20VC Bedrock's Geoff Lewis on Whether VCs Actually Provide Value or Not, Why Bedrock Does Not Have An Ownership Focus and The Difference Between Principles and Rules When Building a Firm or Company

In this episode of "20vc" with host Harry Stebbings, venture capitalist Jeff Lewis, co-founder and managing partner at Bedrock, delves into his journey from starting a company to falling in love with venture capital. Having previously been a partner at Founders Fund, Jeff shares insights on Bedrock's approach to investing in breakout technology companies that defy popular narratives, emphasizing the importance of counternarrative investments and the challenges of capital concentration in venture returns. He discusses the nuanced balance between principles and rules in venture, the significance of intuition in decision-making, and the value VCs can bring to entrepreneurs. Jeff also touches on personal growth, including becoming more religious and learning to be less self-critical, while aiming to build Bedrock into the best early-stage technology investment firm in North America.

• Harry Stebbings introduced Jeff Lewis, cofounder and managing partner at Bedrock.
• Bedrock has over a billion in assets under management (AUM).
• The firm invests in breakout technology companies that go against popular narratives.
• Jeff Lewis has backed companies like Wish, Lyft, Newbank, Rigup, Vasell, Angural, and others.
• Prior to Bedrock, Jeff was a partner at Founders Fund.
• Harry met Jeff five years ago in San Francisco and has since become great friends.

"Now with over a billion in AUM Bedrock, best in breakout technology companies that are incongruent with popular narratives. In the past, Jeff has bat some incredible defining companies such as Wish, Lyft, Newbank, Rigup, Vasell, Angural and many more. And prior to founding Bedrock, Jeff was a partner at Founders Fund."

The quote outlines Jeff Lewis's professional background and the investment focus of Bedrock, highlighting their success in supporting major tech companies.

• Harry Stebbings thanked Garrett at Flock, Joanne at Rigup, Spencer and Eric at Bedrock, and Brian at Founders Fund for their help in scheduling the show.

"Thank you to Garrett at Flock, Joanne at Rigup, Spencer and Eric at Bedrock and Brian at Founders Fund. A real team effort on the schedule and it made such a difference."

This quote is an expression of gratitude towards the individuals who helped coordinate the podcast episode.

• Tegus aggregates qualitative information on private companies, helping venture capitalists and corporate strategists.
• Tegus offers expert call transcripts, assistance in sourcing companies, founder communication, and company diligence.
• Cooley is a global law firm focused on startups and venture capital, involved in private financings and IPOs.
• Cooley.com and Cooleygo.com are resources for legal information and services for entrepreneurs.
• Sprig is a user research platform used by companies like Dropbox and Square for in-product micro surveys and concept tests.

"Tegus is the only company in the world that aggregates qualitative information on private companies from seed stage to pre ipo."

This quote explains the unique service provided by Tegus, which is valuable for venture capital professionals.

"Cooley is one of the most active law firms in advising both early and late stage financings, handling more than 1300 private financings every year with an equal split of investor and company clients."

The quote highlights Cooley's prominence and activity level in the venture capital legal space.

• Jeff Lewis started in venture capital after selling his enterprise SaaS company, Top Guest, and joining Founders Fund as a principal in 2012.
• Initially, he planned to stay for a year before returning to entrepreneurship.
• Jeff fell in love with venture capital during a time of significant opportunity in the industry.
• He co-founded Bedrock with Eric Stromberg in late 2017 or early 2018.

"Jeff really started back in 2009 when I took a leap and left a hedge fund to start a startup. And that business ended up becoming this company called Top Guest which was an enterprise SaaS company."

The quote details Jeff Lewis's transition from hedge funds to starting his own company and eventually selling it, which led to his venture capital career.

• Jeff Lewis does not feel jaded despite the competitive and intense nature of the venture capital industry.
• He notes the significant disconnect between public and private market valuations.
• The correction in valuations is expected to trickle down to early stages over time.
• Company-specific stories and entrepreneurs are more important than market trends, but the valuation gap is too large to ignore.

"I'm far too young to be jaded, Harry. [...] But yeah, I think the thing that is different now is the disconnect between the public market valuations and the private market valuations to me has never been greater."

Jeff Lewis expresses his perspective on the current state of the venture capital market, emphasizing the disparity between public and private valuations.

• Jeff Lewis advises less price sensitivity for initial investments but cautions on follow-on investments.
• For follow-on investments, getting the pricing right is crucial.
• A jump from 100x to 150x ARR multiple is significant, and one must have high conviction in the company's potential to justify such valuations.
• The decision to invest at higher valuations depends on the belief in the company's ability to transcend.

"Where I think there's more potential to get tripped up is in this situation, when you're already high conviction, you already know the company and you really want to double down. Getting that pricing right is actually really important."

Jeff Lewis discusses the importance of careful consideration of pricing when making follow-on investments in companies you're already invested in.

• The investment team at Harry's firm, which includes Spencer and Eric, utilizes a bottom-up approach to reevaluate investments.
• They consider whether they would invest in a company again as if it were the first time and determine the appropriate valuation.
• Emotions can play a role in investment decisions, especially when a company has momentum and is undergoing high velocity follow-on financing rounds by top firms.
• It's crucial to abstract away from market conditions and underwrite the company based on the firm's unique perspective.
• Detailed diligence and spending time with entrepreneurs are key components of the process.
• Harry's most successful investments have been in unique founders and opportunities, even when the market is unclear or the business faces challenges.

"So we try and use that filter here. On the investment team, myself, Spencer, Eric, are always like okay, bottom up, would we make this investment again for the first time? And if so, what's the right price?"

This quote explains the team's investment philosophy, highlighting the importance of reassessing each investment with fresh eyes and determining its value independently of past decisions.

• Jeff Lewis identifies as a high conviction investor, meaning he concentrates capital in the companies he believes will be winners.
• He acknowledges the pressure to demonstrate conviction by investing heavily in successful companies.
• Mistakes occur when ignoring doubts about the entrepreneur, business model, or financial numbers, even after due diligence.
• Jeff has learned to trust his instincts when something feels off and encourages robust internal debates to explore these feelings.
• Following his intuition has proven to be more reliable than ignoring it.

"I've never gone wrong following that little voice. Where I've gone wrong is when I've ignored it, doubled down or tripled down anyways to prove out the conviction."

Jeff emphasizes the importance of listening to and trusting one's instincts, especially when they signal caution, even in the face of pressure to demonstrate high conviction through substantial investments.

• Harry admits to having been wrong in thinking he knew the market better than others, especially in audio and podcasting.
• He questions how to maintain objectivity and avoid biases from past experiences, whether successful or not.
• Jeff believes that youth is an asset in venture capital, allowing for the constant rebuilding of mental models without becoming jaded.
• He credits his team and interactions with entrepreneurs and investors for helping him approach each deal with a fresh perspective.
• Jeff also acknowledges the value of pattern matching in venture capital but notes that the best companies often do not fit pre-existing patterns.

"The youth enables you to not be jaded and to rebuild these mental models for every new market, for every new company that you encounter."

Jeff highlights the advantage of youth in venture capital, which allows for flexibility and openness to new ideas, essential for evaluating each deal on its own merits.

• Jeff believes that only a few venture capitalists truly add value to companies.
• The effectiveness of a VC's contribution depends on the right fit between the VC and the entrepreneur, characterized by strong interpersonal chemistry.
• He tries to provide strategic help and assistance with recruiting at Bedrock.
• VCs are most helpful in downside scenarios, and the concept of VC value add is often overstated.

"I think that there's like twelve VCs that actually provide that value add. And so I think it's vastly overstated as a concept."

Jeff expresses skepticism about the commonly held belief in the venture capital industry that VCs add significant value, suggesting that in reality, only a handful do, and it is highly dependent on the VC-entrepreneur relationship.

• Jeff spends an equal amount of time (50/50) between assisting existing companies and meeting new entrepreneurs to learn about new sectors.
• He takes board commitments seriously and tries to limit them to ensure he can dedicate sufficient attention to each.
• Jeff questions the actual impact of board membership on a company's success and believes being an involved investor may be just as valuable.

"It's 50 50. Helping existing companies, working with entrepreneurs, serving on boards and then 50% like just constantly meeting new entrepreneurs, learning about new sectors, getting smart on things, debating as a team internally, it really is 50 50."

Jeff describes how he allocates his time between supporting current portfolio companies and exploring new investment opportunities, highlighting the importance of balance in venture capital responsibilities.

• Building a venture firm requires rewriting the strategy with each new fund, akin to starting from scratch.
• Bedrock's guiding principle is to search for narrative violations, investing in companies that are overlooked or underestimated by other investors.
• Few rules and a focus on principled, disciplined thinking are key to adapting to changes in the market.
• Jeff once had a rule against uncapped notes but broke it for an investment in Rippling, proving the need for flexibility.
• A venture firm's reputation is only as good as its last fund, and results take time to materialize, necessitating constant innovation and adaptation.

"You sort of have to rewrite the script with every fund. And that is really freaking hard to actually put into practice. Year after year, fund after fund."

Jeff discusses the challenges of continuously adapting and reinventing the strategy for a venture firm with each new fund cycle, emphasizing the difficulty of this process.

• A principle is a guiding ethos that directs actions, such as Bedrock's focus on narrative violations.
• Rules are more rigid and can sometimes hinder the ability to seize exceptional opportunities.
• Distinguishing between principles and rules is essential for flexible and effective venture capital management.

"So, for example, our guiding ethos, our principle at bedrock from day zero was we want to search for narrative violations."

Jeff explains Bedrock's core principle, which guides their investment strategy and allows for flexibility in decision-making, as opposed to strict rules that might limit opportunities.

• Bedrock Capital looks for mission-oriented entrepreneurs with a specific demeanor.
• They do not adhere to strict rules on ownership percentage, unlike many other venture capital firms.
• Bedrock is primarily focused on early-stage technology but is flexible and has invested in later stages.
• Investments in the decentralized world, such as Bitcoin and Ethereum, were made shortly after launching their first fund in 2019.
• They back emerging crypto managers and VR funds.
• Bedrock has rules around portfolio construction, but they are flexible with sectors and investment structures.

"We're looking for a certain type of entrepreneur in terms of mission orientation, how they carry themselves in the world, but other types of things around, like ownership percentage, for example. Lots of VCs will say we need to own a certain percent of a company. We don't have that as a rule here."

This quote highlights Bedrock's flexibility and unconventional approach, particularly regarding ownership stakes in companies they invest in, which is not common in the venture capital industry.

• Jeff Lewis explains that Bedrock's most successful deals had low ownership percentages initially.
• They prefer to concentrate capital into companies in successive rounds rather than starting with a large stake.

"For me, the companies where I've done the best and where if I look retrospectively to our Bedrock track record, our pre-Bedrock track record, the ownership percentages were actually quite low."

Jeff Lewis shares his experience that lower initial ownership has led to better outcomes for Bedrock, which contradicts the common VC emphasis on high initial ownership.

• Bedrock invests in what they consider counternarrative opportunities.
• They invested in Vercel when it was seen as a hyper-growth web development platform with low revenue.
• Vercel had significant developer adoption but was initially perceived as a fad without a solid business model.
• Bedrock's investment in Vercel was based on its potential, despite market skepticism.

"So it was absolutely a narrative violation when we initially invested in series B because developers are seen as very fickle. It was seen as just a fad."

Jeff Lewis describes how Bedrock's investment in Vercel was against the prevailing market narrative, which doubted the long-term viability of a company that developers perceived as a fad.

• The transition from a counternarrative to a traditional narrative is marked by traction or the perception of traction.
• Bedrock focuses on the actual traction of a company rather than market perceptions.
• The example of Flock Safety is given, where Bedrock saw incredible traction that the market had not recognized.

"I mean, for us it's traction and or perception of traction."

Jeff Lewis explains that Bedrock's investment decisions are based on the actual performance and growth of a company, not just on how the market perceives it.

• Bedrock agrees with the idea that limits on capital concentration per company can hinder venture returns.
• Jeff Lewis has learned from Brian Singman about concentrating capital into high-performing companies.
• It is crucial to concentrate capital correctly to avoid negatively impacting the fund's performance.

"I think Brian's 100% right on that, and I've learned a lot from him on how to concentrate capital into companies."

Jeff Lewis acknowledges the importance of capital concentration in successful venture investing, as advised by Brian Singman.

• Jeff Lewis disagrees with the concept of playing the game on the field, which suggests adapting to current market trends.
• Bedrock has slowed its deployment pace compared to previous cycles.
• Bedrock is committed to its narrative violation strategy and believes in temporal diversification.
• They are investing out of their first fund from 2018, with longer deployment cycles planned for future funds.

"So no, I think you need to play your own game. And I think the game on the field right now is a little bit wacky."

Jeff Lewis emphasizes the importance of sticking to one's investment strategy rather than following current market trends, which he finds questionable.

• Jeff Lewis values the opinions of entrepreneurs, his team, and Bedrock's investors.
• He believes that external validation, like markups, is not a true measure of performance.
• Real validation comes from successful exits, such as acquisitions or IPOs.
• Independent thinking and forming judgments based on first principles are crucial.

"The external validation of things like markups, it's not real. It's only real to me when the company has either been acquired or has IPOed."

Jeff Lewis discusses the importance of focusing on tangible outcomes rather than interim markers of success, such as investment round markups.

• Jeff Lewis has observed internal training programs at other firms such as Founders Fund.
• He has learned lessons on scaling a firm and team, emphasizing the importance of concentrating capital correctly.

"You identify your best company correctly and can't get that one wrong if you're going to concentrate capital."

This quote underscores the strategic importance of identifying and investing appropriately in the most promising companies within a venture capital portfolio.

• Emphasize the importance of hiring self-motivated individuals who actively seek learning opportunities.
• Successful hires often learn through osmosis by being proactive and inquisitive.
• Thomas, the CFO from Accolade Partners, exemplifies this by asking questions and spending time in person to learn.

The number one, two and three lesson is hiring people that are truly self starters and have some sort of guiding motivation where they're going to just independently take on initiative and force themselves into your world to learn through osmosis.

This quote highlights the critical need for self-motivation in new hires, as they must be the ones to initiate their learning process, which is often informal and absorbed from their environment.

• Bedrock operates primarily in-person in Austin, Texas, facilitating face-to-face learning and interaction.
• Long-term acquaintance before hiring enhances the osmosis learning process, as seen with Eric and Spencer's examples.
• The approach of getting to know potential hires over an extended period is unique to VC firms due to the flexibility in scaling.

Great question. I'd say part one of that we aren't really that remote. I mean, most of us live here in Austin, Texas, where I currently am. And so we spend a fair amount of time together in person.

Jeff Lewis underscores the importance of in-person interactions for effective team learning and collaboration, mentioning that their team is mostly co-located in Austin.

• The goal is to build a sustainable and enjoyable venture capital firm.
• Avoid creating an impressive yet burdensome "machine" that is not fun to operate.
• The focus is on long-term enjoyment and institutional endurance without becoming a prisoner to the system.

In the first few chapters, there's lots of failure modes. I'd say the one that we are most paranoid about avoiding is building a machine that's not actually fun to operate.

Jeff Lewis expresses his concern about the potential pitfalls of scaling a VC firm, emphasizing the importance of maintaining an enjoyable and fulfilling work environment.

• Jeff Lewis finds all of Nietzsche's work particularly resonant.
• He delivers critical feedback with the understanding that he holds himself to the highest standards.
• Lewis has become more open to the concept of a higher power as he has aged.
• He does not seek to change the venture world but focuses on Bedrock's day-to-day operations.
• Lewis appreciates both Austin and Miami for their unique qualities and does not compare them directly.
• His greatest strength is intuition, and his biggest weakness is being overly self-critical.
• Bedrock's mission is to support entrepreneurs who defy popular narratives and build strong businesses.
• The most recent investment in Praxis was driven by the founders' vision and community-building efforts.

I think basically all of Nietzsche's work really speaks to me. So I'm on this deep philosophy binge, and I have been for the last several years.

Jeff Lewis shares his interest in philosophy, particularly the works of Nietzsche, indicating a deep engagement with philosophical thought.

• Harry Stebbings expresses gratitude toward Jeff Lewis for his mentorship and friendship.
• Tegus is introduced as a valuable resource for qualitative information on private companies.
• Cooley is highlighted as a leading law firm for startups and venture capital.
• Sprig is mentioned as a user research platform that integrates with product development.

I'd also just want to take a minute to say a very personal thank you to Jeff. He's been a great friend, mentor, advisor to me, and I really do so appreciate the relationship.

Harry Stebbings thanks Jeff Lewis for the significant impact he has had as a mentor and friend, emphasizing the personal value of their relationship.