20VC David Tisch on Why Ownership in Venture Does Not Matter, His Biggest Investing Misses and Hits and How His Investing Style Changed as a Result & 3 Core Reasons VCs Pass That Do Not Make Sense

Summary Notes


In a dynamic episode of 20 VC, host Harry Stebbings engages in a rare and candid debate with David Tisch, founder and managing partner at Box Group. They delve into contrasting perspectives on portfolio construction, with Tisch emphasizing the importance of backing exceptional entrepreneurs over fixating on ownership percentages, and advocating for a flexible approach to deal terms. Tisch also discusses Box Group's strategy of investing in a high volume of companies, aiming for 80-100 per fund, and the significance of maintaining a service-oriented approach to add value to founders. Despite the proliferation of capital and the rise of preemptive funding rounds, Tisch advises founders to focus on building great companies rather than stressing over valuations or market size, as success will make any entry price seem reasonable. He also touches on secondary markets for founders and funds, the importance of fresh perspectives on boards, and the constant challenge of identifying and investing in the next breakthrough company.

Summary Notes

Introduction to 20 VC Podcast Episode

  • Harry Stebbings introduces the podcast and acknowledges critiques of not challenging guests enough.
  • David Tisch, founder and managing partner at Box Group, is introduced as a guest with significant experience in the venture capital industry.
  • Mention of Box Group's successful investments in companies like Airtable, Glossier, Pillpack, and Plaid.
  • David Tisch's background includes being a managing director at Techstars New York and a prolific angel investor.
  • Harry Stebbings promotes Carter, Secureframe, and Cooley as valuable resources for companies and venture capitalists.

"This is 20 VC with me, Harry Stebbings, and if there's one element where the podcast is criticized for often, it's that I agree with the guest too much and that I do not push back enough on some ideas shared today."

Harry acknowledges a common criticism of the podcast and sets the stage for a more contentious discussion on portfolio construction with David Tisch.

"David Tish found and managing partner at Box Group, one of the leading seed-focused firms of the last decade, with a portfolio including the likes of Airtable, Glossier, Pillpack, Plaid, and many more incredible companies."

Harry introduces David Tisch, highlighting his role and the success of his firm, Box Group, in the venture capital industry.

David Tisch's Entry into Venture Capital

  • David Tisch reflects on the differences in the venture capital and startup landscape between 2009/2010 and the present.
  • Venture capital was not as commonly discussed or aspired to in the past as it is now.
  • Tisch's interest in technology and the Internet, particularly during the Web 2.0 era, drove him towards a career in venture capital.
  • His career path included making early-stage technology investments, running Techstars New York, and founding Box Group.

"Venture capital isn't this word that gets talked about in school. People aren't aspiring to join our industry."

David Tisch discusses the evolution of the venture capital industry and its increasing popularity and educational presence.

"Box Group became my way to invest into companies that were outside of the Techstars ecosystem. And nine years ago left Techstars to do box group full time."

David Tisch explains the origin of Box Group and his transition to focusing on the firm full-time.

Portfolio Construction Debate

  • Harry Stebbings and David Tisch discuss their differing opinions on portfolio construction.
  • Tisch emphasizes the importance of not projecting internal business concerns onto founders during investment discussions.
  • He focuses on identifying amazing entrepreneurs and creating investment deals that work for both parties without burdening founders with the investor's own requirements.
  • Tisch explains that by investing in unique, outlier companies, the math of venture capital investments works out regardless of ownership percentages.

"I think it's really important in what we do to not worry about projecting our own internal problems externally on founders."

David Tisch highlights the importance of separating an investor's internal business considerations from the relationship with the founder.

"If we invest in unique, outlier companies, our math works. Every VC's math works. If you fund great companies."

David Tisch argues that the success of venture capital investments hinges on funding exceptional companies, rather than meeting specific ownership thresholds.

Discussion on Fund Size and Returns

  • Tisch manages over $100 million and is aware of the returns necessary for success.
  • He insists that the focus should be on the founders building great companies, and if they do, the financials will align.
  • Tisch uses hypothetical examples of owning small percentages of extremely successful companies to illustrate how returns can be significant even with small ownership stakes.
  • Harry Stebbings challenges this model, pointing out the rarity of $100 billion companies.

"I need to make sure that the founder is aligned to build a great company. And if they build a great company, I can figure out the math."

David Tisch stresses the importance of founders' alignment with building successful companies over the investor's financial requirements.

"But I said 0.1%, right? And now if you get to 1% or 2% or 3%, you're not dependent upon a specific size of an outcome."

David Tisch explains that even small percentages in highly successful companies can yield substantial returns, reducing dependency on the scale of the outcome.

Number of Companies in a Portfolio

  • Tisch reveals that Box Group has over 300 active companies in their portfolio.
  • Each fund aims to invest in 80 to 100 companies, a higher number than what Harry Stebbings initially suggests.
  • Tisch describes his role as servicing the entrepreneur and ensuring customer satisfaction.

"We've been doing this a long time, and so I think today we have probably over 300 active companies in the portfolio."

David Tisch provides insight into the scale of Box Group's portfolio.

"My job is to service the entrepreneur. I need to make a customer happy."

David Tisch defines his role in venture capital as providing service to entrepreneurs and ensuring their satisfaction.

Capital Proliferation and Ownership Building

  • In today's market, large tier-one investment firms often consume significant ownership stakes in successful companies.
  • Smaller initial investments may not enable investors to build significant ownership over time due to competition from these larger firms.

"And you can't build ownership."

This quote highlights the difficulty of building ownership in a startup when competing with major investment firms that can take large stakes.

Founder-Investor Relationships

  • Establishing a strong relationship with founders is crucial for investors who wish to increase their investment over time.
  • The ability to "buy up" in a company is contingent on the founder's perception of the investor's value.
  • Strong relationships can lead to opportunities for investors to contribute more significantly in future funding rounds.

"And so what I think happens is if you are, again, satisfying the founder in a way that they believe that you are worth prioritizing, you can, over time, increase your amount that you're investing in a company."

The quote emphasizes the importance of being valuable to the founder in order to secure opportunities for increased investment.

Market Valuations and Price Sensitivity

  • The venture capital market has seen escalating valuations, with some companies reaching over $100 billion in public markets.
  • Price awareness is important on a portfolio level, but individual deal prices should not be the sole determinant for investment decisions.
  • Investors must balance price sensitivity with the recognition of market trends and potential outcomes.

"I think it is important to be price aware on a portfolio basis, and I don't think on a deal by deal basis, price is a determinant of making a decision."

This quote suggests that while investors should be mindful of overall portfolio valuations, they should not let the price of individual deals dictate their investment choices.

Preemptive Rounds and Fundraising Strategy

  • The term "preemptive round" may become obsolete as the speed of fundraising accelerates and such rounds become commonplace.
  • Founders should consider the amount, valuation, and investor relationships when offered capital, regardless of the fundraising stage.
  • The responsibility to scale into a given valuation lies with the company, and venture capital inherently involves risk.

"So if I'm getting as much money as I want, at a price that I want from a person that I want, it's a no brainer. You take the money."

The quote advises founders to accept funding when it meets their desired criteria, highlighting the practicality of capitalizing on favorable offers.

Signaling Risk and Multi-Stage Funds

  • Signaling risk, often cited when multi-stage funds invest in early rounds, is considered an overrated concern.
  • Multi-stage firms have a history of successful early-stage investments and should not be viewed as a deterrent for subsequent funding rounds.
  • The perceived risk of not receiving future investment from an initial multi-stage investor is not a significant factor in a company's success.

"But multistage investors are great seed investors. They've been great seed investors for a long time."

This quote counters the argument that multi-stage funds pose a signaling risk in seed investing, citing their track record of successful early investments.

Price Incentive Misalignment

  • Multi-stage funds participating in seed rounds may have different price incentives compared to seed-focused investors.
  • Founders should seek external options to negotiate effectively with multi-stage funds interested in leading subsequent rounds.
  • Founders need to be aware of their position within an investor's portfolio and manage expectations regarding attention and support.

"That's real. That's 100% real. But that's where you need to get external optionality and leverage in order to negotiate that."

The quote acknowledges the reality of price incentive misalignment and suggests that founders should seek leverage to negotiate favorable terms.

Check Size and Investor Attention

  • Smaller checks often receive less attention from investors compared to larger investments.
  • The intention behind writing a first check can be to demonstrate capability for a larger investment.
  • Multistage firms have more established business practices and may view smaller checks as less significant.
  • Confidence in the value of smaller investments remains high despite potential underestimation in the market.

"You got a 50 to 100k check, you're going to get less attention than a 500." "Or a 750k check, probably on sub average, out of the attention graph."

These quotes highlight the relationship between the size of an investment and the attention it garners from investors. Smaller checks, such as those between $50k and $100k, are likely to receive less focus compared to larger sums like $500k or $750k.

Firm's Investment Strategy and Scaling

  • The firm specializes in early-stage investing, particularly seed and pre-seed rounds.
  • The preference is to not lead investment rounds but rather be a significant, yet not primary, contributor.
  • Collaboration and investing in companies with high potential are core to the firm's strategy.
  • The firm has an opportunity vehicle to increase investment in standout companies.
  • There is no desire to scale to a significantly larger fund as the focus is on maintaining the current successful approach.

"We believe our craft is early stage investing. We want to be excellent at investing in seed precede." "We don't want to lead seed rounds. We don't want to lead series A rounds."

The firm's focus is on early-stage investing, with an emphasis on not leading investment rounds but rather participating as a substantial, collaborative investor. They aim for excellence in seed and pre-seed investing.

Positioning Among Micromanagers and Investment Dynamics

  • The rise of micromanagers in investment spaces may threaten the firm's preferred secondary position in investment rounds.
  • Each investment opportunity is unique and requires a tailored approach to determine the firm's involvement.
  • The firm's investment strategy involves selling their value proposition to founders effectively.

"I think every deal is different and you have to go into every company and figure out if you want to invest, figure out what the round dynamic looks like and figure out how to explain what you're selling and hopefully have the founders buy it."

This quote emphasizes the need for adaptability in investment strategies, as each deal presents distinct challenges and opportunities. The firm must effectively communicate its value to founders to secure investment positions.

Investment Cadence and Fund Lifespan

  • The firm prefers a two to three-year fund cycle, with a faster pace seen as aggressive and misaligned with their business model.
  • Long-term perspective and consistency in the market are crucial for the firm's success.
  • The firm's focus is on building lasting relationships with founders and maintaining a strong reputation in the investment community.

"On a two to three year fund cycle. Two and a half feels totally comfortable, three feels fine, two feels aggressive."

The preference for a two to three-year fund cycle reflects the firm's strategy for sustainable and measured investment pacing, avoiding the pressures of rapid deployment.

Missed Investment Opportunities and Reflections

  • The firm acknowledges missing out on successful companies as an inherent part of the seed investment business.
  • Missed opportunities serve as learning experiences to improve decision-making processes.
  • The firm's partners have a balanced perspective on missed investments, using them as motivation to improve.

"Every company that is good that we had a chance to invest in, they all haunt me."

This quote captures the personal impact of missed investment opportunities and the drive to learn from these experiences to enhance future decision-making.

Learning from Missed Opportunities and Adapting Practices

  • The firm continuously evolves its approach based on lessons learned from missed investments.
  • The decision-making process is a focal point for improvement, particularly in assessing potential investments.
  • The importance of adding value to attract future deals and secure investment positions is recognized.

"I obsess over seeing a deal. What I think is the hardest part to get right and articulate and talk about is number two, is make the decision."

The firm places significant emphasis on the decision-making aspect of investing, recognizing it as a critical area for refinement and improvement.

Reevaluation of Investment Criteria

  • The firm has adapted its investment criteria over time, learning from past mistakes.
  • Valuation and stage of development are factors that the firm no longer uses as reasons to pass on investments.
  • The ability to envision a company's future potential is critical in the decision-making process.

"Don't pass on a deal because it's overpriced. If it's going to be a great company, that's the cheapest it will ever be."

This quote reflects a shift in the firm's approach to valuation, emphasizing the importance of recognizing the long-term potential of a company over its current price.

Market Size and Competitive Landscape Considerations

  • The firm recognizes the challenge of assessing market size and its role in investment decisions.
  • Expanding and creating markets are part of the entrepreneurial process, which should be considered when evaluating potential.
  • The competitive landscape is a separate but equally important consideration in assessing market opportunities.

"If you pass on something because of market size and the company doesn't work, you were right, it was market size."

The quote underscores the complexity of using market size as a determinant in investment decisions, suggesting that a company's success may be tied to its ability to expand or create its market.

Market Entry and Competition

  • Entering a big market doesn't guarantee success; companies must find their unique advantage.
  • Overcoming established competitors is necessary to become the top player in a competitive space.

The market is big enough for multiple players, but it didn't mean that just entering the market enables you to be a big outcome.

This quote emphasizes that merely entering a large market does not ensure significant success. Companies must differentiate themselves and outperform existing competitors to achieve a leading position.

Secondaries for Founders

  • Secondary sales are increasingly available for founders due to more capital in the market.
  • Founders should consider secondaries to alleviate personal financial stress and maintain work-life balance.
  • At scale, founders must make risk-adjusted decisions about selling shares.

Once the company is off the ground, the less a founder has to worry about their day to day life, the better.

David Tisch advises that founders should use secondaries to secure personal financial stability, which can positively impact their focus and performance in running the company.

Seed Funds and Secondary Transactions

  • Seed funds have opportunities to sell in secondary transactions to later-stage investors.
  • David Tisch's firm chooses not to sell their positions.

We don't sell.

David Tisch states his firm's policy on secondary transactions, indicating they retain their stakes rather than selling them.

Decision-Making on Selling after IPO

  • Deciding when to sell shares post-IPO is specific to each company.
  • Selling too early can result in missing out on substantial future growth.

If you had sold Shopify when they went public, you left like 100x on the table.

David Tisch uses Shopify as an example to illustrate the potential loss of value if a venture capitalist sells shares immediately after a company's IPO, highlighting the importance of understanding each company's potential for growth.

Fresh Mindset in Venture Capital

  • Venture capitalists must approach each opportunity with enthusiasm and an open mind.
  • Past successes and failures should not cloud judgment on new investments.

You have to wake up excited to do this job every day knowing that the next company you see is potentially the next great investment.

David Tisch speaks about the importance of maintaining a positive and eager attitude in venture capital to identify and invest in the next successful company.

Internal Decision-Making Process

  • The decision-making process is collaborative and driven by advocacy within the team.
  • Team members support the advocate of a deal to reach a strong conviction.

Our job is to help that person get to their conviction as best as we can.

David Tisch describes their advocacy-driven decision-making process, where the team collaborates to support the member who champions a particular investment, ensuring thorough evaluation and confidence in the decision.

Personal Insights and Preferences

  • David Tisch shares his personal recommendations and reflections on various topics.
  • He emphasizes the value of teaching children through educational documentaries.
  • Living with uncertainty is a fundamental aspect of venture capital work.
  • Investing should be driven by belief in the company rather than trying to outsmart others.

Empathy, kindness, and determination.

These are the three traits David Tisch hopes to instill in his children, reflecting the values he deems important for personal development.

Challenges and Investments

  • The primary challenge for Box is consistent: finding and investing in the next great company.
  • David Tisch highlights recent investments in Ramp and an upcoming company called Catch.

Ramp is a company that we've been fortunate enough to investment since the seed round.

David Tisch expresses enthusiasm for Ramp's performance and potential, indicating why his firm chose to invest in them from an early stage.

Venture Capital Philosophy

  • Venture capitalists must be optimistic and dream alongside founders to identify long-term unique outliers.
  • Trust and collaboration within the venture capital team are critical for making great investment decisions.

Our job is to find the long-term unique outliers, and that has to come through dreaming alongside the founders.

David Tisch conveys the venture capital philosophy of seeking exceptional companies and aligning with founders' visions to achieve success.

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