20VC From Seed To Series A The Due Diligence, The Valuations, The Investment Decision Making Process with Steve Schlafman @ RRE Ventures

Abstract
Summary Notes

Abstract

In this episode of the 20 Minutes VC, host Harry Stebbings interviews Steve Schlafman, early-stage investor at RRE Ventures. Schlafman shares his journey from a tech-obsessed kid to a VC, detailing his experiences at Microsoft, a startup called Massive, and working for the Kraft family before entering the venture capital world. He discusses the differences between seed and Series A investing, emphasizing the role of instinct in seed funding and the importance of founder, product, and market in investment decisions. Schlafman also highlights the significance of mentoring within the VC ecosystem and the need for education on fundraising nuances. Additionally, he recommends reading materials that focus on hiring processes and leadership, and introduces Brightwheel, his recent investment in a SaaS platform for pre-K education, showcasing his commitment to investing in solutions for antiquated markets.

Summary Notes

Introduction to the Episode

  • Harry Stebbings introduces the episode of the 20 Minutes VC podcast.
  • Harry Stebbings can be found on Snapchat for behind-the-scenes content.
  • Steve Schlafman, an early-stage investor at RRE Ventures, is the guest of the episode.
  • Steve Schlafman has led investments in various companies and was previously a principal at Lerer Hippo Ventures.
  • Before the interview, Harry promotes DesignCrowd, an online marketplace for design services.

"Welcome back to another episode of the 20 Minutes VC with your host Harry Stebings. And you can find me, as I'm sure you all know by now, on Snapchat at H. Stebbings with two b's for all things behind the scenes at 20 minutes VC."

This quote is Harry Stebbings introducing the podcast episode and mentioning where listeners can find additional content related to the show.

"But now for today's show, I'm thrilled to welcome a good friend of mine and fantastic VC, Steve Schlaffman."

Harry Stebbings expresses excitement about having Steve Schlafman, a venture capitalist, as a guest on the show.

"However, before we jump into the interview today with Steve, if you've not had a chance to check out the amazing design crowd, then it really is a must."

Harry Stebbings takes a moment to promote DesignCrowd, a design service platform, before starting the interview.

Steve Schlafman's Background and Entry into Venture Capital

  • Steve Schlafman describes himself as an accidental venture capitalist.
  • His interest in technology began in childhood with video games and gadgets.
  • Steve started his career at Microsoft in the venture integration team.
  • He worked at Massive, an in-game ad network, and for the Kraft family with a broad business focus.
  • Steve moved back to New York to be part of the rising tech scene, joining Sticky Bits and experiencing a pivot to Turntable FM.
  • After leaving Turntable FM, he joined Lerer Ventures, marking his formal entry into VC.
  • Currently, Steve has been with RRE Ventures for three years, focusing on seed, series A, and series B investments.

"Sure. So I always like to say I'm a little bit of an accidental VC I never really intended to get into this line of business."

Steve Schlafman shares his unplanned journey into becoming a venture capitalist.

"I got my first Nintendo when I was four years old, and I owned every console up through high school. That really started my love for gadgets."

This quote highlights Steve Schlafman's early passion for technology and gadgets, which influenced his career path.

"I had a really unique opportunity to go work for a startup here in New York called Massive, which was an in-game ad network where I worked for the COO, running a team for her, specifically around network projections and ad operations."

Steve Schlafman discusses his experience at Massive, which provided him with insights into startup operations and the advertising industry.

"I had a chance to move back to New York, which was calling me. And I saw the rise of technology. Things were just getting started here, companies like Betaworks and Kickstarter and Tumblr."

The quote reflects Steve Schlafman's decision to return to New York due to the burgeoning tech scene and his desire to be part of it.

"I've been at re now for about three years, and it's been a really great experience. Re is a little bit of a different beast in that rather than just focusing on seed, we also focus slightly later series A and Series B."

Steve Schlafman explains his current role at RRE Ventures and the firm's investment focus, highlighting his experience with different funding stages.

Transition from Seed to Series A

  • Steve Schlafman discusses the differences between seed and Series A funding stages.
  • Seed funding is characterized by quick decision-making, limited data, and reliance on instinct and pattern recognition.
  • Series A funding allows for more time to build relationships with founders, observe company and market evolution, and requires more attention to financials.
  • At Series A, there is a greater range of investment amounts and valuations, which impacts ownership percentages and future fundraising.

"Making the transition hasn't been easy for me, admittedly, just to talk about seed for a second, I really think seed is about, is just pure hustle, right? It's about moving quickly, it's about doing a set level of diligence. But the reality is that there's really very little data to go off of."

This quote explains that the seed stage is fast-paced with decisions often made on limited information and a focus on the entrepreneur's potential.

"As for Series A, because you're putting more capital to work, I sort of view these things as you have the opportunity. If you see things at the seed stage, whether you invest or not, you can build relationships with founders over a longer period of time and really get to see how a company evolves, which I think is a big difference."

The quote illustrates that Series A funding allows investors to engage more deeply with companies over time, observing their growth and market changes.

"And so the math really changes. Because of the math changes, you also want to price it in a range where it's not crazy, in that it's not going to hurt the company when they go out and try to raise the series anyhow."

Steve Schlafman emphasizes the importance of financial calculations at the Series A stage, ensuring that valuations do not hinder future fundraising efforts.

The Impact of Valuation on Future Fundraising

  • Steve Schlafman explains that optimizing for high valuations during fundraising can lead to challenges in subsequent funding rounds.
  • Market changes and investor expectations at Series B can affect the step-up in valuation a company might expect.
  • Companies need to balance the amount raised and valuation to avoid difficulties in later fundraising.

"I can think of several companies I've seen, both in my time at lear and at re, where a company, they sort of optimized valuation in the amount that they raised, and then when they went out to go and raise the next round, even though the business has continued to do well for a number of factors, including the market changing slightly, or investor, the series B investors wanting to see certain kinds of metrics and not having them, they don't get as much of a step up on the last round that they were hoping."

This quote highlights the potential downside of focusing too much on valuation in early rounds, which can lead to disappointing valuation increases in future rounds.

VC's Role in Educating Founders on Fundraising Nuances

  • Steve Schlafman emphasizes the importance of VCs educating founders on the trade-offs of raising capital at higher valuations.
  • VCs should share different perspectives on fundraising strategy but acknowledge that the final decision rests with the founders or the cap table.
  • The control VCs have is limited to their investment decisions and the entrepreneurs and markets they choose to back.

"Anytime I'm sitting across the table from an entrepreneur and we're discussing this topic, it's something I will educate them on."

This quote indicates Steve Schlafman's commitment to guiding entrepreneurs through the complexities of fundraising and valuation.

"But it's my job to at least share the different perspectives. Again, my job as an investor, what I realize is, and it's something I've been thinking a lot about lately, it's very hard to control an investment."

The quote suggests that while VCs can advise, they cannot control the outcome of an investment, emphasizing the advisory role over the controlling role in the VC-founder relationship.

Role of VC Post-Investment

  • The investor's job is not to control but to educate and partner with the founder.
  • The focus is on building the company over the long term.

"My job as an investor isn't to be a control freak after the investment. It's to help educate and partner with the founder, focus on building a company over the long term."

The quote emphasizes the investor's role in providing guidance and partnership rather than exerting control, with an eye on long-term company growth.

The Role of Gut Instinct in Investing

  • Gut instinct plays a significant role, especially at the seed stage.
  • The effectiveness of gut instinct in investing is validated over time.
  • Examples of gut-driven investments include Remoteive (Zipline) and Giphy.

"At the seed stage, a lot of it is gut...I think seed is a very instinctual style of investing."

This quote highlights the reliance on instinct when making seed stage investments, suggesting that data and metrics are less prominent at this early stage.

Decision-Making Process in VC Firms

  • Decision-making process involves partners and is influenced by conviction in a theme or founder.
  • Seed program focuses on founder, market, and product without a strict priority order.
  • Successful seed investments at RRe have shone in founder, product, and market attributes.

"Each partner can invest in anywhere from three to five seed deals a year...the purpose of our seed program is that it rewards those who have conviction around a specific theme or founder."

The quote outlines the flexible structure of RRe's seed investment program, which allows partners to follow their convictions.

Market Evaluation in Seed Investing

  • Market importance is acknowledged, but it's not always the primary factor.
  • Overlooking opportunities can happen when markets are emerging or crowded.
  • VCs must discern which seemingly small markets could become significant.

"It's not to say that we're deprioritizing market like market is absolutely important, but I think our job as a vc isn't to get fooled into thinking that a market is small, because sometimes the best ones are the ones that appear small but end up becoming fairly meaningful."

This quote underlines the challenge for VCs to recognize the potential in markets that may initially appear small but have significant growth potential.

Investment Preferences Regarding Market Size and Competition

  • Investment decisions vary based on the unique product offering and market conditions.
  • Investing across a spectrum, from competitive markets with new offerings to new, unoccupied markets.

"I sort of like opportunities...I've funded companies in very competitive spaces...But in the case of Giphy, there's not a market, it's a brand new market."

Steve Schlafman expresses a preference for unique opportunities, whether in competitive markets with a differentiated offering or in entirely new markets.

Quick Fire Round: Approach and Reading Habits

  • Steve Schlafman expresses enthusiasm for the quick fire round format.
  • He reads multiple books simultaneously and aims to read at least 30 books a year.

"Sounds awesome...I try to read at least 30 a year."

The quote indicates Steve Schlafman's positive attitude toward the quick fire round and his commitment to reading as a habit.

  • Steve Schlafman recommends three books that he recently finished.
  • "Who" focuses on running a structured hiring process.
  • "Work Rules" by Laszlo Bock discusses Google's approach to hiring, training, and retaining employees.
  • "Leading" by Alex Ferguson and Michael Moritz offers insights into leadership and maintaining success over time.

One is called who, which is all around running a highly structured hiring process. The other is work rules by Laszlo Bach, who ran people at Google that talks a lot about Google's philosophy around people and how they hire, train and retain the best employees. And then finally, I just finished reading leading by Alex Ferguson and Michael Moritz, which was just really phenomenal.

The quote summarizes the themes of the three recommended books, emphasizing the importance of structured hiring, Google's people management philosophy, and long-term leadership success.

Venture Ecosystem Changes

  • Steve Schlafman believes there is a lack of mentoring within and across firms in the venture ecosystem.
  • He suggests that firms should work together to mentor each other, focusing less on competition and more on collaboration to address common challenges.

The one thing that I don't think happens enough is mentoring. And not just mentoring within firms, but also mentoring cross firms.

The quote highlights the need for increased mentoring within the venture capital industry, suggesting a collaborative approach among competitors and partners.

Must-Read Blogs and Newsletters

  • Steve Schlafman shares his daily reading list.
  • He reads Fred Wilson's blog, "ABC."
  • He appreciates "Stratechery" by Ben Thompson for its insights.
  • "The Skim" provides him with a quick dose of daily news.

There are a few every day. I read Fred Wilson's blog, ABC. I love stratechery by Ben Thompson. I think he's a genius. And finally, the skim where I get a quick dose of news every morning.

The quote lists the blogs and newsletters Steve finds valuable for staying informed and gaining insights into the industry.

Gaining a Mentor

  • Steve Schlafman discusses two approaches to gaining a mentor.
  • Building long-term relationships with peers and experienced investors.
  • Proactively reaching out for formal mentorship from seasoned general partners.

One is just building relationships over long periods of time, having people that I can trust and go to. And sometimes these are my peers in the business, and other times it's investors that have been doing this for 20 plus years. But I do think it's a blend.

The quote explains the importance of building trust and relationships over time as a foundation for mentorship, and also the value of seeking mentorship from experienced professionals.

Investment in Brightwheel

  • Steve Schlafman's most recent public investment is in Brightwheel.
  • Brightwheel is a SaaS platform that modernizes pre-K education administration.
  • The company provides a complete administrative suite and communication tools for daycare centers to manage their business and engage with parents.

Yes, I would say that the one that is most recent is a company called Brightwheel, which is a SaaS offering that's powering pre k education.

The quote describes Brightwheel's business model and its impact on the pre-K education sector, highlighting the reasons for Steve's investment.

Acknowledgements and Sign-offs

  • Steve Schlafman thanks Harry Stebbings for the interview and the opportunity to share his insights.
  • Harry Stebbings appreciates Steve's participation and encourages listeners to follow him and the show for updates.

Yeah, no, thanks so much for having me, Harry. It's always a pleasure.

The quote is Steve Schlafman's expression of gratitude for being part of the show.

Show Promotion and Sponsorship

  • Harry Stebbings promotes the show's newsletter and social media.
  • He endorses DesignCrowd, a service for outsourcing design projects, and offers a promo code for listeners.

And if you love the show and want to see more from me, then you can add me on Snapchat at htebbings and you can sign up to our newsletter so you never have to miss an episode or an update from us on the Twentyminutevc.com.

The quote is a promotional message encouraging listeners to engage with the show's content through various platforms and to take advantage of a sponsored service.

What others are sharing

Go To Library

Want to Deciphr in private?
- It's completely free

Deciphr Now
Footer background
Crossed lines icon
Deciphr.Ai
Crossed lines icon
Deciphr.Ai
Crossed lines icon
Deciphr.Ai
Crossed lines icon
Deciphr.Ai
Crossed lines icon
Deciphr.Ai
Crossed lines icon
Deciphr.Ai
Crossed lines icon
Deciphr.Ai

© 2024 Deciphr

Terms and ConditionsPrivacy Policy