20VC Exclusive Roy Bahat on Bloomberg Beta's New Fund, The Truth About Valuation That Very Few VCs Will Tell You & Why Founders of Venture Backed Startups Make The Best Angels

In this episode of "20 Minutes VC," host Harry Stebbings interviews Roy Bahat, head of Bloomberg Beta, an early-stage venture fund with notable investments like Flexport and Textio. Bahat, who has a diverse background including roles in city government and as a co-founder of OUYA, shares the announcement of Bloomberg Beta's third fund, which will maintain its $75 million focus on the future of work and the founder-as-customer approach. He discusses the importance of founder financial situations, the changing expectations of entrepreneurs from VCs, and the role of boards in startups. The conversation also touches on the effectiveness of scout programs, founder secondaries, and the evolving archetype of tech industry role models, emphasizing the need for empathy and diversity. Stebbings and Bahat also critique the current VC landscape, including the trend of continuous up rounds and the significance of ownership in investment decisions.

• Harry Stebbings introduces Roy Bahat, head of Bloomberg Beta, for a special announcement.
• Roy Bahat is a returning guest with a diverse background, including co-founding OUYA and working in city government.
• The announcement pertains to Bloomberg Beta's fund strategy.

"We are back on the 20 minutes vc, and my word today is a special day as it's a first for the show so we normally discuss the news. Well, today we're breaking some very exciting news."

This quote sets the stage for a unique episode of the 20 Minutes VC podcast, indicating that rather than discussing the news, they will be making an announcement.

• Roy has had a "messy career" with roles in nonprofit, government, and corporate sectors before becoming an investor.
• He views startups as his favorite method for enacting change.
• Roy is now a seven-year veteran in venture capitalism.

"I call it my messy career and been a lot of pain that I've gone through by writing. But I have worked in running a nonprofit in government, city government, New York City, at a big corporation, a Fortune 500 corporation, big media."

Roy Bahat describes his diverse career path, which has led him to venture capitalism, emphasizing the varied experiences that have shaped his professional journey.

• Bloomberg Beta is announcing its third fund, which will maintain the same strategy as the previous two funds.
• The fund focuses on the future of work, early-stage investments, and treating founders as customers.

"We are today announcing our third fund, and the exciting news is that it is precisely the same as the previous two."

Roy Bahat announces Bloomberg Beta's third fund, highlighting the consistency in their investment strategy, which has proven successful in the past.

• Fund size directly influences investment strategy and the ability to back winners.
• The fund's focus requires careful consideration of competitive lanes and promises made to companies.

"Venture is a funny occupation where you get to say hooray every couple years when you keep doing exactly what you've been doing."

This quote reflects the cyclical nature of venture capital and the celebration of consistency in a successful investment approach.

• Bloomberg Beta believes in disclosing potential conflicts early in discussions with founders.
• Roy advises founders to build trust gradually with investors and be cautious with sensitive information.

"Our policy on competition is it's in the eye of the beholder, meaning the founder gets to decide."

Roy Bahat emphasizes that Bloomberg Beta respects the founder's perspective on competition and adjusts their investment approach accordingly.

• The diligence process should be conducted in a way that benefits the founder.
• Roy criticizes the practice of contacting a founder's customers too early in the diligence process.

"You can choose to do your diligence in a way that benefits your ability to assess it as quickly as possible, or you can choose to do your diligence in a way that founder as much as possible."

Roy Bahat advocates for a founder-centric approach to due diligence, prioritizing the founder's needs over the investor's eagerness.

• Roy Bahat shares a personal anecdote about a remarkable customer service experience.
• The individual showed proactive awareness and linked Roy's role with potential business opportunities.
• This experience left a strong impression, prompting investment consideration.

"The person was so responsive, and they're like, oh, I can see you're the chairman of a game console company. Are you inquiring about trying to figure out how to ship your components from China? It's like, wow. Yes. And then amazingly, the person's like, wait a minute, you're also a vc. I think our CEO is fundraising. Are you also considering us for investment?"

The quote illustrates the person's attentiveness and ability to connect dots quickly, which impressed Roy and influenced his investment perspective.

• Roy Bahat debunks the myth that post-success founders have an easy journey.
• He observes that successful founders often face intense trials and escalating expectations.
• Roy empathizes with founders and stresses the need for support during challenging times.

"My observation is that as companies become very successful and grow quickly, their founders go through some intense trials. The expectations keep going up."

The quote highlights the misconception that success equates to fewer challenges, while in reality, it can lead to more intense pressures on founders.

• Roy discusses the shift in expectations entrepreneurs have of VCs over the last six years.
• The concept of "founder-friendly" has evolved from not being adversarial to actively helping founders succeed.
• Roy emphasizes the VC's role in increasing the founders' chances of realizing their business aspirations.

"We've seen an evolution toward founders caring tremendously about the chance that an investor will help them become excellent, will make the company nudge the company's odds upward on the brick road toward greatness."

This quote reflects the changing landscape of VC-founder relationships, where founders now seek VCs that contribute to their path to excellence.

• Roy offers insights into establishing a deep trust and compassionate relationship between VCs and founders.
• He stresses the importance of transparency, attentiveness to founders' needs, and over-delivering support.
• Roy believes in creating an environment where founders feel comfortable seeking help during difficult times.

"It's a great question and we're always thinking about it and trying to learn. And I think that you, Harry, just as a human being who is clearly a caring person, part of it is just personality."

The quote suggests that personal traits play a significant role in fostering strong VC-founder relationships, alongside professional efforts.

• Roy discusses the balance between swift investment decisions and the necessity of building trust.
• He acknowledges the desire to move quickly but cautions against rushed commitments.
• Roy values being the first to say yes, but also encourages founders to consider offers carefully.

"First of all, I think we should all aspire to move as fast as we possibly can. That said, I'm making a promise that it could be a decade long promise for you to be my customer and I have to build trust."

This quote captures the tension between the need for speed in investment decisions and the imperative of establishing a lasting, trust-based relationship with founders.

• Roy expresses mixed feelings about large funds entering the seed investment space.
• He acknowledges losing deals to larger funds but also recognizes the benefits of competition.
• Roy believes that the right investor match matters more than just the fund size or brand name.

"I think it's frustrating because we've lost deals for sure. I think we've also won a bunch of deals against them."

The quote conveys Roy's realistic view on competition from large funds and his confidence in winning deals based on the value his firm can provide.

• Roy explains the relationship between fund strategy, check size, ownership target, and valuation.
• He argues that valuation is often a result of the VC fund's size and investment strategy rather than an independent assessment of the company's worth.
• Roy emphasizes that while there is a range of acceptable valuations, the primary determinant is the investing fund's characteristics.

"The valuation a founder is able to get is, in the main, is a function of the fund size. Of the fund that wants to invest in them."

This quote clarifies the misconception about valuations, highlighting that it is not solely about the company's intrinsic value but also about the investing fund's strategy and constraints.

• Proliferation of capital has led to high valuations even for prelaunch companies.
• Price sensitivity is a challenge when considering investments.
• Deciding when to stretch on a company's valuation and when to pass is complex.
• Being willing to lose deals on price is necessary to ensure financial enmeshment with successful companies.
• It's crucial to make investment decisions that will make the fund perform well overall, not just on individual successes.

"if you want to have performance as a founder or as a vc that beats the norm, you have to be willing to flat the norm."

This quote emphasizes the need to sometimes go against market norms to achieve exceptional performance.

• Ownership is typically targeted at the time of the first investment.
• The model of building ownership over time has shifted to owning the desired percentage from the outset.
• A future investment in a company can create a conflict between being a shareholder and a prospective investor.
• Follow-on investments require a specific process to avoid clouded judgment due to emotional bonds with the company.
• Unanimity is required for follow-on checks at Bloomberg Beta to ensure discipline and avoid groupthink.

"own what we want to own the day we invest."

This quote signifies the investment strategy of securing the desired ownership stake immediately rather than gradually increasing it over time.

• The current market sees a lot of continuous up rounds, sometimes with questionable mechanics.
• Some companies raise funds unexpectedly or when not performing well, suggesting a "greater fool" dynamic.
• This dynamic is not a sustainable strategy for a less robust market.
• The strategy of relying on later investors marking up valuations may work temporarily but is not aligned with Bloomberg Beta's principles.

"Money burns a hole in the pocket even of later stage vcs, and VC is going to VC."

This quote reflects the tendency of venture capitalists to continue investing despite potential market overvaluations, contributing to continuous up rounds.

• Boards were originally created to represent fractured ownership in joint stock corporations.
• The necessity of boards for early-stage startups is questioned due to the frequency of critical decision-making.
• Boards can be seen as unnecessary at early stages and more appropriate for later stages when governance matches company decisions.
• Roy Bahat's personal approach to board participation is influenced by his belief in the founder as a customer and not being a source of accountability for the CEO.

"The structure that resulted in needing a board of multiple owners and a board was a republican body, an elected body to represent fractured ownership."

This quote explains the historical reason for the creation of boards and how their purpose has evolved over time.

• Roy Bahat has learned from sitting on boards with experienced VCs like Alfred Lyn from Sequoia.
• The cultural expectation of greatness at Sequoia has been a significant learning point for Bahat.

"habit of defaulting to expecting greatness, is such a strong cultural pull."

This quote highlights the influential mindset at Sequoia Capital, where there is a default expectation of excellence and success.

• Founder secondaries are seen as a valuable tool when used appropriately.
• The financial situation of a founder is critical and can influence company decisions.
• Secondary sales can be justified for various personal and financial reasons.
• The timing, amount, and trust involved in secondary transactions are important factors to consider.

"The founder financial situation is one of the most personal. Financial situation is one of the most important and under discussed aspects of the life of a company."

This quote underscores the importance of understanding and addressing the personal financial needs of founders to prevent them from becoming distractions.

• The heroes in the tech industry are often those who have achieved financial success.
• These figures have significant power, but they may not always be the best role models.
• Technology leaders tend to be very focused, which is beneficial for success.
• However, post-success, there is a need to broaden perspectives and consider the company's societal impact.
• Tech leaders should acknowledge their own weaknesses and promote diversity and inclusiveness.

"I think many of the heroes that we have set up in the technology industry are awful role models in that the heroes that we have set up are often the people who have been the most financially successful."

This quote emphasizes the issue that role models in tech are often chosen based on their financial success rather than their positive impact or exemplary behavior.

• Speaker A recognizes a shift towards more conscious and vulnerable leadership in the tech industry.
• New leaders are presenting a more human side of leadership, being open and globally aware.
• These emerging role models can potentially be more admirable and suitable for the tech industry.

"So I agree with you, maybe in the existing role models in tech not being ideally suited. But then I do think of the next generation of role models, the collisons, Justin Khan, Alex McCor at Clearbit."

This quote acknowledges the problem with current tech role models but points out that the next generation of leaders is showing promise in changing the narrative.

• Speaker B acknowledges that venture capital has traditionally lacked diversity.
• There is a need to embrace different perspectives to bring the world together.
• The tech industry must address diversity and perspective issues to be successful.

"I'm the poster child for the lack of diversity and yet kind of feel like if we don't get our head around this, the whole industry isn't going to work."

Speaker B self-identifies as fitting the stereotype of a venture capitalist and stresses the importance of addressing diversity for the industry's future success.

• Starting a company and investing in a company are distinct roles.
• Speaker B learned that incubating companies is not the same as investing and now focuses solely on investing.
• Understanding the unique challenges of each role is crucial for success in the venture capital industry.

"I mistakenly believed that starting a company and investing in an early stage company were really similar to each other... They're totally different roles."

This quote captures Speaker B's realization that founding and investing require different skill sets and should be approached separately.

• Scout programs are becoming more prominent, and Speaker B has an opinion on their role in the ecosystem.
• Transparency is critical; investors should know where their money comes from.
• Bloomberg Beta's Open Angels program emphasizes transparency and the value of angel investors.
• Returns from investments go to Bloomberg philanthropies, contributing to social causes.

"I think the issues with scout programs are if the goal of the program is to discover investments for the big fund, then that's an important dynamic that a founder ought to know about."

This quote highlights the importance of transparency in scout programs and the potential conflicts of interest that founders should be aware of.

• Founders in Speaker B's portfolio are encouraged to angel invest.
• Angel investing can be valuable for founders' learning and is seen positively by Bloomberg Beta.
• Time and focus can be constraints for founders who wish to angel invest.

"We actually have a list of the founders in our portfolio who have told us that they angel invest to whom we share every deal we possibly can, because we'd love to co-invest with our founders."

Speaker B explains the proactive approach Bloomberg Beta takes to involve their portfolio founders in co-investment opportunities, valuing their insights and contributions.

• Speaker B keeps a list of pet peeves about other investors.
• Dislikes the phrase "adult supervision" as it implies founders are not capable adults.
• Values partners who offer different perspectives and problem-solving approaches.

"Adult supervision is my least favorite phrase... I only invest in adults."

This quote reflects Speaker B's disdain for the condescending attitude some investors have towards founders and emphasizes respect for founders' capabilities.

• Speaker B shares excitement about investing in States Title, a company offering title insurance for home purchases.
• The investment was made early, and the company has shown significant growth.
• The decision to invest was based on the founder's strong presentation and the company's potential.

"And still had to fight to get in. So talk about going early. I mean, you couldn't possibly be any earlier, but still, we had to fight to get in, and still, it was worth it."

This quote illustrates the competitive nature of venture capital investing and the importance of recognizing and seizing opportunities quickly.

• Speaker A thanks Speaker B for the discussion and congratulates Bloomberg Beta on the new fund.
• Both speakers express interest in future collaboration.
• Speaker B is recognized for his contributions and perspective on the venture capital industry.

"What an individual. And I really meant what I said there. I can't wait to see the portfolio that they build at Bloomberg."

Speaker A concludes the conversation with praise for Speaker B and anticipation for Bloomberg Beta's future endeavors.