20VC Aleph's Michael Eisenberg on Why Generalists Over Specialists, Why Boutique Smaller Firms Over MultiStage Firms, Portfolio Construction Theory, Capital Concentration Limits and How To Think Through Reserve Allocations with Market Cycles in Mind

Summary Notes


In this episode of 20vc, host Harry Stebbings interviews Michael Eisenberg, a seasoned venture capitalist and equal partner at Aleph, a leading early-stage firm with a $550 million portfolio including Lemonade, Melio, and Honeybook. Eisenberg shares his unconventional journey from political science graduate to influential VC, detailing his early career in political consulting, his pivot to venture capital in Israel, and the founding of Aleph. He emphasizes the importance of constant investment in innovation, the art of reserve management, and the psychological impact of market cycles on investing. Eisenberg also discusses the value of maintaining an open mind, being people-focused rather than industry-specific, and the significance of long-term relationships in both personal and professional spheres. Throughout the conversation, he reflects on the lessons learned from both successes and failures, and the importance of embracing uncertainty and optimism in venture capital.

Summary Notes

Introduction to Michael Eisenberg and LF

  • Michael Eisenberg is a co-founder and equal partner at LF, an early-stage firm with over $550 million under management.
  • LF's portfolio includes Lemonade, Melio, and Honeybook, making it one of the leading early-stage firms of the last decade.
  • Michael previously spent 15 years as a general partner at Benchmark and began his venture career at Israel Seed Partners.
  • He is also a prolific author with four books published.
  • Acknowledgements were given to Bruce Dunlevy, Daniel Schreiber at Lemonade, and Matan at Melio for contributing questions for the interview.

"Now Michael is co-founder and equal partner at LF. With over $550,000,000 under management and a portfolio including the likes of Lemonade, Melio and Honeybook."

This quote introduces Michael Eisenberg and LF, highlighting the firm's significant capital under management and notable portfolio companies.

Venture Capital in the 1990s

  • Michael Eisenberg began his career in venture capital in the early days of the tech bubble.
  • He worked with Montgomery Securities and was involved in early Internet companies in Israel.
  • The experience provided him insights into the boom and bust cycles of the tech industry.

"This is important about the history of venture capital in the 90s. There were the four horsemen, investment banks. Hamburger and Quist, Alex Brown, Robertson Stevens, and Montgomery Securities."

This quote provides context on the influential investment banks of the 1990s, known as the "four horsemen," which played a significant role in the tech boom of that era.

Impact of Early Career Moves

  • Michael's move from New York to Israel was a significant life change that influenced his mindset and career.
  • He was inspired by a spiritual leader to help build the Israeli economy and create jobs.
  • The move was challenging but fulfilling, offering a vibrant and innovative environment for family and career.

"The most important thing you can do in life is enable the employment or employment people who can earn an honest and decent living."

This quote reflects the advice from a spiritual leader that inspired Michael to contribute to the Israeli economy and job market, shaping his career path in venture capital.

Investment Mindset and Macro Cycles

  • Michael's experience with the tech boom and bust has made him more aggressive in investing during downturns.
  • He believes in maintaining a constant investment pace and being prepared for the unpredictability of bust cycles.
  • The experience has taught him the importance of reserves management and partnership dynamics during downturns.

"But innovation is constant. So I knew a lot of people in 2000, 2001 who took their foot off the gas from an investment perspective, and they let the psychology of the Nasdaq impact the psychology of early stage investing."

This quote highlights Michael's philosophy that despite market cycles, innovation continues, and investors should not let macroeconomic conditions solely dictate their investment strategy.

Reserves Management

  • Reserves management is considered an art rather than a strict science.
  • LF's strategy involves working with partners and focusing on single-stage investing to mitigate risks associated with reserves and signaling during downturns.
  • Psychological impact during busts is significant and can provide advantages to those with capital on hand.

"Reserves is an art and not a science."

This quote emphasizes the nuanced approach to reserves management, acknowledging that it requires judgment and is not solely based on formulaic methods.

History Prefers the Prepared Mind

  • Reserves allow for opportunistic behavior during times of crisis.
  • Example provided of a travel company called Bookaway that was supported during COVID-19.
  • The importance of having something in reserve to invest when others are fearful.

"History tends to prefer the preparative mind, and it prefers those people who keep something in reserve to kind of plow in when everybody else is scared."

The quote emphasizes the advantage of being prepared and having reserves to seize opportunities during turbulent times, particularly in the context of business and investment.

Always Be Raising Mantra

  • Diverse opinions on the "always be raising" approach.
  • The mantra suggests continuous fundraising to have ample reserves for difficult times.
  • Some founders believe it would have helped during the pandemic.

"A lot of founders have used this time as an example of why always be raising is the right mantra to take."

This quote reflects the perspective of some founders who believe that continuous fundraising could have provided a safety net during the pandemic.

Competitive Moat and Capital Strategy

  • The size of a company's competitive moat influences its capital strategy.
  • Companies with a low competitive moat cannot afford to lose the capital game.
  • High competitive moat companies may benefit from taking less capital, staying nimble, and not being forced to grow unsustainably.
  • The character and personality of the founder also dictate the approach to capital.

"If you have a high competitive moat, what's commonly misrepresented to, in my view, as network effects or an increase in competitive boundary, you may be able actually or even advantage by taking less capital over time, because it enables you to be more nimble and not need to kind of modulate your growth to catch up with the valuation expectations and capital return expectations."

The quote discusses the strategic advantage of having a strong competitive moat and how it can allow a company to thrive with less capital by remaining agile and avoiding the pressure of inflated growth expectations.

The Pandemic's Impact on Investment Strategy

  • The pandemic led to a reassessment of the need for capital efficiency.
  • The shift in technology becoming mainstream in various sectors like insurance and banking.
  • Zero interest rates and a decade of technology returns have influenced investment behaviors.
  • Technology is now seen as a long-duration asset, changing the investment landscape.

"Technology has become more part of the mainstream economy. So no one invested in insurance before and called it a tech investment. But lemonade has proven that insurance is really technology at the end of the day."

This quote highlights the transformation of traditional sectors like insurance into technology-driven industries and the impact this has on investment strategies and opportunities.

Human Psychology and Market Cycles

  • Belief in the constancy of human psychology and its influence on market cycles.
  • Boom and bust cycles are inevitable due to psychological factors.
  • The importance of understanding human behavior in economic and business cycles.

"The one constant is people don't change."

This quote encapsulates the idea that despite changes in the market and technology, human nature remains constant, influencing economic cycles and business outcomes.

Risk vs. Uncertainty

  • Differentiation between risk and uncertainty in investment contexts.
  • Hedge fund managers deal with risk and venture capitalists deal with uncertainty.
  • Risk involves managing within known parameters, while uncertainty embraces the potential for complete loss in pursuit of asymmetric gains.

"Venture capitalists deal with uncertainty. You actually don't mind the catastrophic outcomes. You could lose all your money. What you're looking for is asymmetrical upside."

The quote distinguishes between the risk management of hedge funds and the uncertainty navigation that venture capitalists engage in, focusing on the pursuit of significant, albeit uncertain, returns.

Diversified Portfolios and Venture Capital

  • The concept of portfolio diversity in venture capital is not about industry sectors but about having multiple "shots on goal."
  • The focus is on supporting a range of entrepreneurs who are attempting to achieve what most consider impossible.
  • Venture capital success is driven by a small number of change-making entrepreneurs, not traditional portfolio diversification.

"A portfolio should have somewhere between 15 and 25. Call it shots on goal."

This quote explains the venture capital approach to portfolio construction, which is not about industry diversification but rather about investing in a variety of entrepreneurs with the potential for high impact.

Temporal Diversification in Venture Capital

  • The need for consistent investment over time to capture innovation.
  • Temporal diversification involves investing in different technologies and entrepreneurs as they emerge.
  • Innovation is constant, but markets fluctuate, necessitating a steady investment approach.

"You need to kind of invest consistently in the venture business, almost in roughly the same amount of companies every year, to be able to get your shot on different innovations."

The quote stresses the importance of a consistent investment strategy over time to take advantage of emerging innovations and technologies.

Capital Concentration Limits

  • Debate over capital concentration limits and their impact on venture fund returns.
  • Concentrating investments in the best-performing companies can lead to higher returns.
  • Smaller funds may have less risk with concentration limits, while larger funds need to deploy more capital into winners for significant returns.

"If you have a large fund like he does, we are deep believers in the small fund theory."

The quote reflects the belief in the small fund theory, suggesting that smaller funds can achieve high returns without the need for high capital concentration limits, unlike larger funds.

Investment Philosophy and Company Building

  • Michael Eisenberg prefers to be a company builder alongside entrepreneurs rather than just an investor.
  • Believes staying small and focused is crucial because time is more precious than money.
  • Being small allows for dedicated time to support entrepreneurs, who are the heroes of the venture.
  • Large, multi-stage funds tend to make one more of an investor than a company builder.
  • Exceptions exist, like Keith Rabois, who incept companies despite being at large funds.

"So on a personal level, I want to be a company builder alongside the entrepreneur and not an investor."

This quote highlights Michael's personal approach to venture capital, emphasizing his desire to work closely with entrepreneurs rather than merely provide financial investment.

Generalist vs. Specialist Investment Approach

  • Michael identifies as a generalist because he believes he has limited specific knowledge.
  • Being a generalist with a focus on understanding people has been beneficial in his investment career.
  • Specialization can lead to a closed mindset, believing one knows better than the founders.
  • Generalists maintain an open mind, which is crucial for listening and valuing founders' insights.

"I'm a generalist mostly because I don't know much about anything."

This quote explains Michael's self-perception as a generalist, which allows him to keep an open mind and focus on the people aspect of investments.

Investment in Lemonade

  • Michael introduced Lemonade's founders, Daniel and Shy, and was involved from the early stages.
  • Lemonade aimed to disrupt the insurance industry with a new approach, and Michael anchored the seed round.
  • Lack of deep domain knowledge in insurance was an advantage in seeing potential where others saw risk.
  • The company achieved significant success, becoming a public company with a high valuation.

"Being as dumb as I am and looking at this and knowing nothing about insurance turned out to be a hell of an advantage."

This quote illustrates how a lack of industry-specific knowledge allowed Michael to see the potential in Lemonade that others with deeper knowledge might have missed due to perceived risks.

Price Sensitivity in Investing

  • Michael believes that if a founder is fixated on the investment price, it's not a deal he wants to be part of.
  • Founders should prioritize the value an investor brings over the investment amount.
  • He prefers founders who seek a fair and reasonable price rather than the highest possible price.

"If the founder wants my money based on Price, I'm not doing the deal."

This quote conveys Michael's heuristic that a founder's focus on the monetary value of an investment over the strategic partnership is a red flag for him.

Board Management Style

  • Michael learned from Bruce Dunlevy to allow people to come to their own conclusions.
  • His board membership style has evolved to be less confrontational and more about influence.
  • Believes in working hard and bringing a network of resources to support entrepreneurs.
  • Optimism is key, but realism about the practicalities of business decisions is also essential.

"One of the things you learn from that is you have to let people come to their own conclusions over time."

This quote reflects Michael's approach to board management, where he supports but does not force his views on others, allowing them to reach their own conclusions.

Investment Mindset and Learning from Past Experiences

  • Michael admits to having a bad memory, which helps him not dwell on past failures.
  • He focuses on learning from people-related failures and improving support for entrepreneurs.
  • Believes that companies fail primarily due to running out of money, which has underlying reasons.
  • He doesn't dwell on missed investment opportunities and maintains no fear of missing out (FOMO).

"I tend not to dwell on the failures. I just kind of move on and move past really quick."

This quote indicates Michael's philosophy of not fixating on past failures but instead moving forward quickly, learning from experiences without letting them hinder future decisions.

Time Allocation and Personal Approach

  • Michael discusses the importance of managing time well to be ready for significant opportunities.
  • Emphasizes the principle of being different rather than better in investments and personal philosophy.
  • Shares an anecdote about revisiting a previously passed opportunity with a fresh perspective.
  • Reflects on teaching his children the value of not having FOMO and the importance of time management.

"Bruce once told me, I think it's true, you need to make sure you manage your time well, because you never know when the next Google walks into the lobby."

This quote underscores the importance of effective time management to ensure readiness for seizing potential game-changing investment opportunities.

The Importance of Relationships in Business and Personal Life

  • Michael Eisenberg emphasizes the significance of relationships in both the venture business and personal life.
  • Trusting relationships facilitate easier lives, investment opportunities, board membership, and support during personal time.
  • Long-term relationships are particularly valuable and require a long-term perspective in raising children and maintaining a partnership.
  • Michael credits his wife for being an exceptional parent and acknowledges his own improvement as a parent to older children versus younger ones.

"I think relationships matter a lot, and relationships matter in the venture business and personal life and everywhere else."

This quote highlights the universal importance of relationships across all areas of life, including business and personal spheres.

"And long term relationships matter even more than that."

Michael underscores the added value and significance of relationships that are sustained over a long period.

"I think I've been a better parent of older children than I was of younger one."

He reflects on his own parenting, suggesting a personal evolution and greater aptitude in relating to his children as they grew older.

Rejection of Work-Life Balance

  • Michael Eisenberg rejects the notion of work-life balance, considering it a flawed pursuit.
  • He believes that life is inherently imbalanced, including markets and relationships, and that seeking balance is futile.
  • Instead, he aspires to excel in various roles: as a parent, venture investor, practitioner of faith, and contributor to non-profits.
  • Michael acknowledges regular failure in these endeavors but does not view them in terms of balance.

"I don't believe in it. I think it's a failure of modern culture to seek work life balance."

Michael expresses his belief that striving for work-life balance is a cultural misstep and an unattainable goal.

"Balance is a flawed pursuit in my view."

He considers the quest for balance to be inherently flawed and not a worthwhile endeavor.

Parenting Philosophy and Independence

  • Michael emphasizes the importance of not over-coddling children and instead fostering their independence.
  • He criticizes current trends of helicopter parenting and overprotectiveness.
  • When faced with family or work imbalances, he responds by diving into necessary tasks, whether it's work-related or family emergencies.
  • Michael does not strive to restore balance but rather embraces life's inherent uncertainty and imbalance.

"You need to develop independent kids. They need to become independent adults by themselves."

This quote encapsulates Michael's parenting philosophy, which focuses on nurturing self-sufficiency in children.

"So you can find me diving into my books for hours when I'm on deadline, buried in my basement, or yesterday or day and a half ago."

Michael illustrates his approach to imbalance by giving examples of his total immersion in tasks that require attention, whether work or family-related.

Comfort with Uncertainty and Faith

  • Michael Eisenberg, as a person of faith, finds comfort in uncertainty and the belief that the world is improving.
  • He argues that the past is not preferable to the present, citing advancements like vaccines and the internet.
  • Accepting a lack of control allows him to let go of the need for certainty.
  • This mindset is beneficial in venture capital, where outcomes are unpredictable and trust in entrepreneurs is essential.
  • Michael marvels at the unpredictability and potential of the future, as exemplified by Harry Stebbings' own journey from starting with $50 to creating a successful venture business.

"God lives in uncertainty."

Michael's faith leads him to embrace uncertainty as a divine characteristic.

"The world is getting better."

He expresses optimism about the progression of the world despite its uncertainties.

"It's a mysterium. Tremendous, to use the latin phrase, that we can kind of behold how amazing."

Michael reflects on the beauty and mystery of life and human connections, even amid uncertainty.

Writing Process and Textual Analysis

  • Michael's writing process involves textual analysis of ancient texts, particularly the Bible, and applying their wisdom to modern economics and technology.
  • He views the Bible as the most active and discussed piece of literature in history, offering timeless wisdom.

"Most of my books are around textual analysis and then modernization of ancient concepts that appear in the Bible into modern economics and technology."

Michael describes his method of integrating ancient wisdom with contemporary issues in his writing.

"The Bible has the most active users in the history of humanity, and it's had the most written about it in the history of humanity."

He praises the Bible for its enduring relevance and widespread influence.

Venture Capital Insights

  • Michael discusses his experiences with venture capital deals, acknowledging that many do not go as planned and often involve founder issues.
  • He advises maintaining respect for founders regardless of outcome and staying open-minded to new ideas.
  • His recent fascination with decentralized finance (DeFi) reflects his interest in distributed systems.

"Most of them have been founders that blow up in one way or another."

Michael acknowledges the commonality of failures in venture deals related to founder issues.

"I've become obsessed because of Josh Hanna. He's made me obsessed about Defi because it fits kind of my distributed everything."

He shares his current interest in DeFi, influenced by a colleague, and how it aligns with his broader interest in distributed systems.

Venture Capital Industry Perspectives

  • Michael wishes the venture capital industry were more relationship-driven rather than transactional.
  • He misses the personal interactions that have been replaced by remote communication methods like Zoom.

"I'd like to be more relationship driven. I love the people and I miss that a bit."

Michael expresses a desire for a return to a more personal, relationship-focused approach in venture capital.

"I hate this Zoom thing, by the way. This is the worst."

He voices his dislike for remote interactions, preferring in-person connections.

Recent Investments and Stealth Mode

  • Michael's recent investments are in stealth mode, which he prefers, as he sees no rush to announce investments publicly.
  • He discusses his investment in Melio, which was a result of a long-term relationship and a unique insight into small business payments.

"The last seven investments I've made are all in stealth, so literally."

Michael reveals his preference for privacy in the early stages of his investments.

"We're going to brand Ach checks and payments and we're going to create a consumer user experience for small businesses."

He shares the strategic insight behind his investment in Melio, highlighting the importance of a consumer-focused approach to business payments.

Concluding Remarks

  • Harry Stebbings expresses gratitude for the conversation and looks forward to future discussions.
  • Michael Eisenberg jests about not wanting to wait too long for another appearance on the show.
  • The episode concludes with a teaser for an upcoming episode featuring Matan from Melio.

"Thanks Harry. I hope I won't have to wait another 2697 episodes in order to see again. That'd be unfortunate."

Michael humorously comments on the potential wait time before his next appearance on the podcast.

"And speaking of Milo, we have Matan on the show this coming Thursday and so stay tuned for that."

Harry Stebbings announces an upcoming episode, maintaining listener engagement and anticipation.

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