20VC A Framework For Approaching Risk and How It Affects Portfolio Construction Lessons and Advice From Working with Dropbox's Drew Houston Why Being A Learning Animal Is The Most Important Factor For Success with Ted Wang, Partner @ Cowboy Ventures

In this episode of "20 minutes VC," host Harry Stebbings interviews Ted Wang, partner at Cowboy Ventures, an early-stage fund with investments in companies like Phil's Coffee and Dollar Shave Club. Ted shares insights from his 20-year tenure as a Silicon Valley lawyer at Fenwick & West, where he worked with tech giants such as Facebook and Twitter, and discusses his creation of the Series Seed financing documents. The conversation delves into Ted's transition into venture capital, his approach to risk in startup investing, and the importance of founder adaptability and learning. Ted emphasizes the value of concentrated bets in portfolio construction, the nuanced nature of advice, and the significance of founders' ability to learn and adapt. He also recounts his personal growth experience, selling ads in college, and highlights his recent investment in Fullcast, a company automating sales operations.

• Harry Stebbings introduces the episode of "20 minutes VC" and himself.
• Harry mentions his brief stint at law school and compares it to his guest's extensive legal background.
• The guest, Ted Wang, is introduced as a partner at Cowboy Ventures and a former Silicon Valley lawyer.
• Ted's prior work includes involvement with companies like Facebook, Dropbox, Twitter, Square, and Spotify.
• He is credited with creating the Series Seed documents.
• Thanks are given to Eileen Lee and Semil Shah for introducing Ted to the show.
• Harry briefly promotes Carter's fund administration services and other special products such as Brex and StartEngine.

Hello and welcome back to the 20 minutes VC with me, Harry Stebbings at H Stebbings 90 96 with two b's on Instagram, where you can see me and the team here at 20 vc getting into the Christmas spirit behind the scenes. It'd be great to see you there.

Harry Stebbings welcomes listeners back to his podcast, invites them to follow his Instagram, and sets a festive tone for the episode.

And so I'm thrilled to welcome Ted Wang, partner at Cowboy Ventures, one of Silicon Valley's leading early stage funds, with the likes of Phil's Coffee Dollar Shave Club, Bramless Docsend, a company, and previous guest Britain Co. All in their portfolio.

Harry introduces Ted Wang, highlighting his role at Cowboy Ventures and mentioning some of the notable companies in their investment portfolio.

• Ted Wang's unusual route into venture capital is noted.
• His 20-year career as a Silicon Valley lawyer is highlighted.
• Ted's work spanned from company formation to IPOs and company sales.
• His desire for new challenges led him to venture into venture capital.
• Ted expresses a particular fondness for working with founders at the seed stage.
• He describes seed stage companies as a "band of pirates" with a vision and determination.

Yeah, I worked for 20 years in a different industry and then I got into it. So I don't know that it's the normal path...

Ted explains his atypical path into venture capital, acknowledging that his journey may not be the standard route for those interested in the field.

And the thing that really drew me to the seed stage at the end of the day was just I love working with founders.

Ted shares his passion for working with founders, which influenced his decision to focus on seed-stage investing.

• Harry Stebbings addresses the under-discussed element of risk in venture capital.
• Ted Wang talks about the inherent risks of starting a company and the fallacy of risk mitigation.
• He uses the analogy of skiing to explain the necessity of taking risks to learn and succeed.
• Ted points out the balance between hiring for growth and the risk of growing too slowly.
• Ethical risk is one type of risk that Ted is not willing to take.

By definition, if you're taking on a big challenge, if you're trying to build a really great company, it's going to be extremely risky.

Ted emphasizes that building a great company inherently involves significant risk, and attempts to mitigate that risk are often unrealistic.

So it's sort of nonsensical to say that there's a risk-free course. It's just a matter of which risk you're going to take.

Ted argues that there is no risk-free path in building a company; instead, it's about choosing which risks to take.

Well, ethical risk is not one that I'm willing to take.

Ted Wang draws a line at ethical risk, prioritizing character and long-term reputation over short-term gains.

• Seed stage investments often do not work out, which is an accepted part of venture capital.
• Founders who fail but have given their best effort are still considered for future backing.
• External factors and unforeseen risks are part of the journey at the seed stage.
• The lifecycle of a startup includes the possibility of failure, even for great founders who may succeed in subsequent ventures.

"Well, I think when you back seed stage founders, you have to accept the fact that it's very often not going to work out."

This quote emphasizes the acceptance of failure as an inherent risk in seed stage investing and the willingness to support founders through the ups and downs of startup life.

• Mark Lore, the founder of Jet.com, took a high-risk approach to compete with Amazon.
• Jet.com was built with the intention to go big or fail, avoiding the lean startup methodology.
• The company had a successful exit, selling to Walmart for over $3 billion.
• Being thoughtful and intentional about risks can lead to significant payoffs.
• This approach may not be suitable for all, particularly first-time founders without prior success or the ability to attract capital and talent.

"And I think it's a great example of being thoughtful about what risks you're taking and being intentional about them, as opposed to trying to hide these risks off in the corner and think you can get around them."

The quote highlights the importance of being deliberate and strategic about the risks taken in a startup, as demonstrated by Jet.com's success story.

• Percentage ownership is critical in venture capital, especially at the seed stage.
• A diversified portfolio is necessary to mitigate the risk of individual failures.
• Concentrated bets are important to ensure that winners can provide material returns to the fund.
• The balance between diversification and sufficient ownership is key to successful portfolio construction.

"So it's actually a great illustration of the risk point that I was making earlier, because on the one hand, you don't want to make these big bets. You have to get a portfolio that has a certain number of opportunities in it, a certain number of investments, in order for it to mitigate the risk of one failing."

This quote explains the dual strategy of making concentrated bets while also maintaining a diversified portfolio to balance risk and reward.

• Venture capital strategies vary widely, and many can be successful.
• Some VCs prefer to establish their ownership position with the first check and maintain it through subsequent rounds.
• Others may increase their stake when opportunities arise, without rigid adherence to initial ownership levels.
• Flexibility and adaptability are important in venture capital investment strategies.

"I like to use the analogy, if you look at baseball, right, you look at a baseball, a batter, you have a guy who's standing 60ft away from a guy throwing the ball, trying to hit it, and yet they still have like 27 different approaches."

The analogy to baseball batting styles illustrates the diversity of successful approaches in venture capital, emphasizing that there is no single correct method.

• Advice in venture capital is often oversimplified and may not be applicable to all founders or startups.
• Founders should consider the context and rationale behind advice and whether it applies to their specific situation.
• What works for one company may not work for another, as demonstrated by the unique case of Jet.com.

"So what worked for one company, we just talked about Jet.com a moment ago, what worked for Jet.com is not going to work for most founders."

This quote underscores the need for founders to critically evaluate advice and understand that strategies successful for one company may not be universally applicable.

• VCs should acknowledge the limits of their knowledge when advising.
• Offering different perspectives and benchmarking against other companies in the portfolio can be valuable.
• Advice should be tailored to the unique circumstances of each company, rather than a one-size-fits-all approach.

"I think that's the critical thing about giving advice. It's just not one size fits all."

The quote reinforces the importance of customizing advice to the specific needs and context of each startup, rather than relying on generic guidance.

• The story, shared by Drew Houston of Dropbox, illustrates how different animals would give advice based on their own strengths and survival strategies.
• The lion emphasizes strength, the elephant emphasizes size, and other animals would likely have their own key to survival.
• The moral is that advice is often given from the advisor's perspective and may not be universally applicable.

"First there's a lion and the lion says, look, you got to be big, you got to be strong. Only the strongest survive, right?"

This quote from the animal advice story serves as a metaphor for the varied and subjective nature of advice, highlighting the importance of considering the source and context when receiving guidance.

• Everyone's advice is influenced by their personal experiences.
• People often give advice based on their own successes without considering if it's appropriate for others.
• Founders should be aware that advice might not always be suitable for their unique situation.
• Advisers should acknowledge their limitations and offer different perspectives rather than directives.
• The ultimate decision-making power lies with the founders, who have the most information about their company.

"One pernicious thing in the ecosystem is we find a lot of people who give advice based on what happened to them and what worked for them."

This quote emphasizes the tendency of individuals to give advice based on their personal experiences without considering the broader context or applicability to others' situations.

"Ultimately, the decision is in the hands of the founders."

This quote reinforces the idea that while advisers can provide input, the final decisions should be made by the founders who have the deepest understanding of their business.

• Ray Dalio's book "Principles" introduces the concept of a credibility-weighted idea meritocracy.
• When assessing advice, one should consider the adviser's expertise in the specific area.
• Ted Wang emphasizes deference to experts in their respective fields.
• He leans more heavily on his own advice in areas where he has significant experience, such as venture financing.

"Ray Dalio was the founder of Bridgewater, and he talked about a credibility weighted idea meritocracy."

This quote points to the influence of Dalio's framework on evaluating advice based on the credibility and expertise of the adviser.

• The ability to learn is highly correlated with a startup's success.
• Founders must adapt and learn new skills as their company grows and the market changes.
• Ted Wang looks for founders who are "learning animals" with intellectual curiosity.

"It's the founder's ability to learn."

This quote highlights the importance of learning as a critical factor in a startup founder's success.

• Ted Wang asks founders to describe recent changes in their business to gauge their learning.
• He listens for signs of active problem-solving and adaptation.
• References are also used to understand a founder's capacity for development and learning.

"Tell me what's changed in the business in the last 30 days."

This quote is an example of a question Ted Wang asks to evaluate a founder's engagement with learning and adaptation.

• A bad reference doesn't necessarily reflect negatively on a founder.
• Some traits that are problematic in employees can be beneficial in founders, such as stubbornness or independence.
• The key is to understand what traits are being referenced and in what context.

"Many founders are not particularly good employees."

This quote suggests that traits that make someone a challenging employee can sometimes align with those of a successful founder.

• Ted Wang focuses on improving his investment decision-making process.
• He acknowledges the long feedback loop in venture capital and seeks to accelerate his learning by evaluating subcomponents of investment decisions.

"What I've really been focusing on is the actual investment decision."

This quote reflects Ted Wang's self-identified area for growth and learning within his role in venture capital.

• The book "Super Forecasting" suggests that breaking down complex problems can improve predictive abilities.
• Shortening the feedback loop can accelerate learning.
• Ted Wang applies this by assessing subcomponents of his investment decisions to get quicker feedback.

"The best way to improve your ability to predict things is to try to have a shortened learning loop."

This quote explains the strategy Ted Wang uses to enhance his learning and decision-making in the context of long venture capital feedback cycles.

• Ted Wang discusses his approach to improving investment decision-making by recording data on a spreadsheet.
• He uses a simple ten-entry scale to track various factors that influence his decisions.
• Ted is considering whether the data collected will be useful or predictive for future investments.

So what I'm trying to do is for companies that go into a longer process, I am recording all this data.

This quote explains that Ted is methodically tracking data for companies that require a more extended evaluation process.

• Harry Stebbings inquires if Ted plans to use his collected data to influence future reinvestment decisions.
• Ted acknowledges the potential value of the data but has not yet decided how it will be utilized in decision-making.

Yeah, no, I probably should.

Ted admits that he should consider using the collected data for future reinvestment decisions, suggesting he hadn't previously contemplated this.

• Ted Wang recommends "Seven Habits of Highly Effective People" by Stephen Covey.
• He praises the book for its profound insights into personal effectiveness.

My favorite of all time is seven habits of highly effective people.

Ted endorses Stephen Covey's book as his all-time favorite, suggesting its value in personal development.

• Ted shares a story from his college days about selling advertisements for a student publication.
• He learned the importance of accepting rejection quickly and the value of persistence in sales.

No is a great answer to have, as long as you get it quickly, and that if you don't ask, you don't get.

Ted emphasizes the importance of moving on swiftly after a rejection and the necessity of taking initiative to achieve results.

• Ted expresses his surprise at the loneliness of the venture capital profession.
• Despite having a great partner, he spends most of his time alone, meeting with companies and founders.

I'd say the biggest surprise is it's actually a pretty lonely job.

Ted describes the unexpected solitude he experiences in his role as a venture capitalist.

• Ted shares his belief that the government can be a force for good, contrasting with the prevalent libertarian views in Silicon Valley.
• He cites his own experiences working for the government as evidence of its potential for positive impact.

I really believe know government can be an instrument of good.

Ted asserts his conviction that the government can effectively serve the public, despite widespread skepticism.

• Ted discusses his excitement about investing in Fullcast, a company that automates sales operations.
• He is impressed by the founders' unique insights and the potential of Fullcast to unify tools for sales operations.

I think that's the most intriguing thing.

Ted highlights the innovative approach of Fullcast in streamlining sales operations, which he finds particularly compelling.

• Harry expresses his appreciation for Ted's participation in the podcast.
• He also thanks those who introduced him to Ted, acknowledging the importance of their support.

It's been such a pleasure having you on today, and I can't thank you enough for joining me.

Harry conveys his gratitude to Ted for joining the podcast and contributing to an enjoyable episode.