20VC Data Collective's Matt Ocko on Why All Fund Size Models Are Wrong and The Lifecycle of Current Venture Funds Is Inefficient

Summary Notes


In a deep-dive episode of the 20 minutes VC, host Harry Stebings interviews Matt Oko, co-managing partner and co-founder at Data Collective. They discuss the nuances of venture capital, particularly the impact of fund sizes on investment strategies and the venture lifecycle. Oko argues that strict fund size categorization can destroy valuable early-stage company information and limit societal impact by biasing investment decisions. He also emphasizes the importance of a thesis-driven approach over industry focus, highlighting Data Collective's meta thesis on capital efficiency and defensible algorithms. Furthermore, Oko critiques the traditional ten-year fund lifecycle as too short for maximizing the value of deep tech investments, suggesting a potential need for longer fund durations to allow for the full realization of a company's value.

Summary Notes

Introduction to the Podcast and Guest

  • Host Harry Stebings introduces the podcast "20 minutes VC" and himself.
  • Harry highlights the dedication of the guest, Matt Ocko, who recorded at 1:00 a.m.
  • Matt Ocko is co-managing partner and co-founder at Data Collective with over 30 years of experience in tech and VC.
  • Matt has invested in companies like Facebook, Zynga, Uber, and AngelList and holds over 40 patents.
  • Harry Stebings also promotes Eve mattresses, suggesting a good day starts with a good night's sleep.

Hello and welcome back to the 20 minutes VC with your host Harry Stebings. So joining me for this very special show, I'm delighted to welcome Matt Oko. Matt is the co managing partner and co founder at Data Collective and he has over three decades of experience as a tech entrepreneur and VC and has made investments in the likes of Facebook, Zynga, Uber and Angel list, just to name a few.

These quotes introduce the podcast and its host, Harry Stebings, as well as the guest for the episode, Matt Ocko, highlighting his credentials and achievements in the venture capital industry.

Founding Story of Data Collective

  • Matt Ocko shares the story of how he and Zachary Bogue co-founded Data Collective.
  • They met at a mutual friend's birthday party and bonded over a shared investment thesis in deep compute and big data.
  • Their partnership began with investments from their family offices and evolved into a successful venture fund.

It's actually kind of a funny story. We were both at a mutual friend's birthday party back, I don't know, seven, eight years ago. Zach and I ended up sort of talk, yelling at each other about our deep compute and big data investment mutual thesis. One thing led to another, and all of a sudden we had a successful franchise.

These quotes narrate the unconventional founding story of Data Collective, where Matt Ocko and his partner, Zachary Bogue, met and bonded over shared investment interests, leading to the creation of their venture fund.

Contrarian Thinking on Fund Sizes

  • Matt Ocko discusses the current bifurcation of VC into various fund sizes and why he finds it suboptimal.
  • He believes that strict segregation by fund size destroys information or reduces signals.
  • Early-stage investors with the most company knowledge must conduct blind auctions at each capital formation stage.
  • This system pressures later-stage funds to rush due diligence, increasing LP money risk.
  • Early-stage investors may bias investment choices towards what is palatable to late-stage investors, affecting societal impact.
  • Knowledgeable early-stage investors are forced out of the picture due to capital constraints.

I sincerely believe, and there's a large but quiet group of other experienced vcs with successful track records who also believe that the strict segregation of funds by size has an information destroying or signal reducing aspect. The later stage investors are now competing with each other on as short a time frame as the early investor can possibly make happen, which means their ability to do complete diligence and to have the most informed possible judgment is reduced. You may not be doing the most interesting, highest returning, most societally or industry transforming company if you're worried that you can't get it past a larger investor.

Matt Ocko articulates his contrarian view that segregating venture capital funds by size leads to a loss of valuable information and signals. He explains how this affects due diligence processes and potentially stifles the funding of transformative companies due to the need to appeal to larger investors' preferences.

Evolution of Technology and Early Stage Investment Strategy

  • Early stage investors have a keen understanding of technological evolution and competitor awareness.
  • They assess if a company deserves additional funding with high accuracy.
  • This assessment is often better than that of follow-on investors who may lack time.

Their adjudication of whether that company deserves another 3 million or 5 million or $7 million is at least as good, if not better, than the next guy up the line, especially if that next guy up the line is by necessity deprived of the luxury of time for making a decision.

The quote emphasizes the expertise of early stage investors in making funding decisions and alludes to the time constraints faced by follow-on investors that may affect their judgement.

Extricating from Funnel Process Thinking

  • Early stage investors tend to favor startups that can secure follow-on funding.
  • Breaking from this pattern requires the freedom to back companies that show exponential progress and potential for significant impact.

How do you extricate yourself from that kind of funnel process thinking, and think outside of the box in terms of your investing thesis then?

This question probes the strategy used to avoid conventional investment patterns and to support companies with high potential outside the standard funnel process.

Opportunity Fund and Investment Capacity

  • An opportunity fund allows backing companies with high potential without relying on follow-on investors.
  • A conscious decision was made to avoid being a micro VC to have the capacity to invest substantial amounts in companies believed to be extraordinary.

Because if you disagree with conventional wisdom about a series a and you want to write two or three or five or even $7 million in a check yourselves through a company that you believe is extraordinary, you need to have the capacity to do that.

The quote highlights the importance of having sufficient fund size to independently support companies with high conviction, without the need to conform to conventional investment wisdom.

Portfolio Construction and Stage Agnosticity

  • The opportunity fund is restricted to portfolio companies and is used to fuel their growth.
  • The fund applies strict valuation and performance metrics to avoid chasing overvalued companies.
  • There is minimal conflict between early funds and opportunity funds due to similar LP positions.
  • Investments are made early for informational advantage and to minimize dollars at risk.
  • The process allows for insights into entire sectors and strategic moves if a sector becomes less fruitful.
  • The portfolio is concentrated down to core positions after gaining significant insight.

Our opportunity fund is in fact contractually prohibited from chasing deals outside of our portfolio.

This quote describes the strategic limitation placed on the opportunity fund to focus on accelerating the growth of existing portfolio companies.

Managing Signaling Risk with the Opportunity Fund

  • Not all companies require follow-on funding from the opportunity fund.
  • Traditional financing may suffice for some companies.
  • There is no economic urgency to extract additional equity from entrepreneurs unnecessarily.
  • The opportunity fund does not carry a significant signaling risk.
  • Transparency and frankness mitigate any potential negative signaling when not following on.

I don't think that our peers expect us to always follow on from the opportunity fund, because sometimes companies do well enough that they don't need money from the opportunity fund, or sometimes they're growing at a pace where traditional financing is sufficient.

This quote clarifies that the opportunity fund is not expected to always participate in follow-on rounds, as companies may not always need it or may have other financing options.

Transparency in Investment Decisions

  • Transparency with entrepreneurs and investors is key when deciding not to follow on.
  • Not every company fits the investment strategy, and this is communicated clearly.
  • An example is provided with Zen Payroll (now Gusto), where they chose not to be the lead investor in successive rounds.

We are brutally frank with all parties, including the entrepreneurs and the folks upstream, about how we make an investment decision.

The quote stresses the importance of being open and honest about investment decisions, which helps manage expectations and maintain professional relationships.

Importance of Thesis-Driven Venture Firms

  • Thesis-driven venture firms prioritize investment strategies based on a specific thesis or set of principles.
  • Matt Ocko believes in the significance of a meta thesis that guides investment decisions.
  • A meta thesis focuses on the use of compute and novel, highly defensible algorithms.
  • Capital efficiency is a key aspect, both for the company's operations and for delivering value to customers.
  • Preference for investing in companies that address unloved, contrarian markets or massive markets.
  • Examples include computational biology, agricultural genomics, and robotic automation.

"Everybody who's invested in Gusto Zenpayroll at almost every stage so far, is going to make a lot of money. We're grateful we had the chance to participate, but I think everybody also respects that we are relentless about our thesis."

This quote highlights the success of Gusto Zenpayroll investments and the firm's commitment to its thesis, which is respected by their investment community.

"Our meta thesis, the thing that we want to see in any company is that they are exemplifying the use of compute and novel, highly defensible algorithms to themselves."

Matt Ocko explains the core of their meta thesis, emphasizing the importance of companies that leverage advanced computing and proprietary algorithms for efficiency and competitive advantage.

Venture Fund Life Cycles

  • Venture fund lifecycles typically span 10-12 years, with potential for short extensions.
  • There is a perceived misalignment between traditional fund lifecycles and the time required for deep tech companies to fully mature.
  • Some industry leaders believe that extending fund lifecycles could better accommodate the growth and value realization of deep tech investments.
  • The current industry standard may not fully support the long-term potential of companies with the possibility of enduring for decades.
  • Matt Ocko suggests that some limited partners (LPs) may not be comfortable with longer investment horizons, indicating a potential shift in early-stage venture communities.

"The fact is, in deep tech, in sustainable franchises, not consumer companies, not that consumer companies are bad, but companies with 40 5100 year durability... Those aren't fully realized inside a ten year fund life."

Matt Ocko points out that deep tech companies with long-term potential cannot fully realize their value within the standard fund lifecycle, suggesting a need for change.

"I think that the realization of maximum value from a successful investment and traditional fund lifetimes are beginning to invert."

This quote expresses Ocko's view that the traditional venture fund lifecycles are becoming less aligned with the optimal timeline for realizing the maximum value from investments, particularly in deep tech.

Measuring Company Success

  • Success metrics for companies include actual revenue and the number of durable Fortune 1000 customers.
  • Matt Ocko prefers these metrics over others, such as net promoter score.
  • GAAP bookings and recognized GAAP revenue are important indicators of a company's financial health and market position.
  • The goal is to allow companies to reach their full potential, whether through public offerings or significant exits.

"We measure our companies not by net promoter score, as one of our colleagues likes to talk about, but by how much actual revenue they're making across how many durable Fortune 1000 customers."

Ocko emphasizes the importance of tangible financial success and strong customer relationships with major corporations as key indicators of a company's progress toward market dominance.

"Do I sell positions in a panic to secondary funds? Do I turn off the lights because a company with $150,000,000 of profitable GAAP revenue and a hard paid upfront bookings backlog of $600 million isn't quite ready to go be a victim of aggressive short hedge funds in the public market yet."

Here, Ocko rhetorically questions whether it makes sense to hastily exit investments in profitable companies just because they are not yet ready for the public market, implying a preference for a more patient and strategic approach.

Favorite Book

  • Matt Ocko's favorite book is "The Way Things Work" by David Macaulay.
  • He appreciates the book for its detailed exploration of human innovation.
  • Loves sharing the book with his children and enjoys it on a rainy day.

My favorite book is a large volume called the Way Things work, recently updated by the great architect illustrator David McCauley I love it because it's inspired me since childhood and continues to do so by showing intimate details of a huge panoply of human innovation.

  • This quote highlights the book's influence on Matt Ocko from childhood and its role in illustrating the breadth of human innovation.

Productivity Tips

  • Matt Ocko humorously suggests "Never sleep" as a productivity tip.

Never sleep.

  • The quote is a humorous take on staying productive, implying that sacrificing sleep can lead to increased productivity.

Perspective on Sleep

  • Matt Ocko offers a half-joking response to Ariana Huffington's advocacy for 8 hours of sleep.
  • He suggests that his strategy of less sleep is validated by his successful returns.

I would, with a joking but ever so slightly sincere rejoinder, say that our returns speak in favor of my strategy and not hers.

  • This quote suggests that Matt Ocko believes his success is a testament to his approach to sleep and productivity, albeit with a touch of humor.

Founders and Sleep

  • Matt Ocko acknowledges the existence of highly disciplined, brilliant founders who manage to get sufficient sleep.
  • He also mentions "short sleepers," who are exceptionally smart and relentless, managing with only 4 hours of sleep.

There are a handful of founders who are not only superhumanly brilliant, so they process and execute on information an order or more of magnitude faster than you and I.

  • The quote emphasizes the exceptional capabilities of certain founders who can maintain high productivity with less sleep.

Essential Reading Materials

  • Matt Ocko relies on Nuzzel for information synthesis.
  • He reads Science, Nature, MIT Technology Review, and internal magazines from Carnegie Mellon, Stanford, and Berkeley.
  • He values these readings for insights that can validate or challenge his business strategies.

I rely on the synthesis that I get from nuzzle Jonathan Abrams just fantastic information utility.

  • The quote indicates that Nuzzel is a key tool for Matt Ocko in staying informed and making informed decisions.

Investment Decisions

  • Matt Ocko discusses a follow-on investment in 3Scan due to their transformative impact on drug development and medicine.
  • He also talks about a de novo investment in Tradeshift, which applies machine learning to reduce fraud and friction in the global supply chain.

So follow on, three scan. Because they are transforming both drug development and medicine by delivering a 3d map from the subcellular level all the way up to complete organ systems 1000 times faster and with essentially infinitely greater accuracy than human pathologists.

  • This quote explains the rationale behind the follow-on investment in 3Scan, emphasizing their revolutionary technology in medical imaging.

Tradeshift's Market Impact

  • Tradeshift has a large user base and is significantly impacting the global supply chain while remaining under the radar.

They have almost a million discrete companies in 140 countries worldwide, from tiny companies in China up to a huge chunk of the Fortune 100 addicted to their stuff.

  • The quote highlights Tradeshift's extensive and diverse customer base, which includes a significant portion of Fortune 100 companies.

Upcoming Interview on AI

  • A second part of the interview with Matt Ocko will focus on the positive and negative aspects of artificial intelligence.

But remember, that is not the last we'll be hearing from Matt as we have an incredible second part to this interview, which will be featured in our special AI week, which will discuss the dark and the light side of AI.

  • This quote teases the upcoming content of the second part of the interview, which will delve into the complexities of AI.

Show Promotion and Sign-off

  • Harry Stebings promotes following himself and Matt Ocko on social media for updates.
  • The show endorses Eve mattresses, offering a discount and highlighting the importance of a good night's sleep.

You can follow me on Snapchat at htebings with two B's, and you can follow Matt on Twitter at matoko.

  • The quote is a call to action for listeners to engage with the hosts on social media for further insights and updates.

So go to Evemattress Co. UK and use the code 20 VC for a fantastic 50 pounds off and it'll be with you in the next day delivery.

  • This quote is part of the show's promotional segment, offering listeners a discount on Eve mattresses.

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