to Howard Lindzon’s post R.I.P Good Times (Said Sequoia in October, 2008) and Nobody Knows Anything pointing to David Frankel’s tweet:
— David Frankel (@dafrankel) May 15, 2018
All of this ultimately led to me reviewing Sequoia’s classic slide deck from 2008.
I remember reading it in 2008. We were about a year into our first Foundry Group fund, which we raised in 2007. That now feels like a very long time ago.
I encourage everyone to review the deck. It would be awesome if an economist (Ian Hathaway, are you out there?) made a new deck with an update to 4 through 38 that extended the time frame (and analysis) to 2018.