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January 27, 2014

A lot of things are evolving in the startup and VC world. Many of them for the better, as there has been a great surge in great talent going after big ideas and greater access to capital at the early stages.  It’s an exciting time to be an entrepreneur and investor in this ecosystem.

But I find myself lamenting some things that seem to be changing. Or at least, things that used to be very rare, that are becoming less so.  I’m pretty new to VC in the grand scheme of things, but I do think that are some old school idea that are being lost or forgotten that I tend to agree with.  Here are three old-school ideas in particular I’ve been thinking about.

1. Knowing your investors. 

This seems like common sense.  In the early stages, entrepreneurs have historically known who all their investors are.  Entrepreneurs will certainly know the VC’s that led their round, and they certainly know the friends and family that invested in their companies.  Often early rounds included angel investors, and these usually fell into two categories.  The first were people who know the founder really well, and believe in them.  They wrote a check because they believed in the talents of the founder and wanted to support him or her.  The second were people who know the space or opportunity, and either sought out the company because they saw the promise, or were sought out by the entrepreneur for the value they would bring by validating the business or helping the entrepreneur navigate the future.  Almost all the founders we back have seed and series A syndicates that look like this. These syndicates have a manageable number of people on the cap table, and each person there is known and is there for a reason.

But this is slowly changing. Angelist syndicates and some other developments mean that there will increasingly be participants in seed rounds that are unfamiliar to the founder, or in some cases, completely unknown. I suppose it’s good because that means that there is more capital in the market, but it just doesn’t seem great to me. I think the best entrepreneurs tend to raise money in the way described above, so I wonder if these other capital sources are really funnelling their money into the best opportunities.  And as a founder, I wonder if you really want to have someone as a shareholder in your company and life’s work that you don’t know, trust, and think could be valuable. Maybe it’s an old school idea, but I think it’s good to know who your investors are.

2. Investors that Lead, not Follow

The best investors tend to be very independent in the way they make decisions.  They don’t particular care “who else is in” and they are a bit contrarian.  As a VC, leading also means working with an entrepreneur to invest a meaningful portion of a round, negotiating terms, taking a board seat, and other activities that show that you have built substantial conviction around an opportunity.

Similarly, the best angels lead in their investing activity in a different sort of way. As described above, the best angels are either ones who know the founders exceptionally well, or know the space exceptionally well (or both).  They will commit, and often commit early.  They don’t typically say “come back to me when you have a lead and the terms are set”.  They are more likely to say “I’m in for X amount assuming a reasonable deal is in place.”

But this behavior is changing, and I notice it most in seed rounds with smaller funds, especially groups that are more like angels that are institutionalizing.  Once they are managing other people’s money, or once they are writing bigger checks, there seems to be more at stake.  Also, because seed rounds are creeping up larger, you see rounds that are made up of a number of different groups, which makes it easier for an investor to hang back and try to squeeze in when a round has “heat”.  More often, I’m hearing about funds that say “we don’t lead, come back when you have a lead.” Or “who else is interested?”  Or you see the same investors banding together in the same deals over and over, rather than seeking independent, contrarian thought. As a result, you see many “seed funds”, but shockingly few that actually lead.  I thought it was interesting to see a tweet from Shai Goldman a few weeks ago:

“@shaig: who is actively leading seed rounds in NYC? @ffvc @MetamorphicVC @firstround @trueventures @homebrew @NextViewVC @ResoluteVC are, others?

There are certainly a few more he is missing, but even an all-inclusive list is tiny when you think of the morass of seed investors and “super angels” in the city. I think most of the best investors act like leads, even when the market might allow them to hang back and chase heat once syndicates form.

3. One Company at a Time

Sometimes called “portfolio entrepreneurship”, I notice a bit of a trend towards more founders that have their hands in a number of different projects simultaneously. This can look like a lot of things, like founders that launch multiple companies at once, different forms of incubators, founders launching side-project companies while running another one, etc.

I can see why this is attractive, and I can also see how a bit of a creative outlet can be helpful for an entrepreneur’s core endeavor. But I wonder if it’s really net-positive for the vast majority of founders. My old colleague Bijan at Spark wrote a post on this 5 years ago that still rings true. I won’t rehash it, but here’s the money paragraph:

“Ultimately in early stage investing we are backing people. I think founders that don’t want to commit 100% aren’t helping these companies reach their fullest potential. The companies don’t get enough time/focus, employees get mixed signals, end users suffer (and you know how important they are). Plus, every early stage company goes through its ups and downs. If not every day then every week it seems. If the founder isn’t 100% committed then it’s hard to deal with those ups & downs properly.”

There are some entrepreneurs that seem to have been able to do this reasonably well. Jack Dorsey working with both Square and Twitter, Elon Musk working on both Tesla and SpaceX.  John Borthwick has done a nice job with Betaworks, launching multiple companies simultaneously.  But there aren’t that many examples where this has worked out well.

Maybe these are old school ideas, but I tend to think that building great companies takes incredible focus and dedication, and the odds typically are not in your favor.  So I think going old school isn’t such a bad idea for most people most of the time.

  • http://tiffanydstone.com/ Tiffany Stone

    Thought this was a great post, Rob! I guess I’m old school thinking too because I believe there is significant value in the relationships formed between entrepreneurs and investors. I believe the investment should represent the establishment of a long-term relationship, in which the investor commits to mentoring and sees the entrepreneur’s success or failure as his/her success or failure. I think easy capital has led to the idea that money is needed to execute and if you can get the capital needed, you will be able to better execute. While not completely false, it is a dangerous idea when you prioritize it over relationships that could save you when you are struggling or help you continue to develop and grow in the long term.

  • robchogo

    Thanks Tiffany

  • aliciadirago

    This is a great piece. I have to say I laughed to myself a little at your third point just because the idea of working on anything else besides my company seems outrageous to me. The examples you cited are pretty exceptional. If another founder told me they had a side project or second company I’d think there was something wrong with one/both of the businesses.

  • Sudarshan Narayan

    Very well written. I really liked the way in which you opined without running anybody down or sounding dismissive. I personally like the old school approach. Of course the new formats / trains of thought are evolving and we may be able to see some comparisons after some time.

    • robchogo

      thanks!

  • http://www.semilshah.com/ Semil Shah

    Great articulation. #3 is particularly alarming in this day of side projects, lab experiments, etc.

    • Maria Therasus

      of course…

  • rh

    Grounded version of a a serious committed VC Who values the commitment, passion, trust and integrity in the process and long term partnership. Fast changing world today is missing this relationship aspect to everyone’s detriment.

    Well written and thank you for writing a pertinent post.

  • Michel Birnbaum

    Spot on but also applies to Series A. Venture Capital is about: understanding market segments, trends, competitive landscape & dynamics and the current gaps as well as the ones taking shape. When you find a team that can execute and potentially fill these gaps you bank on that team which means putting your resources, as an investor, at play to help them succeed. It is not, in my humble opinion, about spraying a few companies in a segment hoping one pops!

  • http://www.dougjq.com/ Douglas Quattrochi

    RE: One company at a time… I’m a first-time entrepreneur. I worked on four pre-funding projects part time over the last 15 months with four different first-time teams. Crazy, right? Well, it was never going to be a one-man show, so if I lifted my end of each project a little bit, I could wait to see who else lifted with me. Two of the projects got dropped. One has been lifted up pretty high. That’s not the one I would have guessed at the outset, so I’m glad I divided my attention in this formative stage. It’s getting to the point where, yeah, I’d better focus on that one exclusively. It’s pretty obvious that once things start to take off, you can’t reach maximum altitude dragging a glider behind you. But who wants to cut loose their glider, huh? I can see why it’s an issue.

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