20 VC 095 How VCs Find Startups and How To Add Value Once Invested with David Teten @ ff Venture Capital



In an insightful conversation on "20 minutes VC," host Harry Stebings interviews David Teten, partner at FF Venture Capital and a pioneer in venture capital research. Teten shares his journey from a tech-savvy youth to a VC thought leader, emphasizing the importance of being generalists in seed-stage investing and steering clear of life sciences due to a lack of expertise. FF Venture Capital's strategy focuses on supporting portfolio companies to reduce failure rates, attracting a high volume of inbound investment opportunities. Teten highlights the significance of capital raising, outsourced CFO services, and recruiting support as key value-adds for startups. He also discusses the potential of algorithmic sourcing in VC and the challenges faced by traditional VCs in the face of platforms like AngelList. Finally, Teten touches on the fintech landscape, underscoring security, efficiency in manual processes, and data as areas ripe for disruption, alongside his belief in the long-term liquidity premium of illiquid asset classes for informed investors.

Summary Notes

Introduction to David Teten and FF Venture Capital

  • David Teten is a partner at FF Venture Capital and a prominent figure in the venture capital industry.
  • He founded and chairs the Harvard Business School Alumni Angels of Greater New York, the largest angel group in New York.
  • David is leading a study aimed at disrupting the testing industry and has conducted influential research on venture capital practices.
  • His work has been published in top-tier journals and publications, including the Harvard Business Review.
  • David Teten's blog is highly regarded for its extensive and actionable content.

"David is a partner at FF Venture Capital and is also founder and chairman of Harvard Business School alumni Angels of Greater New York, the largest angel group in New York."

This quote introduces David Teten's affiliations and his role in the venture capital community, highlighting his leadership in the largest angel group in New York.

David Teten's Background and Entry into Venture Capital

  • David grew up in Marin County, California, where he engaged with computers from a young age.
  • He earned money through computer consulting and developed an early interest in technology.
  • After being fired from a financial services firm for exposing IT security vulnerabilities, he ran a computer consultancy in college.
  • David's career path included strategy consulting, investment banking, and being CEO of startups before joining FF Venture Capital.

"I got fired when I was about 16 because I was working at a very prominent financial services firm and I wrote a memo to it saying, I've uncovered some very weak security in your it system."

This quote explains a pivotal moment in David's early career that showcases his proactive nature and expertise in IT security, which eventually led him to venture capital.

FF Venture Capital's Investment Philosophy

  • FF Venture Capital is a seed-focused venture capital firm that operates as a generalist, keeping an open approach to a wide array of companies.
  • The firm does not invest in life sciences due to a lack of domain expertise but has a diverse portfolio including drones, software, and food companies.
  • FF Venture Capital does not limit itself to specific sectors, aiming to invest in high-growth potential companies without preconceived notions of future growth areas.
  • The firm has a significant presence in the New York Tri-state area but also invests across the U.S. and internationally.

"We should keep our doors open wide to the broadest possible array of companies."

This quote encapsulates FF Venture Capital's generalist investment strategy, emphasizing openness to a diverse range of investment opportunities.

Deal Sourcing and Portfolio Support at FF Venture Capital

  • David Teten wrote the first research study on deal sourcing for venture capital and private equity funds.
  • FF Venture Capital does not follow an outbound approach like some other firms but instead focuses on supporting portfolio companies to lower their failure rate.
  • The firm's approach has led to a low write-off rate, which in turn attracts a large number of inbound investment opportunities.
  • FF Venture Capital filters through these inbound opportunities to select a dozen or so new companies to invest in each year.

"We have a one out of six writeoff rate which is well below industry norms and that attracts to us over 2000 inbound companies per year, and we filter through them for the approximately one dozen new companies per year in which we invest."

This quote highlights FF Venture Capital's successful strategy of focusing on portfolio support to lower failure rates, which has resulted in a high volume of inbound investment opportunities and a selective investment process.

Algorithmic Sourcing in Venture Capital

  • Algorithmic sourcing in VC is not yet proven but has potential.
  • There is a scarcity of data on private companies compared to public ones.
  • Fundamental analysis remains crucial despite the growth of algorithmic tools.
  • Algorithmic sourcing will be an important, yet not exclusive, tool for VCs.

"I think that that is not a proven thesis as a way of investing, but it is one with a significant chance of success."

This quote suggests skepticism about the current effectiveness of algorithmic sourcing but acknowledges its potential for future success in venture capital.

"There's a lot by historic standards, but low relative to, say, public companies and even the public company universe."

This quote highlights the relative lack of data on private companies, implying that while there's more data than before, it's still insufficient compared to the data available on public companies.

VC Firm Efficiency and Deal Origination

  • FFVC operates without a dedicated origination team.
  • Efficiency is achieved by investing time in the office or with portfolio companies.
  • Building a portfolio acceleration infrastructure and market awareness is key to the model's success.

"In our model, we have no one at FFVC, despite our large headcount, whose job is origination."

This quote explains FFVC's unique approach to deal sourcing, which does not involve a team specifically for origination, implying a more efficient use of resources.

Brand Building in Venture Capital

  • Brand building without substance is not effective.
  • Differentiation is crucial for a VC's survival and success.
  • VCs without a unique edge may struggle in future fundraising cycles.

"Brand building is a bit of a farce unless you have something underneath it to sell."

This quote emphasizes that brand building is meaningless without genuine capabilities or offerings, suggesting that substance is more important than image.

VC Value Addition to Portfolio Companies

  • The top ways VCs add value: capital raising, finance and acceleration services, and recruiting support.
  • Relationships with other VCs are essential for follow-on funding.
  • Outsourced CFO services provide comfort and order, facilitating further investments.

"So we have worked with over 200 other vcs who have written follow on checks in our companies, and our relationships with them are critical to our company's continued growth."

This quote stresses the importance of a VC's network and its role in securing additional funding for portfolio companies.

Evaluating a VC's Value Addition

  • Entrepreneurs should reference check and assess a VC's resources relative to their portfolio.
  • The number of active portfolio companies and team size are indicators of potential support.
  • Operational support technology is also a crucial factor.

"I would look at other funds and say, how many folks do you have in your team? How many portfolio companies do you have? How many checks do you write per year?"

This quote provides a practical framework for entrepreneurs to evaluate the potential value add from a VC, focusing on the VC's capacity to provide support.

  • There is a trend towards VCs increasing their operational headcount to provide additional services.
  • The shift includes larger marketing and finance teams to support portfolio companies.

No verbatim quote provided for this section in the transcript.

(Note: The last theme "Trends in Venture Capital Operations" is incomplete due to the transcript provided being cut off. Therefore, no direct quote could be included for this section.)

Talent Attraction in VC Firms

  • Only a few VC firms actively attract top talent from startups due to high costs.
  • Firms like Google Ventures, Andreessen Horowitz, and First Round Capital are examples.
  • This strategy requires foregoing current management fees for future capital gains.
  • Competitive pressures are driving more VCs to adopt this model.
  • The model may shrink if the market downturns and firms aren't fully committed.

"So that is certainly a trend in the VC world, but it's actually a relatively short list of VCs who do this. The reason is it's really, really expensive."

This quote explains that although attracting top talent from startups is a trend, it is not widespread among VC firms because of the significant costs involved.

Balancing LP Desires and Long-Term Returns

  • LPs are educated about the illiquidity and high returns of angel investing.
  • Returns range from 18% to 54%, but most investments fail, and it takes years to see cash returns.
  • Illiquidity is accepted by LPs who understand the nature of the asset class.
  • Famous investor David Swenson argues there is a liquidity premium for illiquid assets.
  • Even liquid asset classes can become illiquid in times of crisis.

"We educate our LPs that this is a highly illiquid asset class... Our LPs are fine with our model, because by definition, they wouldn't have invested if they weren't comfortable with the illiquidity of it."

This quote highlights the importance of educating LPs about the illiquid nature of angel investing and setting the right expectations for long-term returns.

Corporate Venture Capital and Disruption

  • FF invested in Indiegogo early, recognizing its potential impact on the ecosystem.
  • The firm avoids investing in competitors of Indiegogo.
  • Monitoring AngelList and other crowdfunding variations is part of their strategy.
  • Over 500 crowdfunding sites exist, most of which will fail.

"So we invested in Indiegogo at the seed level when it was not as apparent as it is today... We are certainly monitoring AngelList because there is no question that they are working up the food chain to make themselves the fundamental operating system of this asset class."

This quote discusses the strategic investment in Indiegogo and the awareness of how platforms like AngelList are becoming more influential in the investment ecosystem.

VC Firm Branding and Angel Investing

  • The firm believes their investment comes with added value like brand and resources.
  • Smaller VC firms may be threatened by AngelList's sector knowledge.
  • HBS Angels of New York promotes angel investing and economic development.
  • AngelList is expected to move up to Series A and B funding.

"Our cash, we believe, is greener than the cash from other sources because it comes with a brand, it comes with resources... But I think that the modal VC, two partners and an admin and maybe an analyst is under threat from AngelList."

This quote suggests that the firm's investment is more valuable due to the additional benefits they provide and acknowledges the competitive threat from platforms like AngelList.

Fintech Entrepreneurship and Research

  • Security is a key area of focus in fintech entrepreneurship.
  • The firm invests in companies that address security vulnerabilities.
  • Disruptinvesting.com is a research study led by the firm to identify opportunities in fintech.
  • Examples of investments include identity verification and data protection companies.

"So I'm currently leading a large research study on exactly this topic... First is security. I think that even now, people don't realize just how vulnerable we are."

This quote emphasizes the importance of security in fintech and indicates that the firm is actively researching and investing in companies that provide solutions to security challenges.

Interest in Cloud-Based Security and Efficiency in Manual Processes

  • Cloud-based services are increasingly important for security and efficiency.
  • Early investment in Addepar, a company that improves back-office operations for family offices, shows commitment to streamlining manual processes.
  • Addepar was founded to provide a seamless alternative to traditional Excel and PDF-based systems.

lion since we initially invested in them, which allows for secure use of cloud based services. We're also interested in taking manual processes and making them more efficient. We were an early investor in Adipar, which is started by Joe Longsdale...

This quote emphasizes the investment in companies that enhance security for cloud-based services and streamline manual processes, highlighting Addepar as a specific example of innovation in back-office operations.

Data Space and Investment Research

  • The data space is a significant area of interest, especially with the background in investment research.
  • Investment in Earnest Research indicates the value placed on nontraditional data sets for actionable trading information.
  • Earnest Research provides unique insights to hedge funds and institutional investors, securing a competitive advantage.

I'd also point to the data space. I used to run an investment research business, so care a lot about that. We're an investor in earnest research...

This quote shows the importance of the data space for investment opportunities and the speaker's personal interest due to their background, with Earnest Research being a specific example of a valuable investment.

VC's Use of Social Media

  • VCs are more aggressive in using social media compared to private equity and hedge funds.
  • There is a risk of spending too much time on marketing rather than core job functions.
  • Personal use of social media is judicious, avoiding trivial posts.

Yeah, I think vcs are aggressive in use of social media, certainly compared with the private equity and hedge fund world...

The quote suggests that while VCs are active on social media, there is a balance to be struck to ensure it does not detract from their primary responsibilities.

Perspective on Amazon

  • Skepticism about Amazon's long-term monetization strategy and potential for competition.
  • Amazon Web Services (AWS) has strong customer lock-in and a powerful market position.
  • Concerns about Amazon's traditional retail side and the possibility of emerging competitors like Jet.

I would probably sell on the grounds that it's not clear to me if when they eventually turn on the monetization spigot...

This quote reflects a cautious stance on Amazon's future, particularly regarding its pricing strategy and the potential for new competition.

Tools for Deal Sourcing and Analysis

  • Use of RelateIQ and Salesforce for managing relationships and data.
  • Bottlenose is used to track industry information, with an additional investment in the company.
  • In-house engineers develop proprietary tools for internal use.

We use a combination of relate IQ, Salesforce, one of the data vendors that sells data about private companies...

The quote highlights the use of various tools and platforms to source and analyze potential investment deals, indicating a mix of purchased and custom-built solutions.

Favorite Book on Graphical Communication

  • Edward Tufte's work on graphical communication of quantitative data is highly regarded.
  • Tufte's book is considered essential reading for anyone presenting to investors.

I am a huge fan of Edward Tufty, T-U-F-T-E who's a professor at Yale...

This quote reveals the speaker's admiration for Edward Tufte's expertise in presenting quantitative data effectively.

Preferred Blog or Newsletter

  • Pando Daily is favored for its willingness to cover controversial topics and challenge the status quo.
  • The blog's confrontational journalism is seen as a valuable trait.

Pando daily. I give a lot of credit to for being willing to write about controversial topics and make enemies...

The quote shows appreciation for journalistic courage and the importance of addressing contentious issues in the tech industry.

Most Recent Investment: Skycatch

  • Skycatch, a drone technology company, was chosen for its innovative data collection tools.
  • The partnership with Komatsu demonstrates the practical application of Skycatch's technology in construction.
  • Belief in the underestimated potential of drones across various industries.

So talk about Skycatch, which is a company that we invested in not long ago...

This quote explains the reasons behind the recent investment in Skycatch, highlighting the company's capabilities and strategic partnerships.

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