20VC First Round's Phin Barnes on How The Best Founders Optimize for Learning Per Dollar Spent, What Makes A Truly Special FounderVC Relationship and Why Pattern Recognition is Another Term For Intellectual Laziness

In this episode of "20 Minutes VC," host Harry Stebbings interviews Finn Barnes, partner at First Round Capital, a venture firm with a successful portfolio including Uber, Square, and Warby Parker. Barnes shares insights from his journey from helping grow a $15M business to $225M in revenue as a creative director to starting his own fitness video game company. He emphasizes the importance of listening to founders and providing what they need to bring out their best, a philosophy he applies from personal advice given by his father. Barnes also discusses the current venture landscape, highlighting the challenges of excess capital supply and velocity, and the impact on founder decision-making. Furthermore, he critiques the reliance on pattern recognition in VC, advocating for a focus on consumer problems and solutions instead. Lastly, Barnes stresses the importance of diversity in startup teams, likening diversity debt to technical debt, and argues that the most significant venture outcomes in the next decade will likely come from diverse founders.

• Harry Stebbings hosts the show "20 minutes VC".
• The episode is considered one of the best and most enjoyable.
• Finn Barnes, a partner at First Round Capital, is the guest.
• First Round Capital is known for its successful early-stage investments.
• Finn Barnes has a background as an entrepreneur and venture capitalist.

This is the 20 minutes VC with me, Harry Stebbings at H stebbings 90 96 with two B's on Instagram. This is simply one of the best shows we've ever done. It was such a joy for me to do that.

Harry Stebbings introduces the podcast and expresses his excitement about the episode's quality.

• Finn Barnes has experience in growing a startup from $15 million to $225 million in revenue.
• He started a fitness video game company and built partnerships with major corporations.
• Finn writes a blog called "Sneakerhead VC".
• First Round Capital's portfolio includes Uber, Square, Warby Parker, and other notable companies.

He learnt the business of startups helping grow and won from $15 million to $225,000,000 in revenue as creative director for footwear and started his own fitness video game company.

The quote summarizes Finn Barnes' experience in scaling a business and his entrepreneurial endeavors.

• Brex is a corporate card for startups with benefits like instant online signup and high credit limits.
• Terminal helps startups hire remote technical teams and provides comprehensive support services.
• Lattice is a people management solution for growing companies, offering tools for performance management and employee engagement.

Brex founders Enrique and Pedro built a payments business in Brazil, but found themselves rejected for a corporate card when they were in Y combinator.

This quote highlights the origin story of Brex, emphasizing the founders' personal experience with a problem they went on to solve for other startups.

• Finn Barnes joined First Round Capital as a reluctant intern after business school.
• He chose to surround himself with entrepreneurs and venture supporters.
• Initially, he worked for free and focused on learning from others in the field.

I was right out of business school, and what really happened, if I'm honest, is that absent any good ideas of my own as an entrepreneur, I decided the very best thing I could do, or the second best thing I could do, was to surround myself with other great entrepreneurs and the people who support them on that journey.

Finn Barnes explains his decision to enter venture capital due to a lack of his own entrepreneurial ideas at the time.

• Finn Barnes' transition to becoming an investor involved an apprenticeship with Josh Coppelman.
• He gained experience by working with entrepreneurs post-investment and providing strategic advice.
• The gratitude from entrepreneurs for his help was a turning point in choosing venture capital as his life's work.

The thing that flipped me from thinking I'm learning all these things about how to build companies and can't wait to apply them again, to feeling like VC and being an investor is my life's work, was when the thank yous started coming back.

The quote captures the moment Finn Barnes realized that his impact as an investor was as fulfilling as being an entrepreneur.

• Finn Barnes learned the importance of focusing on the most important aspects of meetings from Josh Coppelman.
• Josh's ability to listen and answer the underlying questions was impactful for Finn.

Josh has an incredible way of figuring out what it is that is most important in any given meeting and focusing on that thing.

This quote describes the key lesson Finn Barnes learned from Josh Coppelman about prioritization and focus in meetings.

• The discussion moves to Finn's approach to communicating and engaging with founders.
• Finn Barnes is known for having a strong reputation among founders.
• Success as an investor is defined by financial outcomes and the ability to bring out the best in founders.

My job is to coach, not play. And if I can bring out their best in any given situation, then I've done my job.

Finn Barnes articulates his philosophy as an investor, emphasizing the importance of supporting and empowering founders.

• Finn Barnes believes that an investor and a founder can be friends.
• The priority is serving the company's interests.
• The relationship should provide a supportive and context-aware sounding board for the founder.

I think you can be friends. I think that there are three people in the relationship. There's the investor, there's the founder, and there's the company.

The quote explains Finn Barnes' view on the dynamics of the investor-founder relationship and the importance of prioritizing the company.

• Venture capitalists have a longitudinal view of the businesses they invest in.
• Quick, rich conversations are possible due to a deep understanding of the company's history.
• The relationship with founders is described as intimate and personal.
• Professional veneer in these relationships can hinder success.
• Founders' mindset and emotional state are crucial to the company's success.
• Support should be both psychological and strategic.

"I think that relationship is the best word to describe it is actually intimate. It's quite intimate relationship, very personal."

The quote emphasizes the closeness of the relationship between venture capitalists and founders, highlighting the personal nature of their interactions.

• Curiosity and competitiveness are essential traits for venture capitalists.
• Curiosity should be focused on the founder's vision and personal motivations.
• Understanding the "dream beyond the dream" is critical.
• Competitiveness comes into play in supporting and pushing founders to succeed.
• The application of curiosity and competitiveness can define the success of the VC-founder partnership.

"I'm most curious to understand the dream beyond the dream for founders that I partner with."

Finn Barnes expresses his deep interest in the long-term visions and personal motivations of founders, which goes beyond immediate business goals.

• Success in venture capital is often attributed to pattern recognition.
• Finn Barnes considers pattern recognition to be a form of intellectual laziness.
• Startups are unique and should not be judged solely on past patterns.
• Dynamic markets require adaptability and forward-thinking investment strategies.

"I think pattern recognition is another name for intellectual laziness."

Finn Barnes criticizes the reliance on pattern recognition in venture capital, suggesting it is a shortcut that hinders the discovery of innovative startups.

• Putting oneself in the consumer's shoes helps avoid biases.
• Investing in people rather than business models is more compelling.
• Understanding the founder is key to moving beyond pattern matching.
• Great venture outcomes often come from creating new markets, not fitting into existing ones.

"I think the number one way to mitigate those biases is to put yourself in the shoes of the consumer."

Finn Barnes proposes empathy with the consumer as a strategy to overcome cognitive biases and make better investment decisions.

• Pre-investment, awareness of a founder's weaknesses is important.
• Post-investment, the focus should be on amplifying a founder's strengths.
• Dominance in a market is more likely achieved by leveraging strengths than by mitigating weaknesses.

"You don't hire for lack of weakness, you hire for strength."

Finn Barnes draws a parallel between hiring and investing, emphasizing the importance of identifying and cultivating a founder's strengths.

• The current venture market is crowded and has an unprecedented capital overhang.
• The velocity of capital is a critical factor driving market inflation.
• Increased capital supply and velocity can reduce the quality of funded startups.

"The ability to drive returns is much more challenged given those two factors."

Finn Barnes discusses the challenges in achieving returns in a venture market saturated with capital and rapid investment cycles.

• Venture capitalists often discuss price sensitivity.
• First Round considers themselves on the sell side, offering a product to founders.
• The founder decides if the partnership is worth the equity dilution.
• Basic math still applies to investment returns, even for successful companies like Uber.

"The science of venture capital is knowing how to price the 95% of investments where price matters. And the art of venture capital is knowing the 5% where price doesn't matter."

Finn Barnes quotes Jim Breyer (pending fact-check) to highlight the balance between the methodical and intuitive aspects of venture capital pricing decisions.

• Oversupply of capital can be detrimental to the best founders.
• More funding is generally positive for innovation and entrepreneurship.
• Capital should be used to test hypotheses and validate or disprove elements of a business thesis.
• Founders should raise money when it's clear that capital is needed to test specific hypotheses.
• Equity and time are irreplaceable resources for founders.
• Capital should accelerate and unblock business in fundamental ways.
• Best founders may apply capital prematurely without fully understanding the problem or the customer.
• "Optimize learning per dollar spent" is crucial for success, but the ratio is decreasing due to plentiful capital.
• Discipline in maximizing learning per dollar is a key indicator of success.

"But in today's market, I think some founders are drawn into the approach that money is the weapon."

This quote highlights the misconception among founders that capital is the primary tool for market success, rather than a strategic resource to validate business hypotheses.

"Optimize learning per dollar spent."

This phrase emphasizes the importance of using capital efficiently to gain market insights and knowledge, which is essential for a startup's growth and success.

• Cash may not be a defensible moat for a durable enterprise.
• Relying on capital markets for defensibility is risky due to their fickleness.
• Network effect businesses require significant upfront investment but can become unassailable.
• A company's moat should include inherent defensibility beyond just access to capital.
• Companies with an unending need for capital are at risk of losing their moat.

"If your moat grows or shrinks based on the capital market cycles, that feels like a very challenging position to be in long term."

This quote suggests that a company's competitive advantage should not be solely dependent on fluctuating capital markets, as this is unsustainable.

• Reserve allocation is a strategic decision in venture capital.
• Initial investments are made with a reserved amount, and the remainder is for follow-on investments.
• Follow-on investments are treated as independent decisions.
• The decision to invest more or less at later stages depends on the company's growth and the relationship with the founder.
• The impact of investment decisions on round dynamics and potential returns is considered.

"We reserve $40 to $50 million for initial investments and the remainder of the fund for follow on."

This quote explains the financial strategy of allocating funds for initial and subsequent investments in a portfolio company.

• Prorata is a common investment mechanism but can be considered lazy.
• Follow-on investment decisions should be made based on the company's performance and potential.
• The initial investment decision may encompass the seed and Series A rounds.
• Decisions at Series B and beyond involve more analysis and consideration of the company's trajectory and the VC's impact on the round dynamics.

"Prorata is a lazy mechanism for allowing you not to think about how much to put in."

This quote criticizes the automatic decision-making process of prorata investments, advocating for more deliberate and thoughtful investment strategies.

• Diversity debt is akin to technical debt but pertains to company culture and hiring practices.
• Technical debt involves taking shortcuts that will need to be addressed at scale.
• Diversity debt occurs when diversity is not prioritized early on, making it harder to integrate later.
• Early employees have a significant influence on company culture.
• Hiring for diversity is challenging and time-consuming but crucial for long-term cultural health.
• Retaining diverse employees is even more challenging due to established company cultures.

"The trap that people fall into is taking on diversity debt."

This quote warns about the long-term consequences of not prioritizing diversity in the early stages of a company's growth.

"Diversity debt compared to technical debt."

By comparing diversity debt to technical debt, the speaker underscores the importance of considering diversity as a foundational aspect of a company's culture from the outset.

• The appearance of an individual, specifically gender and race, is often a proxy for their life experience in the United States due to historical societal formation.
• Life experience influences a person's worldview, which affects product creation, problem identification, and customer understanding.
• Diversity within a business is crucial for serving future customers and for venture capitalists to generate returns.
• The prediction is that the majority of the largest companies in the next decade will be founded by underrepresented minorities and women.

"An unfortunate consequence of our history is that the way someone looks, whether that's gender or race, is often a very good proxy for their life experience." "If you want to serve the customers of tomorrow, you need diversity today inside your business." "My belief is that of those five to seven, somewhere between four and seven of them are likely to be founded by someone who is underrepresented minority, a woman, or both."

The quotes emphasize the importance of acknowledging the role of diversity in shaping the future of business and venture capital. They suggest that the success of future large companies will be tied to the inclusion of diverse founders.

• Finn Barnes recommends two books: "Boyd" and "Writing Down the Bones" by Natalie Goldberg.
• "Boyd" is about a fighter pilot disrupting a traditional industry, which is relevant for founders.
• "Writing Down the Bones" discusses the importance of focusing on the quality of work rather than outcomes, applicable to the startup industry.

"Boyd, which is about a fighter pilot and how he changed the military." "Writing down the Bones by Natalie Goldberg. And this one is impactful because it really talks about working in an industry where the results of your work are unknown for a long period of time and are often subjective or outside of your control."

These quotes highlight the value of disruption and the focus on process over results, both of which are key lessons for entrepreneurs and venture capitalists.

• LP meetings help venture capitalists understand their shareholders.
• Many of First Round's limited partners are nonprofits, and the returns generated have a significant impact on their ability to achieve their goals.
• The success of venture capitalists in LP meetings can lead to tangible societal benefits like funding education and medical research.

"At our LP meetings, you start to understand the work that they do and the impact of our work on their ability to achieve their goals." "When I do my job, people will go to university that otherwise wouldn't have. Because scholarships are funded based on the returns that we generate, children will have medical interventions that have been discovered based on research that was funded from the returns that we generate."

These quotes illustrate the broader societal impact that venture capital can have, particularly when the shareholders are nonprofits whose missions are advanced by the success of the venture fund.

• The concept of "learning per dollar spent" is embodied by founders who maintain a sense of urgency and resourcefulness even after raising significant funds.
• Jeff Bezos and his "day one thesis" is cited as an example of this mindset.
• This approach is key to building companies and maximizing learning with available resources.

"The very best examples of that are the founders who raise a large series b, and the company continues to operate in any given granular area with the same sense of urgency and hustle that was exhibited on day one."

The quote captures the essence of maintaining startup agility and learning efficiency even as a company scales, which is a hallmark of successful entrepreneurship.

• Finn Barnes shares advice from his father: to be a great parent, one must always listen to their child and give them what they believe the child needs.
• This advice has been applied to how Finn interacts with founders, emphasizing deep listening and providing support based on judgment.

"All you need to do is always, always listen to her. Listen to your daughter, and then always give her what you think she needs."

The quote underscores the importance of attentive listening and tailored support, principles that are applicable to both parenting and mentorship in the venture capital industry.

• Ubiquity Six was chosen for investment due to the founder's vision and the potential of augmented reality to influence lives.
• The founder, met through Dorm Room Fund, showed promise in creating a new atomic unit of communication.
• The investment was compelling despite the trend of consumer startups being out of favor compared to enterprise startups.

"The reason that we invested in ubiquity six was, in part, Angini and his dream, beyond the dream around the use of augmented reality and how that would influence all of our lives going forward."

The quote reflects the investment decision based on the founder's vision and the transformative potential of their technology, highlighting the forward-thinking approach of venture capitalists.

• The episode concludes with thanks to Finn Barnes for his insights and to various individuals at First Round for their contributions.
• The podcast host also promotes Brax, Terminal, and Lattice, companies offering services beneficial to startups.

"I cannot thank you enough for your support, and I cannot wait to bring you an incredible interview on Friday with Dennis Mortensen, founder and CEO at X AI."

The closing quote expresses gratitude for the support received and teases an upcoming interview, reflecting the podcast's ongoing commitment to providing valuable content to its audience.