Duncan Davidson is General Partner at Bullpen Capital. He is a serial entrepreneur known for many successful projects. He served as the SVP of Business Development at InterTrust and led the IPO in 1999 and the secondary in 2000. He spent four years as a managing director at VantagePoint Venture Partners where he focused on digital media and telecom investments including Widevine (acquired by Google) and Livescribe. Prior to Bullpen, he co-founded one of the first mobile social app companies, Xumii, later sold to Myriad Group. At Bullpen he focuses on SaaS and IoT investments, and is an advisor to or sits on the boards of Grin, Hologram, Ripplematch, Wheels, GoodTime, Barn2Door and Skywatch.
How did it all start? How did you decide to enter the venture investment business?
I had several startups in the 1990s and two of them went public. Another 2 of them were bought. Obviously, the 1990s were crazy time and people sort of forget how different VC was then than now. In the US, when the VC modern structure came into place in the late 60s - early 70s, they thought you would go public in 5 or 6 years, they designed the option plans for 4-year vesting - for most people by the time that could vest in you were public company and could sell the stock. And they continue that way all the way through the Dotcom Bubble. My first company I worked on for two years started in 1996, in October, with 3 people out of Intel. We put $50K - $12.5K each. We raised our first VC round in July 1997 - $10M and went public in October 1998. If you're counting: 2 years from Seed funding or initial funding to public. By February 2000 it was worth $9B and raised $2B in various ways. Just crazy! I joined my second company in the late 90s and took it public in 2000; it was really 2 years from getting early funding in around 1998 and getting public in 2000. Crazy stuff. Now everything takes 10-12 years to go public. After that Bubble period I joined a venture firm that was very large - VantagePoint Venture Partners, at the time was one of the top 5 funds in the world with $4.5B. It did CleanTech among other things and Tesla was one of its great investments. A big fund, though. But if you're running out of a multi-billion dollar fund, two things immediately should be apparent. First: you can't write a small check, you need to write $5M for a company in your portfolio, so someone could manage it. So your fund size determines your check size. And the second: to return in the normal rate of 3x to 5x you need to have $3-4B in exits, which means if you own 20% of a deal at exit, you're going to need something like $15-20B of exit. And in the odds that the total number of exits was not much more than that. It’s very difficult to make a return on a fund. I started a different fund in 2010, which is almost the opposite of a big fund. And our whole theory was to change a lot of the rules or guidelines of venture, guidelines like “you have to have a board seat, you have to have 20% ownership, you have to put follow-up money in for the whole life cycle of the company.” We didn't do that - we started a small fund; we actually started with $8M and in 2012 topped at $25M - a small fund. At the time we started there were only 20 Seed funds in the US. We thought that in 5 years it might be 100. If you know history, in 5 years it became 1000 Seed funds. And the Series A funds in the US raised a lot more money but the number of them didn’t change that much. This led to something we used to call “The Series A Crunch”: a lot of money went to start companies, a lot of companies get started, but very few got A round and the rest fell to the floor. The idea of my fund, Bullpen, was to be a Post-Seed fund, working with those 20 Seed funds and setting up bigger A rounds. And it's worked really well.
What surprised or impressed you the most when you started working in venture capital?
I knew the Old rules of the 90s, but everything changed in 2005-2010. First of all, we had innovation – we have Y Combinator and the accelerator model which are brilliant models; we had First Round Capital which is the first true Seed fund really thinking through what it means to be the first money in; and then we had some other people that came in with very good venture fund models, like Union Square Ventures in New York or Mike Maples’ Floodgate. The whole industry changed. If you go back to the ‘00s all the way to the ‘70s, the Series A was the first money in – that’s why it’s an A! But now the Seed fund is the first money in. 12 years ago you would go to Kleiner Perkins or Sequoia Capital for your first check – now nobody does. It’s a complete change of power in ecosystem. Now you go to Y Combinator or to a Seed fund for the first money in. As the power shifted, and the Series A funds became much more Growth funds. We at Bullpen want to be very near to the first money in.
What is your strategic vision for the next five years?
They started to call it a Bubble since 2014, but it’s not a bubble. But we are clearly in a historic Tech Boom. In my lifetime there were three. There was one in the early 1980s for PCs, there was obviously one for Dotcoms in the 90s. This is the third. What’s different now is that back then tech was considered cute and was ignored by the politicians. Tech produced nice toys, but it wasn’t as important as cars or energy or other sectors. Now Tech is no longer cute – Tech is the big driver of the world economy and it’s a much bigger sector. As a consequence, the venture industry and the scale and scope of what we see is much bigger than it was in the ‘80s or ‘90s. That’s probably the biggest set of changes. What happens in the future? I wish I knew! There’s a famous statement by American philosopher who was a baseball player called Yogi Berra, “It’s hard to make predictions, especially about the future.” Anything I’ve been now telling you will be proven wrong; I just want to say that up front. If you go back 20-30 years and look at movies of the future, they mostly got things wrong. We’d have flying cars now, we’d be up in the “2001 A Space Odyssey” space station, Pan Am would be flying spaceships (and it isn’t even a company any longer). I’ll tell you what I think is going to happen: this historic boom is going to continue, I would say, at least another year and a half. What happens after that is a new set of factors of production come in. Silicon Valley was named after chips, semiconductors, that was the factor of production in the 70s and 80s. It created PCs and PC software. The Dotcom era the factor of production turns out to be analog-to-digital conversion, MPEG and JPEG for movies and video, but more important – modems got very very fast, and we ended up with cable modems, DSL on the wireside/copperside, and 3G and much better speed in wireless. That was the main factor of production that made everything explode. Today it’s software. It was spurred on by open source software and Amazon Web Services, data hosting. Software was the great driver this era. And to answer the question what comes next you got to answer the question what will be the main driver of production. There’s a lot of people who have thought about this. The Davos crowd calls it the Fourth Industrial Revolution and they show you fancy pictures of the drivers of it. It usually comes down to choosing from 7 or 8 things. It seems like the best thinking about it is the digital and analogue worlds merge. There’s a company in Los Angeles called Relativity Space which is 3D-printing a launch vehicle. SpaceX, which everybody loves, has reusable launch vehicles with 20,000 parts. Relativity has 200 parts, they literally print a thing from the bottom up with different lengths and different structures. It’s an amazing step forward. If you’re going to build a launch vehicle in space, you’ll do it with Relativity. Another example. If you look how fast the messenger RNA vaccines were built after they identified the COVID – it was, like, 2 days! It took many months to get approval of course, but the tech was fast. In pharma we may start 3D-print new pharma products: once you identify it you can begin automatically creating it. You have to get the approval, of course, but it’s a revolution anyway. These are just 2 examples, and I can go down to others, if you’d like, but I think was going to happen is new factors of production spawn a whole different sort of technology boom.
What long-term consequences of COVID do you see?
In the VC industry, probably, the biggest expected impact I don’t think will happen. Everybody predicted that remote work would take over, you never go back to your office. As in the US they’re beginning to ease some restrictions, and people are going back to the office. In fact, some of the big tech companies want people back in the office. When you have high tech, like Zoom, and you have built tools to work remotely, the need for high touch, for human interaction actually increases – it doesn’t decrease. The more you isolate yourself in tech, the more you want high touch. I think that change won’t occur as people think. I do think there are a couple of changes that will occur. In VC we always thought we need to meet the team, look them in the eyes, get to know how they interact. During COVID we learned that we don’t need to do that, we could invest through Zoom. Somebody in the food chain, maybe the first investor or the second has to go that the company to see if it is a real business, is really happening. But you can actually make very good decisions remotely about how well the management team gets along, how good they are, the reality of the company. So maybe the venture capital does have remote investing even if we go back to the office. What does that portend? The US VC has always been driven by Silicon Valley: if you need to drive more than 30 km from your office, don’t do it. Most venture funds, especially Seed-stage, want to be very close to their companies. That’s why tech centers cluster around San Jose, San Francisco, or Tel Aviv. This change of allowing remote investing means the investors can move to Miami or the Cayman Islands or live somewhere else and invest remotely. And that’s, actually, of benefit to most of the Unicorn Nest companies that are not located here: it’s easier for them to have a relationship with investors and raise money.
What was the most unusual startup you ever supported?
At the time it seemed exotic, but now it doesn’t. We went very early into a company called FanDuel from Edinburgh, Scotland, and they were doing daily fantasy sports gaming on mobiles. At the time they came to us, 85 other VC funds said “No.” They talked to everybody, but they didn’t understand. And we invested in it and, of course, it completely changed the whole sports betting and the sports universe. The bigger change people probably do not really understand: in real world sports, you root for a team, while in fantasy sports, you root for a player. It changes a lot. You will watch a really bad contest because you want to see your player do well and win your bet. It’s changing the relationship of a fan to the sport. We used to see this what NBA basketball globally, where you could follow the LeBron James or Michael Jordan, now that’s spreading through all the leagues we now follow more a player than a team. At the time it was remarkable innovation.
Your favorite startup?
I guess my favorite right now is called Wheels. It’s certainly taking the most of my time. There is an explosion of all the scooters on the street corners. Wheels is an incredibly interesting innovation in the shared scooter space: it’s in a form factor of a mini bike. One of the impacts of COVID is been a total change of thinking in mobility from car to a scooter or some other device. And cities are being redesigned for more bike use, it became very popular in the US. There is a belief in this type of device will become very prevalent on the streets. Companies like Uber Eats are using these devices to deliver food, and they can get to your apartment or your office or your home much faster on this than in a car. The reason why I love the concept is a transformation it has on the architecture of a city, which is a big deal and will last for a long time in people’s lives.
What is the size of your current fund?
Our fund right now is running in the $125-150M range. We started small but that’s we found that to be the right size. We raise every 2 years. If you have $150M and you raise every 2 years, in 4 years you have around $300M fund. But fund size is the check size. With $1B fund you write $15-20M checks. With $100M fund you write $2-2.5M checks. As a consequence that fund size is exactly tuned to the market niche that we call Post-Seed. In the US, Seed rounds are normally $2M, post-Seed – $4-5-6M. We can put in $3M and have the right ownership structure, so it’s perfectly sized. We end up doing something like 25-30 deals on a fund to have enough spread of opportunity.
There are many venture funds out there today. How do you differentiate yourself for LPs, entrepreneurs?
Let me talk about LPs. They have buckets, like early-stage or growth. And they fill up their bucket with the certain number of funds and they’ve done – no matter how good you are, they are already overinvested in the category. The advantage we have is we’re in a different category and they don’t have a lot of people like us. They sometimes call us “small A,” which is OK. So they have a bucket they can fill with us. So that’s number one. Number two. The math is really difficult for big funds, because if you have $1B fund, you’ve got to return $3B, but if you have $100M, you’ve got to return $300M, which is a lot easier. Just a lot easier. So our fund size makes it a lot easier to return to limited partners 4-5-6x of fund returns, which is really strong, and that’s what we’ve been doing since our first fund. They look at us as unique, we have a portfolio of companies not duplicating anything else we’ve done, and we return more. One final thing about us which we don’t usually talk about but turned out to be really interesting, I call it “democratization of startups.” Normal venture funds have pattern recognition: two guys…from Stanford…worked in Yahoo or Google – I’ve seen it a hundred times. What about the founder from Chico State College (and there is Chico State in California)? Or a founder who is Black or Spanish or another minority? If you follow the pattern recognition you bias yourself to the recurring patterns. Bullpen wants to be metrics-driven. At Seed stage there is little if any metrics, but at Post-Seed there are metrics – the company has launched, it’s in the market. We don’t have to have an opinion about how good your product is – the market has an opinion, and we can look at your trajectory, your revenue, the customer attractiveness – the results – to get a good feel if it a good product. By being metrics-driven, we don’t care who you are, we primarily look at the metrics of the company first, then look at who the founder is, where they are from, how good the market is, etc. Most people not from Silicon Valley would prefer this style of investing because it is an investment in real-world numbers and performance, not in patterns.
How do startup teams usually find you? Do you wait for inflow or scout actively?
Well, we started off with the seed funds sending us deals, but very quickly, when there are just so many seed funds around, we started using as a sourcing much more friends of friends or founders or people that know us. Most of our incoming is a referral from people that know us. These are the best referrals – not referrals from lawyers and people like that nor referrals from venture funds themselves (which often just send the ones in their portfolio that can’t get funded by Sequoia). So we’ve been spending a lot of energy trying to support that – get a brand out there, get people to know us, tell people our differentiation. And we have a really strong deal flow.
How many startup projects do you review per year?
The question is how many do you actually touch and then how many dive into. I think, in the US you get something like 10,000 startups a year. The ones to get to Post-Seed is fewer than half the startups funded. I think we see 2500-3000, maybe, it’s 60% or something of those Post-Seed. Surely, we’d like to see more, but that’s still good. Of those we only dive into maybe 10%, it’s 250/year and then we do invest in 8-10-12 a year.
At what stage do you prefer to enter?
Post-Seed – pre-A. In the US you tend to go to accelerator programs, like Y Combinator, and then at your demo day you get Seed funded, and this round has migrated to $2M. And then after that, a very high percentage of the companies need another round before they go to an A. The reason is that the Series A funds get really big: a normal Series A is $15M. 10 years ago a normal series A was $5M, and today normal Seed funding (usually in multiple rounds) adds up to $5M. Seed is the new A. That’s why I say the Seed stage has taken away the front end of the venture system; you go to Series A when your company can support a $15-20m raise. Now Seed tends to be a process when you get several fundings and then you get to Series A and then you go through Series A-B-C. We are the last round of the Seed process, we try to be the final money in before your pass to the Series A round.
Geography of your interests? Only the USA?
Mostly the States and about half of our deals are in Silicon Valley – that’s where our deals come from. We have investments in Los Angeles and New York, and we’ve done some in places like Toronto and Montreal, in Chicago, and around the rest of North America. Outside of the US, so far, there are only 5 investments. One from Edinburgh, and they moved to New York. We’ve just done one in Singapore, and three in Latin America, in Colombia, Brazil and Mexico. Out of well over 100 investments, that isn’t a lot out of the USA.
What are the verticals or industries are you interested the most?
Again, we are stage focused. Over the life of the fund until recently it is about 50/50 Consumer or Enterprise. We have E-Commerce, we have a lot of Vertical SaaS which is SaaS plus Transactions, we’re doing more FinTech, which I call FIRE – Finance, Insurance, Real Estate. We do a lot of FIRE deals, Real Estate has become a good area for us. We do other things too. I mean what would you call my little scooter thing? I guess that is Consumer.
Can you name industries you really like, yet will never invest in?
The company I wish I had invested in is Relativity Space. We have one Space investment, but we’re too small to do the Hardware, the launch vehicle – it’s too capital intensive. We found a software company out of Toronto, called Skywatch, which is, basically, a platform to pull down the pictures and images and data and put it in a file. It’s a very interesting platform and it’s growing very fast. It’s like a software layer in the whole space system as opposed to a satellite or launch vehicle.
How do you select startups to support? What are your criteria?
Because we are metrics-driven, we have a fairly quantitative approach. Somebody asks us to do the deal. First we want to see a pitch deck. There we look at the operating plan in the document. We have developed very good metrics for it, because we know the SaaS world really well, we know marketplaces really well, we know certain types of consumer really well – we can look at these things quickly to see if the stage is right for us, if a company is growing fast enough, within about 10-15 minutes. Once we see you are in our box, we have our deal team take a good look at you at least to get another level down of understanding. If you get past this team, then you get introduced to the partners and we do the more qualitative things – what’s your market, who are you, how do you think about it. I think the most important thing we look for after the screen is the unique insight, things like FunDuel will create a different way to interact with sports or SpaceX with reusable rockets. Usually those are not very complicated, and you go, “Wow! I should have thought of that!” We look for that. If somebody comes in and cannot articulate their unique insight or their insight is just 10% better than the five other companies’, we’re not interested. We want to see why you have some really interesting perspective on the market and you’re going to win. Second thing may sound funny: we look for a chip on the shoulder. I sometimes put it this way, “Do you want to make money or you want to be right?” Most founders think that I care about the money. But I want you to be right, meaning your unique insight is something everybody doesn’t like: your mother says you to be a lawyer or a doctor, your friends think that are you’re nuts, and the most venture people you talk don’t like the idea. That develops a chip on your shoulder, and you want to prove that you’re right. We want to see that desire and drive in the founder. Unique insight with a chip on the shoulder, because people don’t believe in you.
When reviewing a pitch do you prefer boring figures or a show?
That’s a hard question to answer, because we’ve had some people who are dramatic and obviously very picturesque and they turned out to be flaky and don’t manage well. We had others that are very systematic, very straightforward, and even though they don’t seem excited, we really like them. It just depends on the context. It’s an important question because some of the big funds, like Kleiner Perkins years ago, have a vision of what a founder look like, say, like Jeff Bezos – the guy really has that aura around them, enthusiasm, fills up a room with personality, and, maybe, flies to space! That’s a pattern recognition model a lot of people like, because they know: to go all the way through public offer you have to present really well at the public investor and you got to get through the noise quickly. And if you’re boring, you don’t get through the noise. I would say though a lot of our rounders are not like that, but they do have a unique insight at that sense they’re not boring. They have the ability to see through and see a little further than other people and articulate what they see. They could be straight-forward manager type as opposed to flamboyant, exciting types.
Before starting a round, what is the way for startup founders to estimate their company realistic valuation and how much money they need to rise?
There are 2 vectors in this question. The most important one is how much do you need to last 18 months. What milestones will you hit in a year to give yourself 6 months to raise the next round? That’s a model people have and a vector that we usually look at. Sometimes people raise too little money and ran out of money, sometimes they raise too much and overspend. The second vector is what the market will give you. You go to an accelerator and there is some amount of money they’ll give you, you raise a Seed round… Right now in the USA pre-Seed round by an accelerator and some other money is around $750K, the Seed round is about $2M, the post-Seed is around $4-5M, and Series A is around $15M. These 2 vectors should give you enough information to figure out the answer to that question. The numbers I gave here are around software as a factor of production.
What are your red flags?
If we’ve made an investment, we put a strong level of effort to get them to be scalable for an A round. Getting a 15 million-dollar check requires to be confident that you are ready to spend in correctly; you cannot just take the money and figure out – you have to figure it out to that point. So we have inside of our fund some people, like finance person and marketing sales person, who are very good at helping companies scale-up and understand how to get to the next round, they are very hands-on, even if we don’t have a board seat. If you get through that stage and you raise a big A round, we tend to reduce our involvement – in a sense, we hand over the keys to the car, hand over the driver of the company to the new investor, depending who they are. If we put the money and don’t get to the A round, we have to make a very specific decision as to do we want to keep supporting the company or not, and it usually depends upon why they’re not getting to the next round. In some cases a company just had a complete failure of management, our judgment on the quality of management was flawed and they simply do not know how to execute. Another example is they don’t grow fast enough, at which point we probably tell them to sell the company, because you’re not going to get you a big A round. We want to work with the founding team and make them famous and great, we don’t want to replace or fight with them – that’s really a job of the people that come after us.
What qualities you are looking for in founding teams?
They have to have a mastery of understanding of their segment or unique insight. They have to have this chip on the shoulder. The third one is they have to have enough breadth in the team or a plan to get it. We have an interesting company called IPSY. It was competing with Birchbox which is make-up sample kits to millennia, mostly women. Birchbox was using traditional marketing at the time which was Facebook and Google and digital. But IPSY was the first to use influencer marketing and one of the most famous fashionistas of the time, Michelle Phan. And it turned out that using YouTube at the time (now they use Instagram) to drive traffic with so much more effective and cheaper, that they had a huge cost advantage. We saw that and we saw how well they are doing, but we were very concerned that Michelle Phan and the management team were incomplete and they needed somebody who could actually operate, fill the sample boxes, get them distributed, and all this. They hired a terrific operations woman and we invested. And she’s amazing and without her, the company would have probably failed. It would have failed to execute and their marketing opportunities would have been wasted. We look for that: at least a complete enough team and then we might have to hire a few other positions afterward.
Who you would prefer to work with, Steve Jobs or Steve Wozniak?
I have met them both. Certainly Jobs. The key to the great Silicon Valley company is product vision, the person who manages the market and product. The actual engineering talent to build it is important – Wozniak, and without Wozniak Apple wouldn’t be Apple. But they needed the vision and the way they conquer the market, understand the market, and that’s Steve Jobs. That person is the most important person in the early company.
Investors prefer to work with teams. Have you ever supported a one-person startup?
I know the literature and the understanding that supposed to be in Y Combinator is at least 2 founders. There was a venture person who looked at this systemically for over 15 years and found out that that’s not quite true – it is a lot of single founder companies that do really well. What’s behind the single founder though is the breadth of the team, so the reason why 2 or 3 founders are generally better is that they provide that breadth. But if a single founder can hire in that breadth it’s equivalent.
What is your process of working with startups, once you invested in a company?
We will be on the board or as an observer and we will set up pacing with the CEO depending upon our needs – that’s weekly or every two weeks. We will introduce them to our operation team, which, as I said before, is a finance person and a marketing person. The marketing person is really a CEO coach. We learned this, by the way, from Randy Komisar, one of the Kleiner Perkins partners in the 90s – he is really really good. He’s written books on the topic. His viewpoint is that CEOs need to be coached. It’s lonely – being a CEO: you often have to be very tough on your co-founders, because you have to make the final decision. And they need somebody to talk to. So we have a CEO coach to help them think through the problem, the person they can talk to, often, an investor, like me, who puts some money in, plays that role. We also have a person who can play that role particularly In helping them scale up – salesforce, marketing, and other people in the company. We’re there involved fairly frequently. And then there are 2 major breakpoints. Breakpoint number one: Something bad happens. Breakpoint number two: Next round. Let’s take number two. We have a woman named Ann Lai, who’s our newest partner, who’s an amazing pitch deck person. She really understands how to produce a deck for that big A round. She gets involved early on to help them think through how to do a fundraise, who to talk to, how to design a story and the narrative. On the other hand, if something bad happens, we roll our sleeves up and get in there to help out the CEO. I have a company, which is now doing really well, that’s a couple of years ago lost 2 out of their 3 biggest customers and had a real downturn. And we had to help them figure out how to right-size the company down, tell the people who are still there they survived, and rebuild the company. I’ve done that several times in my career so I went out to Chicago, I help them think it through, I talked to the company, and they came out stronger. But for a period of time, it was right on edge about whether this company is going to make it or not.
What are the most common mistakes startups make?
One of them is they don’t hire the next set of managers fast enough. For example, marketing is usually a late hire rather than early hire, because they think, sales drive sales, not marketing. Actually, marketing drives brand and leads. And they take too long to hire marketing, and they soon have a problem with sales. That’s one we coach them on. I always tell them to start hiring marketing person or finance person 6 months prior they think they need them. If you’re scaling a company from 30-40 people to 150-200, you suddenly go from a tribe to a village and you need to put in place processes and hierarchy. How you do that is very important, and most people don’t think that’s an issue, but they have to think through the organizational design their reporting structure and how to on-board people way ahead of it happening or they will have real problems. So hire the HR person earlier than you think you have to.
Another one. When you get into a trouble (like COVID), quite often you can to come out of it smarter. So we tell people the following, “Your being in trouble now when your company has enough cash to keep going gives you a free chance to redesign your product the way you wish you had done it when you started the company. You’ve learnt a lot what is the product you wish you had first built as opposed to what you have.” And, by the way, if I can get that concept through to somebody, it’s freeing them, because they get a free reset of time to rebuild what they should have done in the first place. Often when you’re raising and growing you have no time to do that. So the second mistake they make is that they don’t take the the negativity, the pause, the downsizing as a chance to reimagine what the company should be.
The third problem I see over and over again is something I call “the CEO incompleteness.” It’s not just hiring a next round, but there’s a certain way you have to manage a company in these environments, and often the CEO is incapable of doing it. I’ll put it this way. You run into the Heroic CEO, who wants to be the hero all the time. And an Heroic CEO often floats around the company, dives down to 5 feet, yells of somebody, then goes away. It disables a lot of the normal responsibility and accountability people feel. The Heroic CEO can get the startup to certain level but has to turn over authority and control to the people that they hired or they get into trouble. We see that they want to be the hero too much, and as they go from being the individual contributor to the manager , they don’t feel that change – they still want to be the hero.
What is your target multiplication on exit?
Basically, we do the same 10x everybody else does. People need to understand that 10x on your first dollar in is not 10x on all your money you put in. We put money in the Post-Seed round. Then we put some more money in the A round, then we’ll probably put some more in the B round. You’ve got a look at the ultimate outcome across 2 or 3 investments and not just the initial one, see if you can get 10x there. The theory of the case is ⅓ of your deals do really well – more than 5x. About ⅓ will be mediocre and about ⅓ will go away. So those over 5x winners really have to generate more like 10x returns to return the fund 3x. Today lots of people talk about “becoming a unicorn,” everybody loves that. It’s literally the same thing – can you get to that scale of value. If you can’t get there, we shouldn’t invest in you; if you can get there, we try to get you there. It comes out about the same because a Post-Seed round tends to be around the teens pre-money and maybe high-teens or low-twenties post-money. The A round tends to be $50-60M value, the B round over $100M. If you’re doing the math, you really have to get up to $500-600M value – half a unicorn – to get that 10x on the total package return.
What percentage of ownership of a company is fair to take for investment?
I told you about the two vectors – how much you need to go for 18 months and how much the market will give you at your stage to figure out the market. The thing that we’ve all figured out in the Seed stage (pre-Seed, Seed, and post-Seed) is that each round is about 20% dilution. A rounds tend to go 25%, sometimes 30% dilution – just because they can. After that it goes down to no more than 20%, dropping to 20-15-10%. If you do the math, most companies end up at around 65-70% of ownership are investors and 30-35% are former and existing employees and founders. Some companies are more capital intensive so that is 80-85% for investors, some are less intensive and you can sometimes hold on to a big chunk of your company. But that’s the general trajectory.
Have you ever rejected a startup and then regret it?
There have been several cases. We remember them, we probably remember them as much as remember the ones that worked out. My favorite is Chime. It is now worth $45B. The Seed fund behind it, Homebrew Capital, is a really good Seed fund, one of the better ones. One of the founders, Hunter Walk, is a famous blogger – everyone loves it and everyone reads it. So they came to us for a Post-Seed round and Hunter Walk overvalued it and I said “No.” They came back to us for a second Post-Seed round – they were pivoting the business model and they needed more capital. They were classic Post-Seed range, around $15M pre-money value. We’re just bought a new partner who was a FinTech partner. I really liked the CEO, I really wanted to do the deal. My new partner though was reluctant to do the deal and we didn’t do it. I don’t mean to blame him – he had a very good reason and he’s a very good investor. That’s one I wish we had to be done. It’s easy to look at in retrospect, but even at the time I really liked it. I have a Chime debit card! The CEO and I were buddies at the time; we do not talk much anymore but we did at the time and he gave me the card and special dispensation to have it too. I use it all the time – I love the card. It’s like a personal loved company as opposed to investment: I like the guy, I like that they’re doing great.
Can you name the three most breakthrough startups in history?
In Silicon Valley it’s obviously number one would be Hewlett Packard. They are the model for all the Silicon Valley. Number two would be Apple. I worked at Apple for a while, I found the Apple story amazing. Most Silicon Valley startups only have one act – they don’t have a second act. Steve Jobs defined the first style of computing (DOS) early on, he designed the second style of computing (Windows), and then he designed the iPhone – he‘s had three acts, it’s an amazing achievement. I would like to say “My third one is Tesla,” but the story is not yet written. My previous fund, VantagePoint Venture Partners, did Tesla, I know very well one of the Tesla board members. Elon Musk is very Steve Jobs, he is a defining entrepreneur, total vision and craziness. We don’t know yet if it will become one of the defining companies of this area, but I think it might be if the car industry really does switch from internal combustion engine to electric. And he gets credit for this. Although in time his most important achievement might be the first person on Mars.
Who are the 3 entrepreneurs who most inspire you?
Obviously, Elon does and Steve Jobs. I have never met Elon although was involved with the early part of his story. I have met Steve – a very intense individual. I’ve got to tell you that the third one that’s inspiring me, one problem is nobody really knows about it. I really love the story of Relativity Space. I think if they pull off what they are trying to pull off, it’ll be more transformational than anything else in the launch vehicle industry and it’ll get us into space cheaper and faster than even SpaceX. I met the founders (they are not known by name) and you’d probably view them as less flamboyant than Elon Musk or Steve Jobs. I mentioned earlier great product people – they are. These people are quieter and more engineering-oriented (straightforward), but the depth of their vision is amazing, they just don’t talk about it. Where we’re going to go with this is absolutely amazing.
Venture capital is a long-term game. What keeps you going on?
I was involved with 4 startups and I found the roller coaster was quite extraordinary: the highs were really high, the lows were really low. The lows are like you run out of money and you got to go on your credit cards and you can pay people you hired as your friends and you can’t let them down. But then the highs are when you pull off a big win like an IPO or something wonderful happens. In venture capital, the highs are not that high and the lows are not as low, so you don’t have the emotional fear and rush. When a company does well (forget the exits, just when a company is doing well), the CEO has the low lows and the high highs, and I get some moderate pleasure. We have right now 3 companies that are growing very fast and they pulled themselves together and hit big. It’s emotionally different. However, it’s intellectually much more expansive. New stuff comes in all the time. You meet new people and some have a very interesting and great vision, whereas in a startup your range narrows over time because you doing what you doing and you don’t see the rest of the picture. Venture is different, it is much less demanding emotionally but much more interesting intellectually.
What qualities, you think, are important for a good VC?
We need a nose for a good deal. I am blessed with a partner, Paul Martino, the person who saw FanDuel. He just has this ability to pick a founder with unique insight and see and share the vision. He is a unicorn hunter – a great unicorn hunter. The best VCs start with that. They don’t just do what everybody else does; they themselves had a unique insight to this type of a deal and they can pull it off. Some VCs have one really good fund, but the rest are mediocre. If you can consistently find great deals – that’s amazing. The second thing in a good VC is the ability to manage and groom a deal. VCs don’t add as much value as we all think we add, but there’s a certain period of time where we can have a great impact on the course of a company by advising the CEO properly. The knack is to see around the corner, anticipate a problem, and get the CEO to see it as well beforehand. This usually comes from a lot of experience. I think the third really good feature of a VC, and one of my other partners has it, is the ability to network. A good VC is a consummate networker – meets other VCs for downstream funding, meets funds before you, knows a lot of people, gets on the phone all the time and gets a lot of that type of motion going. You put the three together – you’ve got this unique insight and ability to pick the right founder, you got the ability to help them at the key moments, and you can network like crazy – you’ll be a great VC. Most VCs don’t have that, they have maybe 1 or 2 out of the 3 qualities. What we doing as a fund is we try to bring a pool of people together to have it collectively. We don’t expect every VC, every person in our fund to be that good, but we expect us all work as a team and augment each other’s strengths and weaknesses. We do a pretty good job with that.
What are the most important things you have learned from founders? And fellow investors?
Let’s start with Steve Jobs (not that he was one of my companies but I did work for his company). Most people misunderstand what Steve’s real ability was – it was to simplify. It is a famous story that when he went over Apple the second time he simplified the product line brilliantly. This ability to simplify as opposed to complexify is what really made him special. Another thing. They foresaw the iPhone in 1985 – you can see videos of early Apple, and the Knowledge Navigator looks pretty much like an iPad. But he knew he couldn’t launch it until everything came together. So his view of simplicity and his view of a product was, basically, to get the timing right. He couldn’t do an iPhone until he had the music thing tied up with the iPod, he had a touchscreen, he could put a computer operating system into a phone. When all these came together he launched the iPhone. Everybody else was competing with it. Nokia had a smartphone that was a phone with some computer on it. Steve figured out that the future was a computer in your pocket. That insight was amazing. What I tell founders all the time that they need to really appreciate from Steve is timing. You can’t really launch your great idea till all the pieces of it come together. Understanding how technology is creating something that is a really really good knack. I learned that watching him and some other founders. The second thing I’ve learned and I’ve tried to do myself: is to have the ability to create your story and sell it. Again, like Steve Jobs, you’ve got a simplify your argument, so that it’s very compelling and different. My partner Ann Lai is really good at doing decks and is really really good at doing the story and the narrative. You don’t do a deck like everybody else “That’s the problem, that’s a solution, have big the market” – it’s boring! What you have to do is show why your company’s different. That’s her insight. Getting that into the story is an amazingly hard thing to do. People often say “It’s harder to write a paragraph than an essay and a sentence than a paragraph,” because getting it down to that level of compelling simplicity is really hard. I’ve learnt that over the years from some people I work with – brilliant people. Some of them are not big names, but I respect them. I respect Ann for this ability to do this – it’s amazing to see it.
Where do you get your daily information from?
It really comes from probably obvious sources. I do have RSS feeds from a lot of websites – I use RSS reader, which is an old-fashioned thing to do. The second source which I think is kind of interesting is just curiosity diving in – something like web-surf. In other words, I get an idea from a company that sounds interesting and I start figuring it out and diving in and learn everything I can about it. So, the first case is like a flow of information comes in and the second case I’m actually doing raw research and thinking. And the third case is getting on the phone or getting on email or even texting and talking to people. For example, a company comes through and it sounds interesting, but I don’t know about this company, so I start talking to people to find out from somebody who really understands the area what’s good or bad about that I’m seeing. Let me put it this way. When a company comes into, the first question we ask is why am I so lucky to see this? Why hasn’t somebody else funded you? If it comes from a referral, I can understand why I’m seeing it, otherwise – why me? I try to find the answer does it have a unique insight or not.
What books can you suggest to startup founders?
I think there’s a couple of people out there who put together the reading lists for founders. The most important thing the founders should be reading are stories, case studies. It’s better to read a book which let you understand what the story really was in a company and generalize from it, from the challenges people went through, than read a book that says “These are the 8 things in business you have to know.” That’s boring. There is an interesting book (I wouldn’t say that that’s really good for a founder but I found it fascinating to read) called Chaos Monkey by Antonio García Martínez, and this guy wrote it about early experience in Twitter and Facebook; and then he was brought in Apple and he was cancel-cultured out of Apple very dramatically. But the book is a fascinating read because it’s from his heart, it’s funny, and he’s a good writer. And you can see how he wanted to work with Facebook, he went to a startup, how Twitter bought that start-up, and he’s been working with Facebook anyway. If you read books like that, you’ll get an honest story about Silicon Valley experience, much better feel for what it’s like here, the little challenges you hit along the way and how you dealt with it and what you can learn from it. Read these rather than the systematic business books. The only exception I make for that is one of the most interesting books called Crossing the Chasm by Geoffrey A. Moore. It’s an old book. The Chasm Group behind it wrote a bunch of follow-on books like Inside the Tornado. But they do a model of how you go from an early technology to real product. That’s the one business book I think it’s worth reading even though it’s old. If you read that book, you will understand a cycle and learn a type of language and a view of startups that a lot of people in the community understand and use all the time in their daily mental models.
What was your dream job when a child?
Actually, none of the above. I wanted to invent things. So I guess, doing a startup is kind of doing it. Steve Jobs (I’m using him too much) made a brilliant speech at Stanford graduation. He said, “You can’t connect the dots looking forward; you can only connect them looking backward. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.” I’ll put it this way: often in your life you have to make a decision which has a HUGE change in your future trajectory, but you don’t know at the time the deep importance of that decision. It’s only looking back you realize you chose this path instead of that path. If you could recognise these moments, life would be easy. I ended up learning that it’s not so much you follow your passion – its you be passionate in what you’re following. Whatever choice you make, put everything into it till you make the next choice and you’ll achieve more that way then if you just follow your passion. I don’t recommend people to follow their child dreams – be passionate about what you’re doing and see where it goes.
Is VC business chess, checkers, backgammon, go, card games?
I’ve used to be a chess player. I love the game. I think, VC is not chess. There are lessons you can learn from all these games. The lesson from chess is: it’s better to have a plan and follow it than to opportunistically go back and forth. That’s probably true. I think, it’s a little more like poker. The reason is that a lot of poker is really about understanding the metrics, the cards. Best hold-em players have deep statistical knowledge to calculate their best odds with any combination they have in their hand. That’s the metrics part. The second part is that you’re trying to read people, you’re trying to look at them in a more systematic way, not just are they nervous or not, but rather do they have the hand they say they have. And then the third thing is you have to bluff sometimes. For a startup, you have to understand the metrics side, you’ve got to really understand what your competition is doing and what they will do once you’re in the market, how they react, you’ve got to understand this deeper, meta level of behavior. And then you’ve really got to sometimes bluff. If you have a narrative and you want to become a category king of a whole new category, you have to articulate that and sell it to people, and you may be selling it way ahead of actually being the category leader, but you want people to think you are. Bluffing is probably the wrong word; it’s more like you’ve got to believe in your vision and sell your vision and use your reality distortion zone of your own personality that changes other people into accepting your vision.
Your three pieces of advice to founders
Number one. If you decide to go down this path, go all in. Don’t think about this like “I’ll do it for a couple of years and then go to business school or something.” You commit to it or you don’t commit to it. Because it’s a hard path. There’s a lot of reward for it, and also a lot of failures. The second thing is: The best founders had failed. This may be a hard one to understand outside the US, but in Silicon Valley, failure is a feature, not a bug. Failure is good. The question is what did you learn. Most of the great founders failed the first time, but they’ve learned from it. They didn’t blame other people, they learned about what they did wrong, and the second time they are much better founders. The third thing is the most important. If you have this unique insight, hire the right team. The people around you are going to make you stronger. You should hire slow and fire fast. It takes a lot of time to get the right team around you, and if that’s not working out, fire them quickly and bring somebody else in. You can’t be the hero – you have to have a team that collectively has the breadth to pull it off and win.
What are the biggest shifts that you see in technology which will define our nearest future?
The platform, the factor of production, that was silicone and then went to software is about to shift again. And this shift will open everything up again. If you’re not in Silicon Valley, it’s quite possible that some of the future factors of production – whether it’s Genomics or 3D printing or some type of AI or Electric Vehicles – these things may emerge in other centers around the world, not in Silicon Valley. I think that’s going to be the biggest change. When this current boom plays out, there will be a new boom that will take a lot of forms and it will have a center of gravity in several places depending upon the factor of technology that we’re talking about. Go there! Every place has a chance to become the center of the next factors of production. Go to the center where a lot of people like you, where they are all working on similar things, where’s a lot of depth in the particular category. Go there and make your fortune there.
