The Breakout Tech Company Of 2017

For a while, on this blog, I attempted to pick one startup for that year which truly “broke out” of its shell. Dialing back the clock, one could say 2011 was Uber and Airbnb; in 2012, I wrote about Stripe; in 2013, I wrote about Snap; in 2014, I prematurely said there were none but then backtracked when Slack exploded; in 2015, I didn’t write one, and in 2016, my thesis was the big tech incumbents would grow even more powerful from the web’s and mobile’s network effects that startups wouldn’t even have the chance.

Now with 2017 nearing the end, I’m back to the point where I can point to this year’s tech breakout company: Coinbase. I know, it’s likely an obvious pick, but I unpacking “why” is a fun exercise I’ll attempt below.

Right Person(s): Founded by Brian Armstrong and Fred Ehrsam, blending backgrounds in finance, computer science, math, and engineering. Also noteworthy that Armstrong spent time as an early engineer at Airbnb, where he could see how much money the company would spend on Forex with transactions happening worldwide. To grow the company, Brian and Fred recruited and attracted some of the best folks in their space and some of the scrappiest startup builders and execs out there in a dangerously hyper-competitive recruiting environment in the Bay Area.

Right Idea: Initially, the idea to let folks hold Bitcoin in a wallet. And, eventually, the idea morphed into powering buying and selling, and getting real banks to back them up. That idea, coupled with adding Ethereum to broaden the offering, set the company on a course to be a potential kingmaker of tokens in the future.

Right Product: The exchange is the thing. Right now, we know of three ways to make money in this sector. One, you can trade tokens like a hedge fund; two, you can design the outline of a protocol and draft a whitepaper to market an ICO and raise money for yourself from the crowd; or three, you can be the preferred exchange with a banking moat as people buy, hold, and sell worldwide. I like to describe Coinbase as one of the key central nervous systems in this new world

Right Time: Coinbase went through YC in Summer 2012 and raised their Series A from USV in Spring of 2013. While it was a competitive deal, it was not a huge deal in terms of dollars going in, and very few firms had any theses in this space, let alone investment conviction. Fast-forward four years, and with Ethereum and ICOs exploding, Coinbase transformed into one of the world’s most trusted destinations. The company started well before it was “cool” to be in this space and therefore nailed its timing.

Right Market: CRYPTO! Enough said. Well, I can say a bit more… while lots of activity is frothy and could capture the attention of regulators, governments, and class-action lawyers, it is an immutable fact that if thousands of developers worldwide were incentivized to build new protocols to transmit information, and if those models could help rewrite how applications are built, how open source software is used, and a host of other use cases we can only theorize about today, it stands that “cryptocurrencies” can address a growing global market and be worth (if it all works) a multi-trillion dollar market. And if that happens for real, Coinbase will have the mindshare and a massive headstart on others.

The Story Behind My Investment In Perlara

Almost two years ago, I met a founding team during Y Combinator batch. It was in a field I haven’t invested in before, but I have spent time in during a previous life and career. We met for coffee on the Embarcadero, and while my “life sciences lexicon” is quite rusty, I somehow managed to carry on an entire conversation and even (I hope) earned the respect of the founding scientists for being able to recall some of the core elements of why their company, Perlara, had a chance to make a big impact.

What was able to recall from my previous life in the world of life sciences? I remember that while traditional pharmaceutical companies needed to develop drugs to address large markets, a new wave of biotech firms emerged that would be able to more efficiently identify and serve less “popular” afflictions, often referred to as orphaned diseases. Fast-forward to 2016, CRISPR technology began to make headlines, and when I asked Perlara about the connection here, they lit up — we are now in a phase of biopharma where gene editing applied in these methods can help scientists develop cures for with rare disorders.

I asked to make a small investment, and Perlara agreed.

Earlier this week, Perlara announced a large round of funding, which you can read about here and here. While the team has been growing and progressing well, companies like Perlara don’t necessarily follow the funding trajectory we are accustomed to in startupland. Ultimately, Perlara was successful in raising a seed round (where I participated) and significant subsequent investment from the pharma industry (just announced). I can’t underscore how difficult that is to achieve when most dollars are looking to return a quick buck. So, a big congrats to the team, scientists, collaborators, and all the families and friends on PerlQuest journeys for their loved ones.

Perlara was more of a “learning investment” for me to see how the company operates (as a PBC), to see how these companies raise capital, to see what metrics matter, and to support the work of its scientists, which is undeniably huge. Digging a bit deeper, it is very cool to browse Perlara’s site to see the variety of tech startups the company partners with for various business functions, such as Vium, Benchling, and Science Exchange, among others. Perlara had six diseases in its 2017 pipeline which will double in 2018; company headcount will double to 20, adding to what is already an epic team; and the company is projecting $1M revenues from PerlQuests and much more from industry collaborations. That, in effect, validates my investment, as I know the intersection of CRISPR and rare diseases is a place today’s pharma giants will need a play in, but they themselves can’t apply this focus in-house.

I do not foresee myself investing in more life science companies in the future. This was a special case for me, and I am glad Ethan and his team were kind enough to invite me in. I do hope others with more focus in these spaces come into the ecosystem to support the next Perlaras on their journeys, and as you’ll see looking through their site, the results they strive for are painfully tangible.

The Story Behind My Investment In Optimus Ride

About a year ago, thanks to an investor friend who, in this particular case, shall remain nameless (but you know who you are, and thank you!) was kind enough to tip me off about a great team he met on the east coast but one that he couldn’t invest in. Often investors only take referrals from other investors if that introducing investor has invested him- or herself; here, this was a close friend, and it was a very interesting company. I’m glad I took the referral.

That is how I came to meet the team from Boston’s Optimus Ride. This week, Optimus Ride announced a large Series A investment led by Greycroft. You can read more about that news here. And, read this great piece by Xconomy on how Optimus fits into the landscape.

I was lucky to be involved in the seed last year, a round led by friends at NextView and FirstMark. While I couldn’t make it to Boston at the time I needed to decide to invest, fate played a hand as some of the team’s leadership, who hailed from MIT’s faculty, had actually shared lab space with one of my old mentor’s from a previous life — I literally picked up the phone, called my mentor (who is a leader at MIT) and within minutes learned the team was, indeed, top-notch.

While I knew I wanted to invest, getting in was a bit harder. Lee @ NextView and Matt @ FirstMark were nice to vouch for me, but I had to really work the phones with the team to get them comfortable with me. Knowing a MIT professor in common really helped. I also told them that having a west coast investor, even if smaller, would be helpful as they thought about future rounds and company building in what is arguably one of the most active sectors over the last few years. Lucky for me, it worked out, I was able to invest, and happily able to follow into the next round.

For context, I have not made many investments in the autonomous driving space. I have, however, invested “around” the idea of the car — companies like Navdy (heads-up display), or Carmera (V2V communications); or a recent stealth AI/data company in the Valley. I’ve always felt the VC industry has over-tilted after the blockbuster acquisition of Cruise Automation by GM. Since then, we’ve seen a flurry of VC investment in the category, tons of self-driving startups and adjacent tech plays, and even funds solely focused on autonomous driving technology.

While I appreciate the surge of entrepreneurial activity (and investment to support it), it always struck me as out of balance. On the other hand, there is no question the transformation of the automotive industry from machine-driven to technology-driven is upon is. It presents a different challenge for VCs here — very few, if any, of these companies can be independent; few, if any, will IPO; so, they all need to be acquired, so VCs who are investing are essentially betting the consolidating pressures in this industry will reward them for taking this risk.

Despite that, investing in a team like the one behind Optimus doesn’t feel like a risk at all — it feels like a huge opportunity. It is a truly interdisciplinary team of technologists and operators and one that could very well defy my logic above and remain independent, remain in control of their own fate. The interdisciplinary nature of Optimus is, at the end, what distinguishes it — we see today, especially in the Bay Area, many isolated product solutions in this space, but because Optimus is away from the Valley and has these networks, they were able to build the team they wanted to without fear of talent fragmentation. That is working so far, and it’s a theme I’ve been investing against and hope to write more about here.

Finally, of course, congrats to the entire Optimus team, and it will be fun to watch fleets deployed.

Podcast: The Backstory Of Raising Haystack IV (The Full Ratchet)

As my Podcast 2017 Tour continues, Nick Moran from Chicago’s The Full Ratchet was kind enough to have me on his show again a second time. Two years ago, I was a guest on The Full Ratchet discussing the intricacies of how seed-stage companies graduate to institutional Series A rounds. For version 2, in this episode, Nick and I dissect my earlier post on the process (and emotions) of raising a first-time institutional VC fund — I process I tried to capture in this post earlier this year.

The feedback to that post a few weeks ago has been deeper than I had imagined. Folks also listened to Harry Stebbing’s recent pod with me. And, they should listen to this one with Nick, too — Nick’s podcasts are longer (this one is about an hour) and Nick goes through every detail on his notes page. He knows the right questions to ask at every turn, so I’d recommend this new episode…here’s what we discuss…

-Maybe we can start off with how your investment focus has evolved since the last time you joined us.
-What are your thoughts on how seed has split into pre-seed, seed, seed extension, and post seed?
-Are you investing once with a company or reserving for these various stages within seed?
-You just closed fund 3… tell us about the first two funds that set the stage.
-Would you do things differently if you could go back?
-Which raise was the hardest?
-How did the expectations of LPs change from the early funds to the institutional fund?
-What surprised you most about the raise?
-Did you connect w/ prospectives through referrals, cold calls, a combination?
-Walk us through the metrics… how many targets, meetings, avg commitment amt, etc.
-Did you ever think you might not complete the raise?
-What’s the best advice you got on the raise and who’d you get it from?
-In our first interview, you talked about how you couldn’t get a full-time job at a venture firm. I’m sure you’ve had plenty of offers as you’ve built a track record. Did you ever consider making the jump?
-When I sent my fund deck to you, you said “Awesome and looks good. As I always say, the deck matters much less than having capital partners who believe in you” For anyone listening that aspires to raise… talk about what you meant by this comment.

…and especially recommend it if you’re just starting out to invest and/or already have a small fund. When I mentioned I was surprised, it seems like there’s no stop to the rate of new small fund formation. Three years ago, people said the same thing — “How can there be 250 new small VC funds?” And, every year, that question remains the same, with the number going up. By the response to my post, it feels like even more next year. I have been thinking about the gale wind forces driving this trend, and I’ll share a few here below:

1/ Global instability makes the U.S. an attractive place to park money. Money around the world seeks a safe haven, and despite our current troubles here in the U.S., relative to other regions, this country remains a very attractive location to put money to work. That trend has only been increasing in intensity over the past few years.

2/ When foreign money comes to U.S. shores, it often travels west. The money coming in is going to the coasts (another issue, yes), and primarily the Bay Area, which has led to a new kind of local area inflation. It means pre-seed rounds of $1M pre-product, and lots of early investment in new things, lots of talent fragmentation, higher rent, harder recruiting environments, intense competition, etc.

3/ Large, new financial players like hedge funds, banks, and sovereign wealth funds seek to diversify. I don’t want to lump all these folks as their motivations are slightly different, but the Tiger Global’s, the Blackrock’s, and the SWF’s of the world have big asset balances and investing earlier in technology is a good way to diversify. One could argue Softbank’s much-covered Vision Fund is a product large enough to accept checks from major SWFs and give them exposure, essentially picking off the best companies from ever going public and hitting public stock exchanges.

4/ Traditional VC firms may have gotten too large and not planned succession well. Many firms have ballooned from around $200M a decade ago to over $1B per fund now. The nature of those funds and their business models have changed. Larger funds, I believe, will need to be hybrid funds which engage in direct investing, yes, but also fund investing, secondaries, and the like. So, smaller funds are rising to fill that early risk gap with capital that is just seeking alpha.

5/ Founders, at least in the early stages, seem to prefer collecting small checks from operators vs bundled checks from institutions. So, the money is moving where the market is. Let’s see how long it lasts.


My Second 20 Minute VC Appearance: The Mechanics Of Raising A First Institutional VC Fund

About a year and a half ago, I had my first experience on as a guest on Harry Stebbings‘ famous podcast, The 20 Minute VC. In that older episode, we mainly covered the importance of individual and firm branding in today’s ecosystem. Fast-forward to today, Harry was kind enough to have me back again, and this time, as Harry is getting even better as an interviewer and expanding his own knowledge of the business (his brain feels encyclopedic!), there’s a fresh new episode with me on that was released today.

Click here to listen to today’s new episode on iTunes, or click here to listen on your desktop browser.

As the number of smaller VC firms seems to increase each year with no end in sight, Harry thought it would be interesting for his growing audience to hear more about the backstory of how a new fund can think about transforming their capital base from individuals to institutions. I tried to go into detail on that topic in an earlier post a few weeks ago, and Harry does a great job in our conversation of double-clicking into some of the meatier topics.

As most of you who read this blog have come to know me through the written word, I would be honored if you could take a listen to Harry’s new podcast and share any points of view or feedback you have. In this talk, Harry helps me dig into the details and mechanics of trying to raise an institutional fund with limited experience as an investor — specifically, we dive into pre-marketing, building relationships with LP investors, what are the hard questions to expect, how to demonstrate progress and proof, and even the mechanics around the closing process.

And, thanks again to Harry and his intrepid team for inviting me on as a guest again. Harry’s questions and pacing in the conversation were really great and specific. He even stumped me with some questions where I finally relented and got Harry to agree to our third podcast some years in the future when I can finally answer those unanswered questions.

“Leveling Up”

I have been emailing Haystack founders a bit more often with some stream-of-conscious thoughts, and many of them have encouraged me to publish them publicly. Below, I was thinking about how relatively easy it is (in the Bay Area) to raise a seed round versus raising from larger institutional VCs, and how that’s connected to my own experienced of raising small VC funds with individual LPs but then what I had to do to make the transition to an institutional capital base. Here’s the original email, to what I add a few suggested concrete tips for company founders to consider when attempting to make this transition.


Hello Haystack founders,

This a post for seed-stage founders only. It is not for founders who have gone on to Series A or those founders who don’t seek institutional VC dollars. As always with these emails, please delete, disregard, or ignore if not relevant…

Lately, I see well over 50% of seed-stage founders are taking their subsequent fundraises far too casually. I don’t just mean when they gun for that elusive Series A. I mean even when they go for an extension round, or a bridge round, or an insider round, etc. No matter what size or level, while the first seed checks to roll in are relatively easy to secure in the Bay Area, the second check, no matter the source of the money, is a b**ch.

I know a bit about this from lots of indirect and direct experience. Indirectly, I have now helped well over 50 seed-stage founding teams get over to Series A. I feel I now know of the patterns across five years and the personality of investors who provide the second tranche of capital. Directly, I can imagine how it feels having (1) been part of startups that raised outside capital, and now (2) in raising my first institutional VC fund. We all know about how hard it is for a company to raise outside capital, so…

When I set out to raise Fund III back in the Summer of 2015, with two funds under my belt, an incredible roster of my own LPs, my own investments, and even real liquidity, I thought I would surely raise $20M from institutions. My previous funds were only $1M and $3.2M respectively, but this time around I was ready. LPs subscribed to my blog, were emailing me, meeting for coffee. A bunch of famous VCs were making introductions to their LPs. Even If I didn’t hit $20M, surely I would get close, right? I knew three months into fundraising it would be a bust, but legally I was able to “fundraise” for a whole year, so I kept the fund open as an excuse to meet LPs and learn why it wasn’t going to work. I ended up closing only on $8.2M after two tech execs had to back out after the Q1 SaaS-crash.

Fast-forward to last fall, I was on a mission to put those Fund III learnings to work and hopefully correct the mistakes of the past. I tried to leave no room for error. I wrote about the details of that experience here. I know I made new mistakes in raising IV which I will hopefully address when I raise V. But, the point I want to make here is that the switch from III to IV was not just a gradual progression — it was an entire *step-function* change in how I operated, how I prepared for meetings, how I pitched, how I handled a “no,” how I tried to persuade people, and how I cajoled folks toward a close. I strongly believe these principles apply directly to company founders attempting to graduate from their initial capital raise. Yes, for 10% of you it will be easy, and for 50% of folks, the next round won’t come at all, but for the 40% in the middle, the right level of preparation, precision, and tenacity will make a difference — and investors will notice this.

[I’m adding this paragraph for the public post at the suggestion of some founders… Specifically, here’s what I did operationally to level-up, in no particular order: I retained a designer to help me craft pitch materials; I was too close to the story to tell it myself properly. I created materials for each medium and meeting (all files were PDF, .xls, or a picture) — specifically, I had something short to email or share by text image, and longer decks to present in person, as well as an appendix of slides used to answer very specific questions. I engaged with two consultants to clean the data from my previous funds and integrate my data both with eShares and a professional back-office administration provider. I took copious notes from previous fundraises and tried to understand who could be a “qualified” candidate for me based on their actual investment behavior — not just relying on what people say or their “interest” in getting together. I took notes in every meeting and followed-up based on anything we agreed to follow-up on. In some cases, I asked them for what they needed help on and tried to deliver there — most are either hiring and of course looking for their own LPs. Most importantly, I clearly communicated my start and end times in every interaction or correspondence — what I learned is that everyone needs a few reminders and, if folks actually remember, most of them will respect your process and get back to you by the time you like. All of this is a way to anticipate future pushback and to exert some control over what is otherwise a random process.]

In retrospect, I approached Fund III far too casually. I now see this “casual” attitude in fundraising from many seeded founders, whether I’m invested in them or not. Perhaps hindsight is 20/20 and I needed to have a failed Fund IIi experience in order to make the fundraise for Fund IV work. I hope the “tough love” here is helpful. Do not underestimate even how hard a bridge round can be. You’ll likely have to fight for it & “level-up” — and that is a good thing.

Notes From The 2017 Cendana MicroVC Summit

Yesterday, I attended my fourth Cendana Micro VC Summit in San Francisco. As I’ve done in years past, I wanted to briefly summarize how I perceived the mood of both LPs (the money source) and GPs (those who allocate to founders) in today’s current environment. [For a look back on my notes from previous years, click on either 2014 or 2016.]

Briefly, and in no particular order, here’s what I thought about in finding patterns from the panels and chatter:

1/ LPs seem more resigned to the fact that exits will take longer, perhaps never materialize. Think about that. After years of being on stage asking for quicker exists, the data has come in and unless someone holds an LP position in a fund with an outlier exit, these are simply really hard to come by and manufacture right now. It will be interesting to see what this implies for the LP side. I suspect for many, after some reflection, the model may not work. That may not be a bad thing for the ecosystem, however, but could cause pain for those looking to keep raising institutional funds. We could expect some consolidation, too. (I’ll write separately on how the exit environment could affect micro VC behaviors in another post.)

2/ Seed is entirely its own asset class. I have felt this for years and finally yesterday it became clear to me. The return profile, the way to pick, the types of people — it’s not really micro VC, it feels entirely different.

3/ A cottage industry is forming around helping new fund managers build out franchise firms. Building on Point #2 above, we now see a range of service providers for fund formation, legal counsel, accounting and financing, back-office operations, diversity & inclusion consulting, and executive coaching for smaller funds who aspire to build into franchise firms.

4/ Traditional VC firms weren’t a topic of discussion. Building off of Point #2 above, seed really is its own asset class. I didn’t hear much talk about the bigger established funds at yesterday’s event. Usually, people like to name drop or cite funds as aspirational targets or funds they’d love to see their deals go to for reputational signal, but I heard none of that yesterday. Perhaps that’s because the gap between seed and the Big VCs is getting even bigger to the point where it isn’t on folks’ radar.

5/ No one can outrun the math. Earlier this week, I linked to an excellent interview Michael Dearing did with Harry Stebbings on The 20 Minute VC. In that chat, Dearing provided a great frame for the seed market, which he believes has “bifurcated” into two camps — the camp that relies on convertible notes and is not price sensitive may not have enough ownership in their winning companies to return principal capital back to their LPs. Moreover, I personally believe we will see a lot of good funds with great/smart managers have portfolio vintages from 2013-2015 that may not see even one company realization & exit above $100M in transaction value. That wouldn’t be a big deal if most micro VC funds were around $10M, but many of them are quite big in size. We can all keep running, but we can’t outrun the math.

I want to thank Michael and Graham from Cendana and Jim, Alex, and the entire SVB team for always putting on the event, for inviting me, and asking me to moderate a great panel. Each year at this I’m reminded of the fact that Michael and SVB were so early to see this category emerge, which now boasts nearly 570 “new managers,” defined as having fewer than three institutional funds under $150M. There are 163 firms with new managers raising $5.4B (with 58% of these raising under $30M; and 14% of new managers are female), dominated by the Bay Area with NYC and LA following. A quarter of new managers are spinouts from established VC funds, another quarter are serial founders, while the rest are mostly operational executives — most don’t have legit return data yet. (Source: SVB, Cendana)

The panel I moderated was with very experienced institutional seed fund managers (MHS, Homebrew, SoftTech, Forerunner) on how they progressed from institutional Fund I to Fund II. The key takeaways were for me from that panel are (1) the relationship-building between GPs and LPs should be thought of in years before a business relationship consummates; (2) sharing bad news and the ‘warts’ upfront helps build trust and also helps filter for LPs and GPs who they can trust to enter into business with; (3) stick to the strategy that you told LPs you’d execute on, as too many funds “veer” off strategy; and (4) as funds grow, the GP’s time and mindshare needs to be protected and scaled by investing in key fund operations.

How To Transform A VC Fund Capital Base From Individuals To Institutional LPs

Lots of people have raised small VC funds. There are more startups, and there’s more LP capital from various sources to meet that demand. After the rise of institutional seed funds in the late 2000’s, we’ve obviously witnessed a pure explosion of new (mostly seed) fund formation, with seemingly no end in sight. Many of those 400+ microVC funds (sub $100M) are also trying not only get bigger, but also trying to convert their LP capital base from mostly individuals to mostly traditionally institutional capital. It’s a heavy lift to make that conversion. While I would never give advice on how to do this, as I’m still learning and each individual case is very different (each fund manager is his/her own special snowflake!), I can share a bit about how I prepared myself for it, how I launched my campaign, and how it all closed. My hope is that this post serves as a helpful guidepost for other managers and that it can save someone time in the future. Much of this below benefits from me looking back with hindsight… there’s lots in here that I wish I had known just a year ago!

At a high level, I break this process into three distinct phases: (1) Pre-Marketing Preparations; (2) The Actual Campaign; and (3) The Closing Mechanics.

Phase 1: Pre-Marketing Preparations

Timing: I built my LP list and began putting the word out two months before hitting the market. Now looking back, i wish I pre-marketed a full six months in advance. Institutional LPs need lots of time to meet folks, to digest initial meetings, to socialize things with their network, and to fill their pipeline. I could even argue that six months is too short. During these meetings, it’s nice to socialize your plans, target size, and strategy. LPs will offer great feedback which can be refined and folded into your final official campaign.

Materials: i prepared a master slide deck (with the help of a designer that I paid REAL money to), which I sliced into a very short “email deck” and a slightly longer “presentation deck.” In retrospect, I only needed the shorter deck (to get the meeting, and for LPs to circulate to their colleagues and peers). I sent everything via PDF, with no exception. What mattered most in the materials was explaining the manager’s background & differentiation (what makes you stand out?, the strategy (where to invest the fund), the portfolio construction (how to invest the fund), deal sourcing (where do you get your leads from). I’ll go into more details on this in future posts.

Key Service Providers: I signed up with very well-known and vetted legal counsel in fund formation, fund administration (back office), and banking. For me, finally being able to go with the top class players forced me to play a better game.

LPA Documents: I asked legal counsel to make my fund docs “plain vanilla,” very simple and in-line with the market. I am not a proven manager. I was shocked to hear how many people play games with the LPA when they haven’t returned real capital.

Data Room: I built a data room on Box with a paid subscription. The folders in my Box data room covered the following topics: References (co-investors, follow-on VCs, previous LPs, and portfolio CEOs); Press Mentions; Notable Blog Posts; Raw Investment Data; Service Providers; Marketing Materials; Previous LP Reports; Audit Paperwork; Official Fund Documentation. The file formats in my Box data room were only PDF, .xls, .jpg, and .png.

Lead Qualification & Tools: The pre-marketing campaign is a good time to find out who isn’t a fit. I had a friend who is an LP just tell me even before seeing the deck or anything that it wouldn’t be a fit. He actually helped me a ton in my process. Similarly, I was able to get into the pipeline of other LPs as I hit the market. I managed my contacts and flow through Pipedrive.

Skin In The Game: LPs will look for any new manager to commit a raw dollar amount commensurate with their liquid net worth. To be safe, I would suspect 2% GP commit would be table stakes, and many folks have to finance that. For folks who have the nest egg, wise to expect to put the appropriate skin in the game.

Phase 2: The Actual Campaign

I will just briefly share what I did. I think it is different for everyone. If anything, I would be conservative in how long you think it will take — and then add another 3-6 months to that conservative projection.

At a high-level, I made three initial decisions that, again in retrospect, made (I believe) a big difference — however, it didn’t feel that way until the very end. Specifically, I picked a tight target size range and I stuck with it — I never once entertained going one dollar over the high-end of my target. Two, I told everyone that I’d be “in market” for six months, and that’s it. No special closes. No opening the fund for even the most royal LPs after it was closed. Third, I told everyone that whatever I had at the end of six months would be my fund size and I would fight the war with the army I had, even if it was well below my target. I don’t know why I stuck to this all the way through, but it is what I believed in and I basically ran out of gas as the sixth month came to an end, so it was good to know I was going to stop then.

I put my rear on an airplane. A lot. I flew over 40,000 miles (all in the U.S.). I spent 28 nights away from home, two of them as red-eyes. I probably talked with and had initial calls/meetings with over 200 different institutional LPs. Naturally, most didn’t go to a second live meeting, but more than enough did. I did not wait until an LP was going to be in the Bay Area to see them — they’re usually only here for a night or two, at the most, and they have to see their current managers. I went to see them on their turf, every single time. I took notes in every meeting. I have a pretty good sense now of what LPs are in specific VC funds. Note-taking is important to remember follow-ups, to understand their network and relationship, and to send them things that interest them in their business. As they get more interested in you, they will come meet you in neutral locations or on your turf, and those signals are important markers to pay attention to.

The entire decision often rests on the quality of your references. It is very hard to quickly gin up references. You either have stellar references or you don’t. Even your biggest supporters will share your weaknesses and area for improvement with prospective LPs. Even though I’ve now raised four different funds, I couldn’t believe how much referencing went on this time. There is nowhere to hide. However you’ve treated others and behaved, it will be surfaced — for better or worse. LPs are looking at the history

It sounds corny, but I befriended a good deal of LPs who passed on me very quickly but were so nice and helpful (as people) that i sent them tips on new interesting funds and managers, some of which even led to them making an LP investment. Once you accept that most LPs are decent people and that they’re going to say “no,” it becomes easier to simply have a conversation with them. Some of them are really far away from our world of startups and VC funds; yet, some of them are incredibly deep into it and know way much more than even popular fund managers do. Sure, there will be some that you meet that you hope to never see again, but it’s a very small minority.

I held two official closes. The first close was half-way through the campaign, and most of my insiders re-upped and some super-sized. Looking back, I thought I would have more of the fund done by then — but, no, not even close. In the second-half of the campaign, I turned on the jets and just focused on the institutions. Seven business days before I was set to give it up and go with what I had, I finally got a string of institutional LP commits, like dominoes falling. It was really random. If you follow NBA history, it was like the Pacers-Knicks game where Reggie Miller hit all those three-pointers at the end. It felt like that. I got lucky, but it was really close.

Phase 3: The Closing Mechanics

I only can share some high-level learnings here:

1/ Good legal counsel matters. It is an art to line up these different LPs at the same time and on the same terms.
2/ No one but you has the deep urgency to close. You have to be fierce in pursuit of the close. Some people will get annoyed with it, but you have to close it out.
3/ Expect a major curveball. I can’t say what it will be, but expect to be taken by surprise and roll with it.

[Big disclaimerI cannot emphasize enough how many people you will need to help you and advocate for you to get over the finish line. I have been in awe of what others have done for me. All the reference calls, extra nudges over text, and pounding the table even in cases when it didn’t work out. I will go through this process and thank folks properly in the coming weeks.]

I hope this helps folks out there. I hope you’ll notice this isn’t as detailed as it could be. I think the process can be pretty simple and straightforward. Set up the materials properly, be human in the meetings, follow-up with precision, and drive people to a decision and close. Lots of folks have been asking me recently “How did you do it?” so I thought it would be only fair for me to share it more broadly and expand on key areas over the next few weeks. Good luck out there!

Brief Thoughts On VC Fund Management

If you’re a new or relatively-new VC, you simply must download or stream this new 20 Minute VC interview of Michael Dearing of Harrison Metal (download here). Harry Stebbings does a great job with this one. There are two key reasons to spend the time to listen to this — One, Michael is obviously known to be one of the Valley’s pure outstanding investors, and two, as he rarely opines so publicly, the wisdom he shares toward the end of this podcast with respect to fund management is gold. While a new investor can raise capital, build a network, and pick companies with somewhat relative ease, the art of managing a fund, portfolio, and multiple funds and companies across rounds and markets is very difficult to just pick up. Instead, fund management takes time, requires making mistakes, needs mentorship and guidance, and so forth. For me personally, it is both a topic I’m obsessed about and also struggle to learn. There isn’t much of a shortcut in that process, but I think this short podcast actually provides a little sliver of a shortcut.

There is lots of other great stuff in the interview, I won’t summarize it all here because you should hear it. The topics which stood out to me as they relate to fund management are:

1/ Price Sensitivity: There’s been a lot of talk in the angel & pre-seed space that effectively price shouldn’t matter if you think an opportunity will be huge. Yet, so early, it’s very hard to know, and in today’s environment with angels, syndicates, new LP types, and more, it’s significantly easier to raise a seed round in the Bay Area. Dearing has a different spin on this — calling pricing the way a manager manage their risk. In his view, price is just one consideration, which should always be managed against the investor’s conviction in a business, demonstrated progress, and/or management team.

2/ Recycling: Many LPs will say they prefer their managers to recycle funds (see Brad Feld’s blog for more on this, particularly on recycling management fees) as a way to help the LP put all of their dollars to work. In theory, it makes sense, but in practice, the manager needs a relatively quick exit to make it work. With that liquidity, the manager then elects to reinvest that capital. Dearing has a different operating principle, citing that he would rather get the liquid funds back in the hands of LPs quickly versus taking ownership over the decision on how to deploy the funds.

3/ Today’s Bay Area Seed Market: Most market observers know that, at least in the Bay Area, it’s beyond crowded. Dearing’s point of view here helps frame the divide. He essentially says the seed market has bifurcated: There’s a wing of the party which consists of professional managers with professional LPs who are mostly all pricing deals reasonably and careful around risk vs reward… and, there is the convertible debt wing of the party which is basically “undisciplined” with a “tulip auction vibe” and “toxic.” It is hard to argue with either Dearing’s expertise and this description.

4/ Reserve Allocations: This is a big topic of debate when VCs raise funds from LPs. I will write on this topic more later this year. Essentially, managers want to reserve some amount of capital against each investment they make for a variety of options, although those dollars aren’t always allocated equally. To do a proper reserve model, it requires many disparate assumptions about the overall market, the market for acquisitions versus downstream VC funding, and whether there are better uses for each dollar in question. Like most parts of fund management, what is often done in spreadsheets turns out to be more art than science when played out in real life.

Who Startups Truly Compete With — Each Other

When a founding team is raising institutional money — either an institutional seed or Series A/B round — those founding teams may have a slide in their pitch deck which shows the competition in their market or sector. This is often referred to as “the competition slide.” Yet, while many investors do want to know what other incumbents and upstarts are competing in the space, oftentimes the startups pitching miscalculate who their real competition in that moment is. For instance, say an education marketplace company is about to pitch a firm for their Series A. That team may assume they’re competing for investment dollars against other education marketplaces who seek money. It’s slightly true, yes, but what is often more true on the ground is that startup is actually competing with every other single investment opportunity an investor sees on a daily or weekly basis.

I’ll illustrate with an example. September and October are historically months where many GPs at firms will strike for a Series A investment. A GP may have capacity for only one deal. So in that two-month period, that GP will tee up intros, take referrals from the summer, build up his/her own list, and start meeting teams, talking to customers, and seeing how different investment opportunities develop. While that GP may be taking a deep dive in a specific vertical, my observation is that’s rarely the case — instead, they’re spending time with folks they are naturally drawn to and those who have been given strong referrals and recommendations. As each week passes, they’ll go over their notes, think about the “shape” of an investment ($5M to own 10% vs another deal where $10M gets me 20% ownership, etc.) and refining the list down to a few candidates. Rarely are those final candidates from the same specific sector.

So, yes, that education startup does somewhat compete for its business with other education marketplaces, but in the early-stage throes of getting financed, that education startup is often competing with a diversified hodgepodge or cohort of startups who are also seeking funding at the same time from the same investment firms. The “competition slide” is important, but at same time, the investor is building his/her “cohort slide” — and that presents the real competition.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2017 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus