Q&A: Principal at Early-Stage VC Fund

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I work @ a $500M+ VC/Venture Growth Fund and have gotten some phenomenal feedback from this forum over the past few weeks.

With all this scary COVID stuff wanted to try and be positive and pay it forward. I also saw a great recent thread here about our asset class being a shit-show and thought there might be interest in something like this :)

My background prior to venture was in product management and I've been in this job for close to 4 years. Led several Series A-C deals and sit on a few boards.

Questions on "How to Break into Venture generally or for my specific situation" are better answered over DM.

Ask away!

Comments (49)

 
  • VP in VC
Mar 24, 2020 - 12:27pm

While in PE, I noticed people take a "lawyer's" approach to building investment theses - start from the ground up and use data to build your case, and use inconsistent data to modify as needed.

However, in VC, I have noticed at my own firm and others' that there is a strong thesis bias, where diligence consists of finding ways to confirm the deal originator's thesis, either through limiting market research to current customer calls, searching for favorable market trends, etc.

I am not trying to discount the intelligence or analytical rigor of VCs, and I think that one of the key reasons this happens is because of the lack of data and lack of budget for diligence. E.g., a retention cohort analysis means a lot less for a pre-hockeystick Series B company with a customer footprint exclusively in the valle than it does for a mature, national company.

What are the specific tactics you take to building a strong investment thesis? Whether they be techniques or useful mental models, please share this with the community, because this is something that has been woefully absent from most VC discussions thus far.

In my own mind, VC is "sourcing", "picking", and "growing", and I hope you can help elucidate the second of the three.

 
Mar 24, 2020 - 2:53pm

Yeah I agree with your assesment - most people do take a "lawyer's" approach if they are thematic.

I think great thematic investors excel at assessing:

a) Market Timing: why is the adoption curve for this technology going to accelerate now versus down the line. Take AR/VR as an example - I think most of these technologies will eventually take off, but investors have lost a ton of money here because they were too early.

b) Evolution of Category Economics: how will the broader technology and space evolve in 3-10 years, all factors considered? Good example of this that comes to mind is the Bill Gurley vs. Aswath Damodaran debate on Uber's market size/valuation. The latter argued that Uber's market size was limited because the rideshare market was the size of the overall taxi cab market. Gurley argued that network effects and downward cost pressure would make this market 30-50x bigger and was proven resoundingly correct. He could assess how the economics/incentives broader space would evolve given many different factors.

Many investors who are good "pickers" in Enterprise Software, or software generally, are ex-operators or seasoned veterans who have incredible instincts for both. That said, many rely on a few components

a) Expert/KOL Feedback: If you're looking at a company like Hashicorp at the Seed/Series A - you will go ask other folks in your network at AWS, MSFT, etc. for feedback on the idea/company.
b) Longitudinal Survey Data: you either are looking at market trends from survey data ('I see adoption aerial imagery for XYZ use cases accelerating in ABC segments') or from conversations with your aformentioned KOLs. You're talking with customers, industry participants regularly and seeing how their priorities change
c) Mastery Venture Mental Models: As you alluded to, there's particular investment frameworks that apply more in venture - things like network effects, systems thinking, Carlota Perez' work on tech. adoption, etc. Those are a few, impossible to list all of them and quite varied on if you're enterprise vs consumer

It's frankly a cottage industry that relies a lot on luck and seeing the best deals. You get better at picking deals if you have access/see the evolution of the best deals. VERY few investors are truly great pickers in the mold of Peter Fenton (Benchmark Partner, knows Open Source Software and can pick consistently better than anyone else).

It's less true intellectual rigor than pattern matching. Obviously intellect has a role but I'm speaking relative to other asset classes.

 
Mar 24, 2020 - 2:28pm

I will be interning at a well known growth-stage fund this summer (General Atlantic, Bessemer, Insight, etc) and would appreciate your opinion on being a VC/growth investment analyst as a first job out of college. In the long run I see myself hopefully ending up in either VC or a F500 corporate role. My investment analyst role would consist almost entirely of sourcing, so despite my interest in tech startups and VC, I am concerned that I will not develop many useful/transferrable skills (not saying sourcing isn't useful, just feel that it might be necessary to develop other skills in relation to finance/operations as well). So, even though the role might help me get my foot in the VC door initially, I feel that it might not actually develop my abilities in a ways that are useful in corporate roles or even VC at a higher level (because startups like investors with entrepreneurial/financial/operational experiences). I am wondering whether you think consulting might be a better first job to help me gain some foundational skills that better position me to succeed in either VC or F500 in the future?

 
Mar 24, 2020 - 3:04pm

Those are all phenomenal shops that will give you wide latitude to pursue a career in growth equity, early stage venture, or operationally at a startup.

Do consulting if you want to work in more mature organizations/F500.

Re: Sourcing as a skillset - I think sourcing well is actually really hard and definitely a transferable skillset to operations, partnerships, and sales/strategy roles at many companies. You develop a scrappy get it done attitude that serves you throughout your career. Your exit opportunities from consulting will be wider, certainly, but GA/BVP/IVP on your resume early in your career can be as valuable as some brand name MBAs later in your career.

If you're too early in your career to know -simply ask yourself if you deal with ambiguity in professional situations? Do you like it when your boss gives you no directions but asks you to go find XYZ answer and execute? Then you will love venture and startups.

Do you want more structure in your day to day/direction? Then later-stage investment firms or consulting are the better answer. Hope that helps.

 
Mar 24, 2020 - 4:15pm

Top mistakes founders make?

Top financing/cap table mistakes you've seen in potential opportunities?

Most overlooked startup market segments (industries/geographies)?

"Out the garage is how you end up in charge It's how you end up in penthouses, end up in cars, it's how you Start off a curb servin', end up a boss"
 
Mar 24, 2020 - 4:32pm

Mistakes are varied but things I see:
- failure to be self-aware on shortcomings vs. strengths as company grows. It is really hard esp. if you've been ambitious/a go-getter your whole career
- obsession over strategy versus balancing intellect/insight with speed of execution
- not growing as a leader into someone who can serve the leadership team OR not finding a core area of functional leadership as the company grows
- hiring "B or B+" talent at positions because you don't know what A level talent looks like.
- raising too much at crazy valuations
- not TRULY diligencing investors (going for shiny logos or friendly folks versus doing thorough background checks on investors)

Underexplored areas: Hard to pinpoint, but if I had a single one... cloud + enterprise software in Asia is just beginning and will be a generational investment opportunity. I own a fair bit of Ali/Tencent/Baidu stock. The opportunity for cloud in Asia (China in particular) is massive and just getting started. I find it hard to believe AWS/MSFT will own the same market share there as they do elsewhere for a variety of reasons.

 
Mar 24, 2020 - 4:47pm

Thanks for taking the time to respond. Great observations and insightful info.

Appreciate it.

"Out the garage is how you end up in charge It's how you end up in penthouses, end up in cars, it's how you Start off a curb servin', end up a boss"
 
Mar 24, 2020 - 5:54pm

How did you become a principal? Is it as simple as working hard for several years, crushing it and having the title bestowed upon you by your manager?

Does being a principal require that you pony up 6 figures+ into the corporate mothership and/or its funds?

How can you grow from your current role? For instance, can you earn a bigger share of the carried interest by doing well etc? Feels like the normal rules of being laid off vs promoted change when you become a principal, no?

 
Mar 24, 2020 - 6:27pm

Essentially yes, that's what happened. Titles are pretty meaningless in venture (everyone is a "Partner" at Lightspeed, Andreesen, etc.).

Principal/VP/post-MBA roles vary in name but generally tend to mean you have check-writing capability or something close to it. You're either issuing term sheets or the #2 to a GP/set of GPS who take your opinion incredibly seriously and have you lead the majority of the diligence work.

To get promoted to that level generally you either have to prove an ability to source + diligence good deals OR be in early a growing/emerging fund.

We're not a corporate VC nor do I have to pony up six figures, but I am co-invested in the funds.

Re: Growth from current role. Unlikely I'll be laid off unless my investments crash and burn. Progress will come from building a track record to earn more carry or become a partner

 
  • Intern in IB-M&A
Mar 24, 2020 - 8:27pm

Someone is gonna ask this question, so figure it might as well be me.

What does all-in comp look like for a VC firm with a fund of your size, and how is it usually structured? For Analysts (if your firm has them), Associates, Vice Presidents, and finally Principals + beyond. Thanks a ton, a very helpful thread for an incoming IB analyst.

 
Mar 26, 2020 - 11:00am

Great thread here. I'm joining a growth firm out of school in a sourcing role. Was curious to hear your advice for ramping up the sourcing skillset. Things like quickly learning about a space, crafting an email that gets CEOs on the phone with you, understanding if it's a good business, building your network among other VCs/Investment Professionals...etc.

 
Most Helpful
Mar 26, 2020 - 12:47pm

You'll be able to pick up the cold-emailing, learning, soft-skills, etc. if you're half-intelligent. Learn QUALITY over QUANTITY and how to make your direct superior look like a rockstar.

5 great calls and leads a week >>>> 25 half an hour mediocre calls. Everyone confuses activity for skill their first year.

  • Go to someone more senior and ask him to share 10 of the last best companies he/she has looked at. Study the notes, the team composition, metrics etc and begin to pattern match.

  • Only elevate or advocate for opportunities you. are THRILLED about.

  • The best deals are very competitive by nature. Learn to present action plans with how you think you can get time and win. the CEO (founder intros, stalking at a conference, customer intros, advisor intros).

Every year I stay on this job I triage better between "good opportunities," "solid opportunities," and "great opportunities." If you're doing things right you're surfacing 5-10 solid opportunities a yea and maybe 1-2 great opportunities.

Become someone who consistently elevates/advocates for solid opportunities versus getting excited about everything. Become someone who presents next steps and makes a principal/partners job easier. Send notes on market/talk tracks to your partners to make them look good on their calls with the founders.

(Caveat: If you work at a shop where leads are assigned to analysts/managed like business development reps this might apply less so don't listen to me in that case)

Edit: Good tactic - in elevating deals you are excited about, also always highlight open questions you have. It makes you seem much more matured, measured in your analysis. And when you eventually do have true conviction and pound the table for a deal - people will listen.

 
Mar 26, 2020 - 2:30pm

Market/LPs want 3x Net Moic - that is ideal.

Venture LPs care about IRR, but that is super sensitive to timing which doesn't make too much sense in venture. Think about it - if you're a 5x fund. you have a great looking IRR anyways, and the scale of that just depends on when you exited XYZ $2B+ company in year 9 or 10 or 11 which is largely out of your control anyways.

So, when the ink is dried 15 years later most astute venture LPs will look at MOIC (and DPI along the way to protect against extension risk).

They don't actually expect higher! Counterintuitive, I know. It's because most of the asset class does so poorly. If you're 2x net MOIC you're essentially close to top quartile and getting another fund.

Why? Because venture is slugging percentage (how big were your wins) vs. batting average (how often did you get to 2-4x returns).

If you're consistently proving you have access to solid deals by having a unicorn or ~2-3 $250-$500 exits with high ownership - then you're showing you can be trusted to at the very worst return the fund and at the very best have a crazy multi-bagger. So LPs look at you as diversification/potential for a 5-8x net fund at the best and a 1.5x net moic fund at the very worst. They'll take that risk curve/profile all day - if they wanted consistent 2-3x returns they'd invest in growth equity or PE.

 
Mar 28, 2020 - 10:54am

Do you have any advice for someone interested in a similar switch from product management to VC? I've been a PM for the past three years out of business undergrad and recently joined one of the big tech companies as a PM focused on machine learning. I'd like to stay here for at least a year but am wondering if there's anything I should focus on as a PM that would position me well for a switch to VC in the future. Thanks

 
Mar 30, 2020 - 1:29pm

I guess the one thing I might add here is that 80% of folks looking to get into "venture" don't realize that the "allure" of the career path mostly only really matters if you can join a top tier firm or an emerging firm with a high chance of success (great GPs/LPs) and likelihood of making partner or principal.

Sounds like you're in a great spot as a TPM - I'd go that path for a few years and try and get into a solid firm - just don't jump ship for any shop. I know several folks who end up in venture and give up a path at FAANG to Principal PM/Group PM only to realize that it wasn't worth it.

 
Mar 30, 2020 - 2:56pm

This is awesome, thank you for doing this. I have a several questions, no need to anwser all of them. I'm going to be interning at a growth fund this summer (hopefully the program still happens) and was wondering what resources you use to stay knowledable about new tech/software/cloud developments? You're probably more technical than I am since you were a PM, but for a non tech person what do suggest I read (or podcasts) to learn about different software components/ technological defferentiators?

You talked about it above, but I was wondering what you think about the bottoms up investing strategy that benchmark uses. Bill Gurley is adomant that it is the best way for VCs to invest, do you think the reason so many firms are so thesis driven is because LPs demand it as a way to get some kind of defferentation among firms? Obviouslt Benchmark can kind of do what they want, but just curious on your thoughts about the topic...

Not sure what kind of companies your firm invests in, but what kind of effects do you think this dowturn/ economic shock will have on the growth at all costs narrative? Obviously there has already been a shift after the wework debacle/ how other cash burning vc backed IPOs were received by puiblic equity investors, but do you think now we will see more emphasis on sustainable growth, or maybe break even growth atleast at later stages?

How much do LPs contribute to whether or not deals get done right now? I know they have a legal obligation to abide by capital calls, but is it possible for them to make arrangements with funds to slow the pace during times where they likely are rebalancing their portfolios/ their equity positions are under water?

I've seen Geoff Lewis tweet that he is unwilling to cut checks with out meeting entrepeuers in person, how do you feel about this? (It makes sense to me)

Thanks again, I apprecaite you contrubting to the content on the website, its a great resource for me.

 
Mar 30, 2020 - 5:28pm

Everyone asks me how to develop "product sense" or understand technical architecture. For the former, I'd try and visit Product Hunt regularly and track the best software products in a particular category (e.g. developer tools) and how they perform/read the feedback thoroughly. You'll develop a better idea for why certain features resonate with users and others don't. For the latter - that is tough. There's not really a textbook on that.

Eh - Benchmark says its bottoms-up but everyone thinks diligently about underlying trends and where they're headed. You have to be comfortable with uncertainty (competitive entry, regulation, etc.) in big new markets which is I think their general point. They're more comfortable saying "IDK" about a market than other firms.

There was already a shift towards a focus on positive unit economics pre COVID. This downturn will be really bad - I'm not sure how many Series A-C companies will survive it. The argument against this pessimism is that there is so much captive capital to deploy in VC that the best companies with long term growth prospects (regardless of virus) will be able to raise.

Genuinely unsure of how I feel about cutting checks to a founder without meeting. I would not want to though I will be forced to if this continues for 3-6 more months.

 
Apr 1, 2020 - 12:50pm

Tons of early stage firms look for ex-PMs. FAANG experience in a good group that is relevant to a firm's area of investing (e.g. Facebook/Apple for consumer VC, MSFT/AWS for enteprise).

Ideal PM experience for junior roles is early employee (Series B or earlier) at a fast growing unicorn - you learn more that is relevant to assessing companies that way than at a big company.

FAANG experience will get your foot in the door, but it's very competitive so the rest is up to you.

 
  • Intern in IB - Ind
Apr 2, 2020 - 2:16am

Thanks for doing this. I am summering a top BB tech group this summer (GS/MS/JPM) and hope to go intoventure/growth after 2 years of banking. Do you have any tips/outlook on recruiting and which stage/tier of firms will be possible for a banker? I assume it would be easier to work for a later stage firm out of banking first then try to go down market to early stage later if I want than the other way around. Is it pretty hard to go to an early stage firm right after banking if you have no technical experience? Also any other general tips on what to be doing in the meantime to differentiate myself (reading/networking). Appreciate any guidance.

Array
 
Apr 2, 2020 - 12:23pm

You'll have a shot at most early stage firms as those are elite groups. A lot of partners who have product/operational backgrounds like to have a banker on the team to do more rigorous quantitative/modeling analysis. Depends on firm timing, needs, how you do in interviews.

You're correct - it's easier to start later stage and work your way earlier. Technical experience is valued in certain roles but so is operational/finance experience.

If I were you I'd go to a venture growth shop (Meritech, Insight are the iconical example) to start and if you enjoy working with early stage companies you can more easily recruit there then than straight out of banking.

There is a big cultural difference between traditional growth equity (TA/Summit) and venture growth shops - just make sure you're choosing the right style for your interests/career path.

 
Apr 14, 2020 - 5:50pm

You should consider going LEK/OW -> Growth Equity route if you can. It takes hustle but you can get interviews at TA/Summit and similar shops. And from there you can go to a range of growth/venture growth shops.

If I were you, I would go operational experience -> venture directly unless you can get into H/S. Maybe even just Stanford! Most early stage VCs do not care about MBAs besides signaling factor which you can get at a great startup or large tech co.

Re: Figuring Out the Company to join - Simple - if your goal is to do venture then I would target companies that have recognition with VCs. Wealthfront lists 100 companies each year and ~50% of this list are rapid-growth, unicorn trajectory companies or later-stage that will brand you're resume.

Also - ask VCs! Everyone asks me how to break into venture - no one asks me who the most exciting companies are in XYZ ecosystem (outside our portfolio) or even about a specific company to join.

 
Apr 25, 2020 - 6:06pm

Why is it so easy for VC funds to raise if exits have been poor and MOIC are unrealized? I see fund life getting long and longer at 10+1+1, and even top quartile funds are not making money. It seems the model depends on management fee a great deal. How is this sustainable?

 
Apr 26, 2020 - 3:51pm
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