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Charlie O' Donnell
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I believe that the next generation of top companies are far more likely to be founded by people not on VC radars today. Today's top founders will undoubtedly start something new in the future, but they won't make up the majority of innovators going forward--just as prior generations of venture backed founders don't make up a majority of those who are succeeding today.
That believe has not only translated into the most diverse portfolio run by an investor who looks like me, with over 50% of the teams including diverse founders, but also into top quartile returns in our last fund.
But diversity isn’t any kind of criteria for us—it’s a function of trying to create value for the whole ecosystem--not just those you back. Opening up our circle to create and scale genuine engagement for people outside of typical venture networks is how we do business—and we’re getting exceptional deal flow because of that.
We backed four of the female founders in the Inc Female Founders 100 list—another five we passed on and two had rounds oversubscribed before we got a chance to invest. (Hey! I didn’t say venture investing was easy—but at least we got a look.)
Just yesterday, I got a note from a female founder of color:
“Earlier this year you invited me to one of your off sites and that made a huge difference for me as a founder raising capital for my first company… I'm just looping back with the individuals who were helpful and who said "yes" to me during a pretty grueling process. You passed on investing in my company but you still made an investment in my leadership and I'm deeply appreciative.”
Last week, we ran Fall Fundraising Days, which featured 11 NYC events on raising capital that 800+ individuals attended across the week. Most were open to the public, but we didn't stop there--we intentionally sought out recommendations for underrepresented attendees and didn't stop making those asks as the events filled up with greater balance than your usual tech event.
This story from Cherae Robinson was just one other example of how our events helped someone we didn’t back (we have a portfolio conflict) reach their potential.
Venture is all about access—getting the best deals. That access cuts both ways—because at our stage, we need to make sure the best deals can get to us.
That means, to start out, no need for warm intros, since everyone’s network looks too much like themselves—but that’s just table stakes.
I generally accept any invite to speak or answer questions in front of a public group that I get.
We run a series of best practice workshops where we put top VCs in front of audiences of new junior professionals at funds and accredited investors looking to start angel investing—and we intentionally seek out underrepresented people to join. (Contact me here to find out more about this.)
We host neighborhood dinners across different parts of NYC—from Park Slope to Harlem, and the West Village to Bushwick, and beyond, to connect startup and tech professionals to their neighbors.
For the last decade, I’ve been sharing open events, opportunities and info in my weekly tech newsletter.
So come participate in the community we’re creating around Brooklyn Bridge Ventures.
I got asked by a reporter yesterday what I thought about WeWork’s IPO situation and I’ll summarize what I said here:
First off, let’s pull back for a moment and acknowledge that WeWork has built a huge company that generates a ton of value for its members. Real estate was previously a huge headache for small businesses before WeWork made co-working mainstream.
I don’t know where its valuation will wind up, but I believe that there is a going concern there that is worth billions of dollars. How many billions is for the public market to decide but there’s no doubt in my mind that the underlying value of renting out big chunks of space and using tech enabled, streamlined processes to sublet it out in smaller chunks works. After all, that’s what hotels are, right?
Plus, if you were an angel or Series A investor in WeWork, no matter how this plays out, you either would have cashed out by now for a huge return or still done enormously well in the IPO. If any one of my seed investments ever needs to debate whether its worth $40 billion or $20 billion, I’ll take on that headache any day of the week.
What it does bring to mind for me is the perception of risk.
A lot of people think early stage and seed is really risky, but risk is a function of return—and returns are a function of price. I would argue that a portfolio of making bets that late stage, but still unprofitable companies like WeWork are going to be worth X billion dollars and buying in at a huge valuation is way riskier than buying a basket of promising early stage companies at single digit millions of dollars in valuation.
At least the small companies have lots more opportunities to get gobbled up for some amount of value even if they don’t ultimately work out as well as you would have hoped.
Plus, the overall dollars invested tend to be smaller. A small fund like Brooklyn Bridge Ventures might have minimum investment sizes of a quarter to a half million dollars—whereas a late stage megafund probably expects its LPs to put multiple millions to work.
These late stage funds are often the ones that get crunched in market downturns—because they find themselves over their skis quickly on valuation—whereas early stage funds have longer time horizons anyway. Seed investments made now are expected to exit sometime after this next recession will have likely played itself out.
I also think seed and early stage managers are more aligned with their LPs. A $10mm, $25mm, or even $50mm fund isn’t generating enough management fees for anyone to get rich off of just taking your money—so they’re out looking for big outcomes.
A multi-billion dollar megafund that is investing in the late stages of companies like WeWork makes a lot of fees and can afford to treat late stage rounds like options. They’re going in at high valuations using preferred securities—meaning they’re the first money out in a downside exit. Sometimes they have various ratchets and other bells and whistles that protect their downside further, like when Square IPO’d.
They also have lower upside, since they’re going in so high to begin with—so the percentage of money they’re ever going to make on fees is higher versus a smaller, earlier fund that really needs upside to cash in.
The other area to consider is the timeline. WeWork is under 5% of all of the commercial space in NYC—its home market. If all real estate goes the way of server infrastructure, with no one ever signing a commercial lease except for larger campuses like Google and Apple, then WeWork hasn’t even scratched the surface of its potential. Today, Amazon’s AWS product is probably worth hundreds of billions of dollars because who buys their own server anymore—but when they first started, people thought of it as a money losing distraction. If WeWork, like Amazon, is betting on a much longer term view of the market, the price could be justified.
One thing is for sure—there does seem to be a lot of hair on this deal. The IP transfer from the founder, his family’s underlying interest in some of the real estate—it might end up being all square, but it just gives people pause.
I’m convinced WeWork is part of a sea change in how business think about real estate, and from great disruption comes great economic opportunity. Companies like Lina (a BBV portfolio company), which creates joint spaces for medical practices, will pick apart other segments of the market created by this disruption and lots of winners will be created.
How big these winners will be is not a game I’m in. When you operate out of a $15-20mm fund, a winner is pretty much a winner at almost any size.
“I didn’t want to bother you.”
“I didn’t want to impose.”
“I didn’t want to show up with my hand out.”
“I feel like if you were interested, you would have said something already.”
“I wasn’t sure if it was ok to ask.”
“I haven’t spoken to that person in a while—it might be too random now.”
Do any of these lines sound familiar? Too often, I meet founders that need something, and feel awkward about asking for it for a variety of reasons. Disproportionately, the ones who hesitate to make the ask are women or people of color—at least in my experience.
Speaking from a position where I often get asked a lot, what I don’t think people realize is what the other half of the exchange is in an ask. If a startup pitches me, for example, they’re not asking—they’re selling their equity. That’s a fair tradeoff (at least, if they don’t think it is, they probably shouldn’t have quit their job to start this company.) If no one ever pitches me, then I’ll have no companies to invest.
And if I know the person, I’d so much rather get a pitch from them than someone I have to get to know from scratch (although I’m happy to take cold pitches anytime, too!).
Pitches, while asks for the founder, are potential opportunities for me. Even if I don’t find the company, it’s an opportunity for me to learn about a new space, or just to be helpful enough where you might recommend a founder come and pitch me later on—and maybe that founder is the next big thing.
Most people like feeling helpful—it makes them feel less alone and more useful to others. An ask is really an offer of purpose to someone else.
“Here’s something you can do to help me,” can be a welcome interpretation of an ask if someone is feeling low on self-worth.
You should never be scared to ask for something you need—because the worst thing that can happen is that someone says no. Anyone who dings you just for making an ask, saying perhaps that you’re too needy, probably was never really going to help you with much of anything anyway, and probably doesn’t add much value to your life.
No person is an island—and getting ahead means getting help from others. An ask is a very simple way to direct those who are interested how they can help—because you probably have a lot of people in your life who would help you, but aren’t sure what you need.
I wouldn’t have gotten my first job in venture capital had I not asked to extend my internship part-time past its original deadline. I wouldn’t have gotten that internship if I hadn’t asked if there were other opportunities after interviewing for a few that I didn’t love.
And if you’re ever concerned about making too many asks, you can ask just one more—ask how you can help someone that you’ve asked for help from.
Running a startup consumes a ton of time. Just the immediate priorities seem to take up more than one person’s potential working hours—so it’s no surprise that when it comes to something like social media, many founders have trouble making it a priority.
The consequences of failing to position a founder’s profile aren’t always obvious—and it’s usually all about missed opportunities. Some founders get more press, get speaking opportunities or have an easier time fundraising thanks to leads that started with social media. Does just randomly posting on Twitter mean an automatic Series A?
No, of course not.
But if you have to start your VC list from scratch when you’re thinking of who will fund you next and all of your PR outreach is just a bunch fo cold e-mails, you’re starting from behind the eight ball in a way you wouldn’t have had to had you just participated in the public square that is social media in small amounts daily.
Here’s a primer on manageable things a founder can do to create and take advantage of social media driven opportunities for the benefit of their company.
The Base Layer
The very basic level of participation on social media isn’t posting—it’s listening. There is a public conversation going on around people who need to know about what you’re up to and that you ultimately benefit from having a professional connection to. Being unwilling to listen to that is foolish, because it’s good information—and it’s networking 101. Any relationship you build should start with listening first, and social media, despite what you might think, is no different.
Where you can outsource some of this to interns, researchers, a PR firm, your team, etc. is figuring out who your top 250-500 list is. Take the time to understand that if there was a conference full of people that would be highly relevant to what you were doing, who would they be? It’s some combination of industry leaders, other founders, academics, media, big company folks, etc., but in the end you should know exactly who your best few hundred (or more) potential networking leads are, and follow them. Conferences are actually a good place to start to find these lists of folks, as someone has done the job of curating a list for you. You can also look at the list of who other people in similar positions follow. For example, if you were the founder of a self-driving car startup, checking out who the founders of the other dozen self driving car startups follow might be a good place to start.
Generally speaking, I think Twitter and Instagram are good places to start. Twitter feels like a given, whereas Instagram is a bit more personal, but as long as people don’t have private accounts, they’re fair game. It’s often a good way to figure out if there are hobbies or interests you share in common with someone.
Now that you’ve got your follow lists, I would think about perhaps 10-15 minutes per day as a pretty good investment of time checking out what’s going on around you. Share or retweet what you find interesting, ask questions, comment, etc., but do it authentically. Don’t comment just for the sake of commenting—comment only when you have something to say.
If you took the time to pick out 500 industry people who are ultimately the right people for you to connect to given what you’re doing, and you follow them for 10 minutes a day for the next 30 days, but still have nothing worthwhile to say in response or can’t find anything worth sharing—I think maybe you need to reconsider whether you’re really passionate enough about this industry to be in it for the next eight years.
Think about an angle—some unique insight—that you bring to bear into these conversations as you start to post. For example, if you were the founder of some new home workout device, posting about fitness isn’t unique enough. Posting about how hard it is to fit fitness into your routine as a parent of three kids—that’s something unique to you that you could imagine being a magazine article.
It doesn’t always have to be about you and your company either. Maybe there are some people you follow who have created great little routines to squeeze into your day doing everyday things—like doing calf raises stepping up and down from your tippy toes as you wait for elevators. Sharing that type of thing helps build your narrative but it also curries social capital with others—because sharing is a currency you can build up.
Medium, LinkedIn and various contributor networks like Forbes are great places to get extended stories out. What is it that you would share if you had the opportunity to give a talk at a conference—this is where that kind of message goes. The best way to write long form articles is to keep your reader in mind—what is the interesting thing you’re giving them that is going to be conversation-worthy for them later. Can you imagine them talking about it later at a networking event? Probably not if you’re writing a post on “An Overview of the Banking Industry” but probably yes if the article is “Is the Fintech Startup You Just Signed Up for Worse than Your Bank?” This would be a good way to talk about ethical issues around money and data, and how your company has made a promise never to sell its user data.
A lot of opportunities for founders to be on panels and on TV come from posting video clips. Just because someone writes well doesn’t mean they’re well spoken and perform well on camera—so showing off your speaking skills on video can go a long way to creating more interview opportunities for you.
If you don’t have the money or time to setup a video studio (Who does?) you might check out a company I invested in called Openreel. Openreel allows you to capture HD quality video from your phone, tablet or laptop with all of the controls available to someone using a professional setup with a director. You can even have someone else do the capturing and controls remotely and it comes with a teleprompter feature as well. It’s a fraction of the cost of rolling in a video crew everything you want to shoot something, and an order of magnitude higher quality and more professional just doing selfie videos on your phone.
With this kind of solution, posting a video once a week isn’t a big ask—especially if you just spend an hour banging out three or four at a time. Similar to the longer form posts, try to think of sharing something meaningful that you want people seeing when they search for you—like why you started your company, what’s important to you about this business, or something specific about your leadership style.
Obviously, when you’ve got multiple types of posts—long form on Medium, videos, etc. you’ll cross post across your various channels. This is also a good spot to outsource. Put someone else in charge of making sure your LinkedIn connections know you wrote a Medium post and vice versa.
One way you can build up your following is by engaging others. Write posts where you pose interesting questions to others—giving those people a reason to share things that you compose, along with your profile. If you’re eventually going to be fundraising for a wellness startup, it might be worthwhile to ask 50 investors about their own wellness routines—or, if you’re looking to stir the pot a little, measure the wellness routines of the founders that those 50 investors backed and point out the likely differences.
Interviews other others are a great way to punch above your weight as you build your profile. Most people are willing to have content composed about them for SEO purposes or even to have something to share to their own audience if you’re willing to do the editing.
Not everyone is comfortable posting every last intimate detail of their lives on social media. The good thing is, no one is asking you to do that. However, it’s not an unreasonable ask that there’s some human semblance of you on the internet that a potential hire or funder can find if you’re asking them to commit several years of effort to helping you. When you post about what’s important to you outside of your professional life you build not only a multi-dimensional image of yourself that might give others a better picture of whether they want to work with you, but it also increases the potential ways to connect with key stakeholders. Maybe there’s a VC that also plays the sport you do, likes puzzles, or who can relate to stepping on their kid’s Legos in the middle of the night—and when you’re a founder, you could use any inroad you can into a conversation.
Here are three next level media strategies that I think have a significantly high ROI and might actually take less resources than you think:
You can use a tool like Zencastr or even a video capture tool like Openreel to create interviews for podcasts very easily—and a basic suite of Apple software like Garageband can get you pretty far in terms of basic editing. A single interesting podcast interview can hook an investor’s attention and running a show can excellent excuse for connecting with high level stakeholders. Running a logistics startup? Interview the GM of North America for UPS. Got a new parenting app? Interview an influential or celebrity mom or dad.
When you’re starting out, much of the value of doing things like podcasts isn’t necessarily in the building of a big following—although that can happen over time. It’s all about having a reason to connect with someone that isn’t so transactional and that gives them some value, too. Instead of grabbing coffee to pick someone’s brain, which is particularly one-sided for them, invite them to an interesting podcast conversation they can share with their own audience. Instead of cold-pitching the media, bring them onto your podcast to share their expertise.
Getting a professionally done survey from a real firm costs about the same as one month’s worth of retainer from a PR firm—but is bound to get you way more in terms of press hits. There’s nothing more sharable on social media than data—so let the numbers make your case for why you’re starting a company in this space. Moreover, why not let customer surveys create leads for you? Google “indoor farming data” and you’ll find Artemis Ag’s (formally Agrilyst) State of Indoor Farming Survey, which added a windfall of leads to their sales pipeline. You can work with a media outlet or professional society to get a whole bunch of potential folks in your target market answering questions that they all want to know the collective answers to.
One Day Conferences
You can book a space and feed everyone in a nice space for less cost and effort than you think—and create a lot of content and connection in the process. In fact, if you just need to break even, you can often get sponsors to cover much if not all of the cost of it. It’s also a good excuse to invite interested investors and get into a conversation with them. You could literally script an entire day of panels that fit with your company’s narrative for a higher ROI than trying to get in front of someone else’s audience for just one panel. It’s more work, sure, but it’s potentially a much more valuable outcome. Besides, if you really are the industry leader you say you are, shouldn’t you be running the go to industry conference?
The most valuable career asset I have is my weekly newsletter that goes out to the NYC tech community. It’s mostly just a collection of events, but it has grown to include a fair bit of preamble and perspective. Imagine you were going around telling everyone that there’s a new revolution happening in the dating world away from just a solitary swipe right/swipe left perspective—and that there’s going to be a backlash about how dating works today. Then isn’t there at least a week’s worth of articles, links, essays and content being put out there already to fill up a newsletter, not to mention what you yourself might have to say about it? Having a weekly, consistent curated stream of news and becoming the industry’s source for your narrative is invaluable—and can also be turned into an asset for others. You can post events, conferences, and links to what others are saying and doing too.
Participating in social conversations and thought leadership as a founder isn’t something that is going to pay off overnight—but consistent contributions to this area has a high likelihood of paying off for your company. On the other hand, being a founder trying to raise money when no one’s ever heard for you or what you’re up to, nor have they ever read up on what you’re saying is going to happen in the industry is starting from less than zero.
Plus, if you never invest in serendipity, it’s never going to happen to you. You’ll never get that speaking opportunity at a conference or you’ll never get that inbound from an investor asking “Hey, I read your piece, let’s meet the next time I’m in NYC” if you’re not contributing to your thought leadership profile. I can’t promise when, where, or how it’s going to pay off, but the best time to plant a tree is twenty years ago, and the second best time is now. Trust me what you’ll wish you had been doing this for the past year when you need something to happen to your company that’s a bit out of your control like fundraising, hiring or launching.
I’m getting married today.
At least, if she says yes.
But, assuming that all goes according to plan, I have a few thoughts on how I got here—given that dating and relationships seem to vex a lot of people.
I would say that the most important factor that went into both of us finding someone to marry was that neither one of us felt like we had to find someone to marry to be content. We both spent time developing ourselves and our lives as complete and we weren’t waiting for someone to make us whole—so we entered this relationship not as gap fillers for each other, but as two independent people who chose to be together because it was better, instead of trying to avoid being single.
You don’t need anyone to be content—but it’s very nice to meet someone you want who wants you back.
For me, winning her over was an exercise in self-awareness, patience, and respect. In the past, not only had I been pretty unaware of the other person’s perspective in a relationship, but I thought that getting to the finish line was a function of effort. There were times when I thought I could get someone to like me by trying super hard—by proving I could be the best boyfriend ever, when that wasn’t anything close to what the other person was looking for.
When you find someone who is content with themselves, most of what they’re going to look for in you isn’t how you treat them—I mean, it’s important, but it’s not the only thing. It’s going to be about how you treat others. Aja and I appreciate each other just as much if not more for how we treat our families, our friends, and the authenticity we put into our work than for what we’re doing for each other.
Don’t accept someone that is nice to you but a jerk to everyone else.
A few years ago, I dated someone for whom therapy was an important part of her self development. As part of my development, I decided that if anyone was either critical of me or made a suggestion to me that I would start from a position of acceptance before I was dismissive of it. When we broke up and she suggested that I might get something out of therapy, I went ahead with it. I felt fine and didn’t necessarily have something that I thought I’d get out of it, but I was doing this thing of non-dismissiveness, so I tried it out.
I did one session and in talking about relationships, I realized that while I had tried very hard in prior relationships, I never shifted my perspective to try to understand what it was the other person was looking for in a relationship.
I was too busy trying hard to be nice, to be romantic or loving to focus on being understanding and empathetic. No one wants a bigger version of a gift that they didn’t want in the first place or two of that gift.
It totally changed my approach to relationships (and frankly, was the best free introductory anything I ever did, since I didn’t go back).
Things become a lot clearer when you ask yourself the question, “Am I honestly the person that this person is looking for?” versus “How much do I like this person?” It works really well for someone who, at 39, doesn’t really feel like changing who they are that much—because it’s much easier to answer than trying to figure out if you like someone “enough”.
The last thing that I feel is really important is a realistic sense of what’s important to you.
I’m obviously pretty athletic and into sports—but I don’t really need anyone to do them with me. What I do care about is that it’s going to be ok when I roll out of bed on a Sunday morning at 6AM to go on a ride or do a half marathon.
What I’ve found with myself is that Aja is so accepting of the things that were a part of my life before she arrived, like sports, that I’m more willing to give them up, because it doesn’t become a proxy war for balance in our relationship. When I got asked to play on an ice hockey team this summer, I only signed up for half the games not because she would have had a problem with me playing on all of them—but because it would have been ok.
Frankly, I’d rather spend more time with someone who thinks it’s ok for me to play more hockey than actually playing more hockey.
Aja, I am incredibly lucky to be marrying you today. I love you and I cannot wait to see you later…
… after my bike ride.View this post on Instagram
A post shared by Charlie O'Donnell (@ceonyc) on Mar 28, 2019 at 8:14pm PDT
Not every fundraise is easy and sometimes you wind up having to take a higher quantity of smaller checks than you’d like. On the other hand, some people try and pad the cap table with a bunch of big names or industry vets, even if their check size is small, just to build the network. They have an idealized vision of how easy it’s going to be to utilize everyone once the business gets going.
The reality is that the last thing most founders will have time for is writing up investor updates. They’ve got tons of other things that seem more pressing and the last thing they need is a bunch of scrutiny and questions from people who wrote small checks. Not only that, sending out important information in e-mails to lots of people increases the possibility that confidential information gets out.
Still, I think it’s worthwhile to keep all of your investors in the loop for a lot of non-obvious reasons. Maybe it’s an e-mail or maybe it’s just a quarterly phone call that everyone on the cap table can dial-in to. Whatever it is, here are the benefits of keeping everyone—no matter how small, in the loop:
1) When you don’t hear from a founder, it makes an investor feel unappreciated.
Small investors are people, too—and there’s no upside to having a bunch of your cap table feel negatively in any way about the company. These people all have some expertise and experience, and by never reaching out to them for anything, it can feel like you don’t think they have anything to contribute besides money. No one’s saying you have to throw someone a parade every month for writing a $10k check—but sometimes a little nod of involvement goes a long way, especially given that statistically, most startup outcomes aren’t that great. Maybe one day you’ll be able to write everyone a big check at the end, but until then, taking a “That’s what the money is for!” Madmen approach isn’t a good bed, especially if you ever plan on doing another startup.
2) There’s a Butterfly Effect to not being top of mind and not having info on a company.
Investors talk to other investors, to media and to talent, and it’s great when they can share why they’re excited, in a general sense, about your company—or that they’re excited at all. When you have no information about what’s being accomplished at a company, you’re not got to share anything, and people are going to wonder whether not mentioning you is a signal that things aren’t going well. That’s going to make fundraising and hiring even a tiny nudge harder than it needs to be, and certainly costing you more time than the e-mail update would take.
3) Small investors are more aligned.
The way preference works, small investors who just do early rounds are actually much more aligned with founders than later stage VCs who are looking to pour more in to get a bigger outcome. They may not have as much experience as your larger VCs, but their preference is invaluable if you’re looking for a wide spectrum of feedback. Is it worth going for your Series D or thinking about getting to break-even now? Your seed investors might have a different take and diversity of perspective always makes for better decisions.
4) Sometimes, they can surprise you.
People can have pretty random networks, especially around hiring. By keeping your needs top of mind with regular updates, you might get a lot more out of your early investors than you expected in terms of introductions. Recruiting is one of those things where getting a note that a particular hire has been difficult is much more effective than just posting a job into the ether.
5) You actually might need them.
Setting a precedent for updating your investors should start early—early enough where you might actually need to reach out to them in a pinch. Sometimes, rounds fall apart, and if the last thing they heard was that things were going great, then all of the sudden you’re doing a bridge to make payroll, the likelihood they’re going to be excited to write a check will be pretty small. Even in later rounds, you never know what money they might be connected to and they might be able to hook you up with some random family office that you never heard of to help close a difficult raise.
If nothing else, I also just think it’s a sign of respect. Someone gave you their money (or their investors’ money) and I think besides your hard work, the least you can do for them is just let them know how its doing. They might not have a right to that information based on the legal docs, but it’s just the right thing to do by someone—and it also keeps you in the mindset of being responsible for people’s capital when you’re actually interacting with them. As we’ve seen over the past few years, it wouldn’t hurt our industry to make corporate responsibility a little higher priority.
Using the proliferation of newly GPS-enabled mobile devices to enable taxi hailing and beat out stagnant incumbent providers was always going to be a big win for consumers. It provided a better service than existing cabs were going to be able to do for at least several years—cutting out lots of unnecessary overhead in the system.
Had it been built differently, it could have been a better company and honestly I’d like to believe maybe even a more valuable one in the long term. Maybe it would have given up short term hypergrowth—but as the standard bearer, it could have helped the whole market get on this path, instead of just landgrabbing.
It could have championed fair pay and a national minimum wage—incorporating it into its brand. Would that have cut into its growth? Maybe—but in the long run it would have created happier drivers and a base of more loyal customers feeling better about their brand.
It could have made HR, diversity and employee experience a priority from the start. There’s no reason why a culture needs to fall apart at the seams in a hypergrowth startup. The damage done to the company’s brand do to internal scandals and mismanagement was an economic reality that was the result of really short term thinking.
It could have made accountability around driver behavior more of a priority, but instead it pulled out of cities that required higher levels of screening.
Instead, we got one of the most lucrative startup investments of all time from a company built off of a legion of drivers unable to make a living wage after expenses, without benefits, and not even classified as employees even when they work for the company for full time hours.
But, the VCs did their job—as designed. It’s a tricky subject, because VCs only exist to make money—not really to oversee the running of these companies as beneficial to the world, unless it gets so bad that it affects the economic outcome.
Not only that, we have other portfolio companies to worry about. So, the extent to which any one VC would be openly critical of another’s portfolio company or the investors behind it is limited by the fact that you’ve got other companies that need their late round money. I have a portfolio where 50% of the investments have founders that come from diverse backgrounds—and yes, I want them to get money from all of the still-active funds on Uber’s cap table that benefitted from the IPO.
So, the extent to which any one fund will call out the other funds on the cap table that sat quietly on the sidelines for three years after Sarah Lacy called the company out in 2014 is going to be somewhat limited. The company’s misogynist culture was well documented before Susan Fowler tipped the scales in 2017 and I don’t recall a single investor saying anything about it up to that point.
What if the early investors—some of whom had decades long reputations for being on the forefront of social issues—had made all of their companies sign diversity pledges and been active and public from day one instead of quiet for seven years? Perhaps I’m being too cynical, but when the problems get this big, I think I’d rather hear “I could have done more” than “I tried”.
Everyone is documenting through e-mail screenshots how they invested or didn’t invest in the early days of Uber—showing off their access to the early deal as a badge of honor, but where are the screenshots of the 2014, 2015 e-mails to the team showing their concern about the journalist harassment issues, driver earnings, or privacy concerns?
The too little too late around Ubers culture created a missed opportunity to build an empowering industry leader on social issues—because, at its core, matching drivers to more work is a good thing. Everyone could have done more and until we acknowledge that, this will keep happening.
What if all of the early investors in Uber had, as part of their criteria, a vetting of how serious the company was at creating a healthy culture and a company that would be an impact trendsetter—either because they believed that was the best way to create sustainable economic benefits, or because that was required of them by their investors?
That’s who really should be driving this—because that’s who the bosses of the VCs are. If all of these foundations and endowments that fund VCs start asking about what their social impact screens are, because they want to make sure their money is improving the world, VCs will start behaving differently.
What if the kind of portfolio diversity, became a sought out feature that LPs look for and not just a nice to have—not just from diverse managers, but from everyone? How many LPs are asking the top tier funds what they’re doing to enforce and oversee values and culture from a board perspective?
Does any fund that invested in Uber fear not being able to raise their next fund because their underlying companies might not perform well around these other criteria? Nope.
Until the underlying money starts shifting, we’re going to see more of the same—waiting until the problems get really bad, only calling things out when the cats are out of the bad and it’s politically safe to do so, and championing business models that come at the expense of workers and economic equality.
When I was growing up, I watched Seinfeld religiously—literally every single Thursday night from the premiere to the end without missing a single one. Not only did I really love the show, but I was that committed to it because of the reinforcement I experienced by being part of a community that also watched when I did. The next day, I couldn’t wait to see my classmates and repeat whatever the key line from the episode was. It was almost more enjoyable to laugh about the episode the next day with friends than it was to watch it on my own the night before.
The other nice thing about live, scheduled TV—something I’ve come to appreciate now—is that sometimes there was nothing on worth watching. I would flip through the channels and if I didn’t find anything to watch, I would turn it off.
When’s the last time you hit up an on-demand streaming service, came up empty, and decided to do something else instead?
What else did I do? I might have read a book, called up a friend, or went outside for a walk—all things that as I evaluate my habits today are probably more productive than watching Iron Man for the 8th time or clip compilations of West Wing.
The behavior is even more pronounced with kids today. They know that Frozen is available to watch anytime the mood strikes them. They can ask Alexa to play their favorite song.
They never have to sit through anything they don’t initially like.
Some of the most enriching and enjoyable activities I experience in my life now are scheduled and they involve other real live people… in person.
I’ve been playing on the same softball team for almost 14 years. We started playing in our mid-late 20’s as a way to meet new people. Now, as the number of kids and significant others rises on our team, it’s our way to stay connected with our friends—it’s a thing we make time for to keep people in our lives.
I’ve abandoned going to the gym anytime I want to work out by myself in favor of group classes at Conbody—where I see a lot of the same people on a regular basis and trainers that I’ve become friendly with. Interestingly, social media enhances my relationship with these real life people—it gives me a window into their life outside of the gym so I can see who really loves their dog or who likes photography. This makes my real life interaction with them more substantive. Making time for Conbody classes in my schedule is not only a great motivator, but it provides important accountability. I’m going to hear it if I don’t show up for a week.
Meditation is a similar experience to working out—anyone can find a video or an app to watch, but the experience lacks for the kind of community that is built up when you gather live humans at a particular time to experience the same moment. For a lot of people, getting stuck in your own head for too long isn’t a positive experience. It might feel lonely or the whole thing might be super intimidating.
That’s why I got excited when my friend Stephen Sokoler told me he was building Journey Meditation. Journey is a live, guided meditation experience and a community of participants. Friendly teachers bring their own style and experience to the session and it’s something you make time to participate in on a particular schedule.
If you’ve ever wanted to meditate, were curious about it, or tried other methods that didn’t stick—consider joining a community where there are no spoilers, because everyone is experiencing it at the same time. Meditation is a practice of calming focus—where you exercise your ability to narrow the beam of sensory overload. Technology especially throws way too many things at you at once, and the ability to let what doesn’t matter or what you find distracting from your mission pass around you is a useful defense mechanism for today’s world.
Plus, there’s nothing to lose—because you can try it free for seven days.
It’s been a pleasure working with Stephen and his team, as well as Brendan Dickinson at Canaan who also invested in Journey’s seed round with me.
Over the years, we’ve seen a revolution in how labor is supplied because of technology.
First, we saw simple outsourcing—taking one person doing one job and moving the job over to a cheaper person in another geography. That only worked because you could connect everyone via technology—routing phonecalls, e-mails, design documents, etc. halfway across the world so that working with someone in India was as seamless as if they were on another floor in your building.
As emerging markets start to achieve more equality with the rest of the world in labor cost, that arbitrage starts to go away. The best people start to charge more, or they simply move to the US, and the time and efficiency cost of working with labor for less complex tasks starts to not be worth it anymore.
To gain next level efficiencies, we worked on breaking up the tasks that go into a job. If you have two people, a highly skilled worker and an entry level person, if you could microchunk the simpler tasks, move them over to the entry level person, and make the highly skilled person not only more productive but probably happier.
That gave rise to platforms like Amazon Mechanical Turk on the simple task side of the spectrum or marketplaces like Upwork and Taskrabbit where you want someone a bit better, but the tasks are still pretty straightforward. In all of these cases, workers are working as individual contributors—while one person might be managing multiple people, the workers are not connected to each other as a feature of the platform.
Uber and Lyft largely work the same way. Driving is obviously a more complex task than identifying whether an image has a puppy in it, but lots of people can do it, and as long as the driver doesn’t crash or kill you on the way to the movie theater, you’re pretty much ok getting anyone.
If you needed anything done by someone not in your employ for anything more complicated, you are basically looking at some kind of agency work—because more complicated work generally requires teams of people working together. For the longest time, teamwork was inefficient—requiring lots of overhead in planning and setup to get a team with a variety of skills all on the same page and working together on a complex project.
Every new job or set of tasks was treated as unique and constructing teams was viewed as a challenge—so agency work from McKinsey to IDEO, or your corporate law firm, was very expensive.
That’s starting to change as companies realize that for many aspects of teamwork, 80% of most work frankly isn’t that hard and looks somewhat similar to a lot of the other work. You could build semi-rigid operating plans that cover most of the jobs that come through.
Take Block Renovation. Block takes the stressful and sometimes disastrous process of remodeling and makes it simple. Instead of going out into the market and getting a contractor, which is essentially an agency, and an architect (another agency), it focuses on the 80% of bathrooms where all you’re doing is just taking out old stuff and putting in new stuff. They preselect the inventory of fixtures, create standardized pricing, and vet for the basics of contractor reliability—has references, is licensed, etc. The bar is lower here because the jobs are simpler—and the worst aspect of having work done, the price negotiation, is done upfront.
They’re eliminating the work that a customer needs to do in a marketplace—the sorting, vetting and labor management—and turning it into a service with something of a guarantee, which puts the marketplace aspects on the backend under the management of the company.
In short, they’re offering Certainty on Demand—a term coined by Michele Serro, the founder of Doorsteps. If your job fits their criteria, they’re selling the certainty that at the end of X time, you will definitely have a new bathroom. That’s much easier to do when you’ve taken apart the process and put it back together again in a way that optimizes for getting to the finish line with certainty over and over again at scale.
Investors took notice and gave the company over $4mm in its seed round.
It’s a model that is starting to get repeated in the market. Bench looked at the process of bookkeeping, realized that 80% of the clients had the same simple, straightforward set of needs, and built in automation to service them more efficiently and less expensively than an accounting firm that treats every new client’s set of needs from scratch. Noken replaces a traditional travel agency quite effectively for 80% of the trips in the market where the person is going to a new country wants to see all the stuff that everyone agrees you should probably see. At the same time, they figure out which customer decisions are major consumer satisfaction leverage points—like the quality of the hotel. Just a handful of choice can make an automated process appeal to the vast majority of the market. These platforms enable automation to solve higher order problems effectively, driving above market revenues for lower cost tasks. Consumers are thrilled with the experience, which often seems like “magic” that they are being served so well on such “low” costs compared to full service agencies. Axiom does this for law—providing “the same” legal service for way cheaper because it has filtered which tasks it makes sense for it to do and has more throughput than a traditional legal firm.
Wethos is now doing this for a variety of higher order labor outsourcing—like website design, PR campaigns, or social media marketing. Creating a new website isn’t a job for just one person—someone needs to think about the site copy, someone else needs to do the visual design, and someone else needs to do the front end coding necessarily to implement that design.
There are a multitude of higher order projects that fit this same pattern—too complex for just one person, but 80% similarly structured to a million other similar projects that came before it. Instead of paying for a full on agency with all its custom overhead, Wethos can quickly spin up a group of people from its curated talent network, give them a framework for collaboration, and help you accomplish your goal for a serious discount to a traditional agency. The full potential of a creative agency is something you wouldn’t have taken advantage of with a project like this—much in the same way that Block Renovation doesn’t need to hire an architect for every new bathroom they give a facelift to, Moving curation behind the curtain is key, too. Why outsource the selection of the talent to the customer when the platform knows who is actually good?
The exciting aspect of these startups is that they can turn on revenues from day one—they often experience solid margins from the beginning, and those margins improve over time as they expand the number of playbooks they research and implement. Wethos will add more verticals of work. Noken will add more countries. Block will do kitchens one day and the list goes on.
Labor will find itself able to complete more task, more appropriately funneled to the right level of work, and business will get more efficient, thanks not only to technology but to thoughtful process design.
I'm a bit tired of tweeting, donating, protesting, etc. to end gun violence--so I'll take a different tact in the wake of the Christchurch shooting.
If you're an investor, employee, or just user of a large media distribution network, please ask the hard questions about the responsibilities of those platforms to prevent the spread of hate and violence--again and again until these platforms take their role seriously.
It's just not acceptable that violent people see online platforms as a viable channel for their hate and that, after all this time, the "smartest innovators in the world" still seem at a loss as to how to stop it. How many ways have we heard Youtube tell us that hundreds of hours of video gets uploaded to Youtube every second--and they make it seem super easy, but yet they can't get out in front of people trying to share a mass shooting livestream over and over again? Isn't building an infrastructure to ingest all of those videos with the kind of uptime it has pretty darn hard? Is it really possible that your $500k/year engineers can somehow build the world's best infrastructure but can't be held accountable to figure out how to put a safety on the damn thing when someone wants to use it as a weapon?
This is what happens when your tech largely gets built by people at the top of the social food chain--it escapes their imaginations that someone might want to use it to hurt someone else because they're so rarely the victim of anything.
Diversity isn't about numbers--it's about changing the way we design our products to better our society.
Across the world, various economic development organizations, government agencies, and non-profits are putting in admirable and well-intentioned efforts to develop startup ecosystems. They’re building campuses, districts, buildings, spaces, as well as running new educational efforts and contests—basically anything they can think of to foster the growth of new and innovative companies.
One thing they’re spending very little time on could wind up being the reason why all of these efforts dry up. Very little time and effort is spent helping professional, full time investors raise capital for venture funds. Everyone is excited when a new company gets funded in their ecosystem, but no one spends much time thinking about where the money comes from to fund that deal.
To care about this issue, you have to believe one thing—that the presence of full time, professional investors in an ecosystem catalyzes funding rounds better than a collection of part time angels, accelerators, and/or government entities that usually don’t lead deals. Accelerators can be great, but they’re not giving companies enough money to achieve the kind of escape velocity needed to get on the radar of national Series A firms that will invest anywhere. At some point, a real seed round needs to get raised—and it needs to get led by someone. Angels will often sit on the sidelines until someone comes in to set the terms and write a bigger check.
Take the example of goTenna, a thriving communications hardware startup located in Downtown Brooklyn that employees almost 50 people. I backed that company in 2013 when it was basically a table top science project, but the key was a series of connections that could have only been possible as a full time investor. I first met Daniela Perdomo, goTenna’s founder, at SXSW. So, number one is that I needed to be at least engaged enough as an investor to be out there attending gatherings of innovative people.
Second, I sought her out at that conference because I saw on SXSW’s intranet that she had listed NYC Resistor, a hardware hacking space and collective, on her bio. Resistor is a bit under the radar as a very cool community—and so being associated with it was a signal that I could have only known about if, again, I spent all of my efforts as a seed investor turning over every rock looking for opportunity. This isn’t the kind of thing your average high net worth individual who occasionally does a deal would know about.
This company would have had a much harder time getting a seed round together had it not been for the presence of professional seed fund investors—and my seed fund wouldn’t exist had it not been for the 50 different individuals and entities who participated in my first fund.
Yet, do you know how many of those investors came through intros made by those who have a strategic economic development interest in fostering the NYC ecosystem?
Not a one—and through conversations with other seed funds I know, this is pretty widespread. A lot of these strategic entities have boards that are filled with some of the most successful high net worth individuals, family offices, foundations, etc. but the connections are not being made to support the funds that are supposed to be funding all these local startups.
I was talking with someone who worked for one of these entities recently and they gave me some insight as to why. This person told me that their group was worried about these folks “getting hit up all the time”.
This is exactly the wrong way to think about the economic opportunity presented by innovation. Innovation isn’t a charity—it’s a ticket to a very interesting and exciting future.
Wealthy people trade that wealth for interestingness—and the opportunity to economically participate in the upside of your local startup ecosystem is super interesting to many people. Not only that—these people are doing all sorts of different kinds of deals—and you don’t do deals without deal flow. No one has to say yes, but rather than this seeming like a bother, anyone with an investment mindset is going to welcome the opportunity to roll up their sleeves and dive into thinking about an opportunity.
Not only that, but for many in the real estate world, their economic upside is already tied to innovation. The growth of the local NYC startup community has been a huge moneymaker for many of those folks and can continue to be if the ecosystem continues to roll.
This won’t happen if all the seed funds become institutional, get larger, and stop writing the kinds of small checks that turn science projects into 50 person companies.
The other reason why development related entities that support startups should be making these introductions is because of some of the indirect roles VCs can play in the startup ecosystem. By being full time in the community—they can make connections to help market various programs and opportunities. They can help filter who these organizations should be focusing their time in supporting. They can also help generate interest across different types of wealth through their history of success. There’s no better way to get a room full of people who made money in real estate, manufacturing, or natural resources to care about tech startups than to have a professional investor up in front of a room sharing their approach, their wins and translating the enormous amounts of individual deal risk they appear to be taking into a sensible investment philosophy others can buy into.
Raising for a seed fund is exceptionally difficult. Institutions typically don’t participate until you’ve already got a few funds under your belt, and even when they do, their average check size is often too large for what you’re trying to put to work. That leaves seed funds out trying to gather a random mix of high net worth individuals and family offices, which is a bit like trying to find a needle in a haystack in a dark room with one hand tied behind your back.
It’s not exactly like anyone puts “willing venture fund investor” on their LinkedIn profile.
If you really want a solid startup ecosystem, you need multiple seed funds all coming at the community from different perspectives both funding a wide variety of companies but also working collaboratively together. It’s not just about having one dedicated fund—you need many funds coming together in a marketplace of ideas.
No one is asking the Mayor to tweet their fund prospectus, but hosting informal meetings with members of community economic development boards, looking into small baskets of endowment funding that can go into local early stage funds, and just generally being willing to help because they understand that we can’t fund your local startups unless someone funds us would be enormously helpful.
Some VCs peel off of other funds to start their own and they have the benefit of a track record from their previous firm to show. Obviously, that’s ideal, but that’s not where everyone starts.
If you’re lacking for track record as a firm, here’s three exercises you should walk through to help turn your pitch and due diligence meetings from guesswork into something more substantive.
The Fantasy Cash Flow Model
When I was an analyst at the General Motors pension fund, investing in VC funds, I had to build a model of how I thought they would perform. It started out with initial investment size, pricing, and outcome behavior for each deal and then it made a prediction around the distribution of outcomes.
It’s easy to say you’re going to be a 3x fund, but how does the math actually get you there. If you’re not actually modeling this out with a spreadsheet, I don’t know how you can look an LP in the face and say this. Build up your model of what you think the individual financial outcomes will be over time—layer that on with follow-on decisions, fees, carry, etc. I think the results will surprise you how hard it is to be successful.
A Time and Attention Model
How much time will you be spending on each portfolio company? Taking board seats? For how long? How long is your partner meeting going to be? Will you be going to the gym at all? Spending any time with family? How much do you sleep?
You give money away for a living—and so you’re going to get overloaded with requests. Once you do distribute the capital, you’re giving it to companies that will need a lot of help. How will you provide it across 30 investments? Will you have analysts? Partners? Will that increase the work?
Figuring out how you’ll spend your fully loaded time is something any LP will want to understand in order to know if you can handle going from just angel investing or doing whatever you were doing before to running a portfolio full time. Here’s what my model said.
The Backtesting Model
In the public markets world, when you start a new fund, you backtest it. You take your investment model and run it against the past to see if it would have worked. Want to only invest in diverse boards? Only companies with a certain contribution margin? Maybe you only care about growth. Whatever it is, could you have run that model successfully over the past five years? Not all prior performance is a guarantee—but it would be nice to know if this would have worked in the past.
I ask the same of new managers. Had you actually had your fund in the four years prior to today—which deals would you have legitimately been able to do? This is actually easily referenced.
For example, let’s say I had a more national fund. Because I had previously met Jack Dorsey through the Union Square Ventures network, in 2009 I was able to grab coffee with him before he launched Square. He demoed the product to me and I wound up being dollars #476 and #477 to be swiped on the very first Square prototype. I was blown away.
Had I had a fund, I could have said, “Hey, let me invest in this…” and maybe I could have squeezed $25k into the round. It’s at least plausible—versus being someone who had never met him at all who said they’re starting a fintech fund and Square is the kind of thing they would have invested in. It wasn’t likely that a fund who had no prior connection to him at all would have gotten in.
If you’re looking for more tips and advice on starting out as a first time fund manager, you should check out the webinar I’m putting on with Carta next week covering all the basics and stupid questions that aren’t so stupid.
You hear this from VC’s a lot: “We need to own X% of your company to make our returns.”
They back it up with sensible math—owning 20% of a billion dollar outcome returns a $200mm VC fund, and, of course, you’re trying to at least return the fund. So, no one really questions the ownership model.
Yet, when you buy shares of Apple or Facebook, you don’t even think about what percent of the company you own. How then, do you expect to make money when you’re buying on the public market?
Everyone knows the answer to that.
“Buy low, sell high.”
Seems like that should translate over to the venture world, too. After all, all we’re really doing as VCs is buying shares, aren’t we? How come VCs don’t think about it that way?
There are two reasons. First, price discipline doesn’t work in overly competitive markets. When there are too many funds in a market segment trying to do the same deals, keeping your entry price reasonable is going to get you shut out of a lot of deals. If you’re a first check lead VC for pre-seed rounds in New York, you can keep your head on when it comes to price, because you’re not going against that many other people.
If you’re in SF trying to fund AI companies from YC, good luck with your price discipline.
Second, you can only get so many dollars into “cheap” seed shares. If you raise $100mm, you can’t put it all to work upfront because the rounds aren’t big enough—so you have to deploy more capital later (and more expensively). Dilution becomes the enemy. You tell your investors that you don’t want to own a smaller and smaller percent of your “best” companies. You need to write bigger checks to maintain ownership.
What you’re not saying to your investors is that you’re buying more and more expensive shares at a lower return.
I guess that doesn’t have the same ring to it.
Of course, there are other non-financial reasons to follow-on. Brooklyn Bridge Ventures, my fund, does small follow-ons (10-20% of the original investment) that enable the founder to say that everyone is continuing to participate. That means you might get $400k upfront from me in your seed or pre-seed round when the money is hardest to get, plus a term sheet that helps wrangle everyone else, with a follow on of $50k in whatever comes next. The vast majority of founders are completely willing to get more money upfront when they haven’t proven much yet in exchange for less money later when there is enough risk off the table to get others to participate instead.
Also, funds that lead Series A, B, and C rounds have serious capital needs that extend over the life of a company. They’re not only leading larger rounds, but may need to bridge companies they’ve otherwise made large investments into that have higher burn rates. Sometimes, you’re the only one around the table who wants to do a Series B and that requires real cash.
That’s not what seed funds are doing. They don’t have enough cash to bridge a Series C round anyway.
Seed funds specialize in doing a lot of work for not a lot of money—and I suspect that’s why they’re getting larger. We do the work of sorting through the pitch decks of everyone and their mother, finding the diamonds in the rough, helping them turn an idea into something that looks like a company—and we do it for a fraction of the management fees of our later stage counterparts.
The incentive to want a larger fund is real—more staff, better office, better salaries—but the investment strategy of holding back your capital to pay up for pricier shares really doesn’t make much sense from a returns perspective if you ask me.
I took the time to model out some returns using share price as a basis—to figure out if the price you’re paying when you buy up is worth the difference in the outcomes.
Here’s a very plain vanilla model. It doesn’t take into consideration fees, carry, options, down rounds, or recaps. It’s just a model of the share price of a company going up and to the right smoothly until it exits for $300mm, and the outcomes for the shares purchased in each round of financing.
Seed round investors get a tidy 18.2x return—which means in this model I’d return half my $15mm fund on one $300mm exit—since I front load most of my investment into the first round and write checks of $350-400k.
Later round investors who pay up get less, obviously.
Keeping fund size the same, they also wind up putting less into the first round of their winners while at the same time putting less into the losers. They hold their cash back until they have more data, and lean in as a company is outperforming.
That creates a tradeoff of paying up for more information.
How much do they hold back? This is the data of what your investment dollar distribution looks like if you’re doing the pro-rata of each of these rounds.
Obviously, if you’re only doing the seed, you’re putting 100% of the fund into the seed. If you’re holding back to do your pro-rata in a seed+ round, you’re holding back about 32 cents on the dollar and putting 68 cents in upfront. Doing your pro-rata in the Series A? That means you’re only going to get 37 cents into the cheapest round and you’re holding back the other 63 cents for later, more expensive investing. That means your winners are giving you just under a 9x return, because, on average you’re paying twice as much.
At least you’re avoiding putting more of these dollars into the losers, through, right?
Yes, but you have to be really good at that to make it a better fund overall—like, REALLY good.
I created a few fund mix scenarios and estimated what the overall fund return would be given that mix.
Here are the following outcomes:
Big Winners: Exit at $300mm No downrounds
Solids: Exit at Series B Post No downrounds
Meh: Exit at Seed+ Post No downrounds
Capital Back: Capital Return
Wipeouts: No Return
I don’t like modeling things with billion dollar outcomes because they’re rare and you shouldn’t base your investing on getting one.
Then, I estimated a seed fund’s mix of dollars necessary to get a 3.3x return without follow-ons:
It’s not unlike what you hear a lot—that about 10% of the fund or so generates most of the returns. Throw in a couple more solid returners, a few singles and doubles, and you’ve paid for the fact that half your portfolio was a complete wipeout.
Some call it lucky. I call it disciplined—because you’re buying in cheap enough to make your winners return enough to make up for the duds.
If you keep on going through the seed+, you’ve got to be a bit better allocating your dollars. Only about a third of your dollars can go into the duds and you’re up closer to 15% of your dollars going into winners to get the same fund return.
The pattern continues through the A. If you’re following on that far, you’ve got to be that much better in your dollar allocation to get the same returns:
How much better? Well, now a quarter of your portfolio has to be invested into the big winners and only 15% can be in the duds. That’s actually kind of a problem—because, at seed, a lot of funds will admit that half your seed bets aren’t going to make it—but our math earlier gave us the following:
This is the dollar distribution of your investments when you do pro-rata through the A. About 37% of your dollars will be in the seed rounds, and if half of them went bust, then you definitely invested more than 15% of your fund in those rounds. Not sure how you get around that math—unless somehow you’re able to know ahead of time they’ll be duds and you put less in them. It begs the question of why you invested in the first place.
Obviously, the math and estimates here are super variable, but the point of this is that we have walk right up to the edge of suspending reality to just get the same returns as in the no follow-on model. Imagine what the math needs to look like for this model to be demonstrably better by following on all the way through.
Keep buying up, and the pattern continues…
Follow on all the way through a Series C and you’ve got to put in a full 90% of your dollars into your big winners to get in the ballpark of the no-follow model. Again, that’s going to be super hard to do, because if you invested through the A on all your companies, you put in about 15% of your dollars into the duds…
Here’s how your dollar into a company shakes out if you’re doing pro-rata across rounds. In a one company model, it’s about 30%—but since half your seeds don’t make it to A, you cut the 14% A round follow in half. I don’t know how many seeds make it to seed+ or how many seed+’s there are, but the point is, you don’t have much margin for error if only 10% of your portfolio is allowed to be invested in the duds.
Following on is just really, really hard work if you’re going to get the same returns—and you can’t afford to follow on big into a company into the Series B, C, and beyond and not get a big outcome. That will sink a fund in a hurry.
The nice thing is that you don’t need the same returns, because you have more management fees and a bigger fund—so less carry on a larger base is still more money.
If you’re a larger LP, you don’t have much choice to put the money to work either. If you need to invest $25mm at a time, you’re still better off in venture capital than in the public market if you can access good managers. If you’re a smaller investor, however, and you can get your check size into any fund—the math points to trying to get into the fund buying in at the lowest average share price across its portfolio. It’s a lot easier to make a better multiple of return there—and if it’s all the same to you check-size-wise, then smaller seems better.
I’m sure someone else can build a much better model than I can, and throw in a lot more complexity around return expectations—but to even build a model at all probably makes me top quartile in terms of GP analytics. I’m absolutely stunned at how few managers, especially new ones, ever bother taking a shot at doing any fund cashflow models. Too many times I hear echos of what’s been talked and blogged about without any data behind the thinking. What might work for a larger fund may not hold true for a smaller one—so before you take someone else’s strategy as your own, take the time to do some math around it.
Also, we all need to play to our strengths. Some investors are better at dealing with more data—and others might be better “first pitch” hitters. What’s important is that you’ve thought through how good you need to be if the data says you need to be better than average to make your math work.
The other day, I generated a lot of buzz and feedback around my assertion that calling yourself an “angel investor” should require a little more than small syndicate investments:
You are not an angel investor if all your investments are less than $10k, made through @AngelList syndicates, and the founder doesn't even know who you are because you've never met.— Charlie O'Donnell (@ceonyc) February 21, 2019
Most people seemed to agree—some disagreed, but a few people were like “Why do you care? What does it matter as long as they’re out there writing checks?”
Some people thought it was a privileged way to enforce hierarchies and to equate money with value—and I understand where they’re coming from. The issue is that nomenclature creates a certain set of expectations that founders use to allocate the most precious of their resources—their time. They want to make sure that they can achieve fundraising goals as fast as possible and I am nothing if not a passionate defender of a founder’s time. That means deciding who to take 1:1 meetings with, who to travel for, or who to take 2nd or 3rd meetings with—and size of check has a major impact on that.
It used to be that the only people who could even get into angel rounds were high net worth individuals that could write at least $25,000 checks—so if someone said they were an angel investor, you could assume this was their minimum check size. With the advent of platforms like Angel List, now you could be investing with just $1000—which is great for the democratization of the asset class. Everyone should be able to access any investment—but it becomes confusing for founders to figure out where they should spend their time. It becomes even more confusing when they’re out going to conferences and reading articles that feature interviews with “angel investors” because they’re assuming these are folks with a certain type of experience that could be very different than reality. Crowd investing platforms allow anyone to be an investor even if they’ve never even interacted with the team—so you could have made two dozen investments and still have very little firsthand knowledge of what life is like at a startup or what early stage founders go through.
With new technology should come new terminology. I would propose that we call these types of investors “syndicate investors”—super useful folks who join with others to help rounds get raised on various crowd investing platforms. They could speak to this experience quite well if you were going that route and it would help differentiate from the kind of folks sought out for direct relationships and bigger checks. To me, an angel investor is someone who writes at least $10k checks (if not actually $25k) directly into company cap tables (as opposed to into syndicates or SPVs) and at least has some direct relationship with the founder. Other relationships can be very valuable and helpful, but I think we should call them something else.
A similar problem happens at venture firms—where no longer are you seeing clear cut terms like analyst, associate, and general partner. Now, everyone’s a partner, blurring the line around who can actually lead an investment and get a deal done. I was the first analyst at Union Square Ventures and so I get why this is done—because who wants to talk to the analyst? They don’t have pull and so founders try to go around them—defeating their purpose of screening for a partner.
Still, I think founders (and other VCs) who desire to make connections with investment professionals who have the “power of the purse” should be able to differentiate. When I was an analyst, I never took founder meetings on my own without either Fred Wilson or Brad Burnham because I didn’t feel experienced enough to vet the companies. When I wrote or spoke, I talked mostly about what I learned from the firm’s partners and what their actions were versus speaking authoritatively on my own. Today, the blurring of titles means that you have to go a few layers deeper in someone’s bio to understand what kind of experience they’re coming from and what kind of pull they might have in their firm—and I can’t see how this is better for founders trying to allocate their time and attention.
Partners, in my mind, should have carried interest (upside) in the fund and be able to lead deals and take board seats. They should be the kinds of key people that limited partners are basing their investment decisions on the fund itself on—not two to three year rotational employees. If you want to call someone else part of the “investment team”, that’s cool, let’s not try to make it seem like the person who just got their MBA has the same experience and pull as the person who started the firm. They’re an important teammate, but for founders, experience and influence is a meaningful signal on how to spend their time.
I feel the same way about someone who calls themselves a “VC”. You might work for a venture capital firm, but unless you’re an equity partner in that firm (and I would like to think a significant one) that writes checks, sits on boards, I wouldn’t consider you a “venture capitalist”. I believe the name creates a certain set of expectations and founders make assumptions about it enough that you should be a bit discerning about how you use it.
Call me old fashioned, but back in my day, I was happy working for a VC firm, but content to use my actual title of analyst so people didn’t think I was on the same level as the VCs who actually started the firm.
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:
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?
Could you have led any of these deals?
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?)
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.
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 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.
Perhaps if tech suddenly made housing, healthcare, transportation, combating opioids AND fixing climate change super cheap, AND enabled underemployed and displaced workers to survive on a living wage, AND provided childcare and education, I’m sure @aoc would give you a refund. https://t.co/40lMhxtOLu— Charlie O'Donnell (@ceonyc) February 18, 2019
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?
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.
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:
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.
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.
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.
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.
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.
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:
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:
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.
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 firstname.lastname@example.org—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.
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.
It’s that time of year again—the season of people quitting their jobs soon to start a company. I don’t know whether it’s New Years resolutions or end of year bonuses, but I feel like there’s a bit of a peak in people wrapping up previous things looking to start something new.
If you’re going that route—here are a couple of things I would suggest:
Have at least six months of personal expenses in the bank—and that’s only if you know you can at least get some angel capital based around your connections to investors, friends, family, etc. It should take you at least that long from having an idea before the idea is fully vetted in order for it to be worth investing in. Sometimes it’s shorter, but you always want to be conservative in this case.
Understand where similar companies have struggled and tackle that part first. If enterprise sales is the hard part of what you’re doing, figure out how you can de-risk that first—maybe by trying to pitch some vaporware to buyers or perhaps getting them to pay you to build it on a consulting basis. Think about what investors are going to ask to see that you’ve done when you pitch, and how early you can pull proof of being able to do that into the present.
Build a following around what you’re doing. Whatever you’re working on, it’s easier to do if you’re a leader in that space—so for the next six months, how can you visibly be a leader? Write a newsletter. Host events. Start a podcast. Build up the parade of people who will get behind you—because it will be easier to find customers, investors and hires as an insider than as someone trying to break in.
Get out of the house. Too often, “working on an idea” means alone at your computer. Talking directly to customers and the people most familiar with a problem firsthand, because they worked at or started something similar, should be your first priority.
Be deliberate in terms of what you want to get out of investors. Investors are better for pointing you in the direction of people in their network with expertise and letting you know how they think about your pitch—but not necessarily about the quality of the idea. Too often, an entrepreneur asks me what I think of something, when what I really want to know is what they think. You shouldn’t have to ask me if an idea is good—it’s your responsibility to know that it is, because you’re taking other people’s money to risk on it.
That being said, there is a lot of variability in terms of how an idea can be presented—whether it is well understood, etc. I’m working on two things that should help founders get early feedback:
First, I’m continuing my "Fix Your Pitch” series—where founders can get their idea workshopped in exchange for a charity donation. This way, founders who are far too early, or perhaps not getting the investor uptake they’re hoping for, can just skip to the front of the line while contributing to some good causes. I’m raising for Code Nation, the Brooklyn Bridge Park Boathouse, the Challenged Athletes Foundation and the Red Hook Initiative.
Second, I’m working on a new stealth project that enables founders to get feedback from investors in a fast and easy way. If you’re interested in testing out a way to understand if the investor market is keen on your idea, fill out this form to get in on the early beta:Name * Name First Name Last Name Email Address * Thank you!