20VC Haystack’s Semil Shah on Whether Founders Are Bypassing Seed Funds in Favour Of Less Dilutive MultiStage Funds, How Fund Strategy Changes With Fund Scaling & Why The Hardest Challenge is Price Discipline

In this episode of "20 Minutes VC," host Harry Stebbings interviews Semil Shah, the founder and general partner at Haystack, an influential early-stage fund in Silicon Valley. Shah discusses his journey from a $1 million to a $50 million fund in six years, highlighting investments in billion-dollar companies such as Instacart, DoorDash, and Opendoor. He also serves as a venture partner at Lightspeed Venture Partners and shares insights on the evolving venture landscape, particularly how top founders often bypass traditional seed rounds for larger funds with stronger brands and networks. Shah's approach to fund management, portfolio construction, and investment strategy emphasizes discipline in entry price and maintaining close founder relationships. The conversation also touches on the importance of time diversity in funds and the challenges of customer acquisition costs in consumer markets.

• Semil Shah is the founder and general partner at Haystack, an early-stage fund in Silicon Valley.
• Haystack has a notable portfolio with investments in billion-dollar companies such as Instacart, DoorDash, Carter, and Opendoor.
• Semil Shah is also a venture partner at Lightspeed Venture Partners.
• Before founding Haystack, Semil was involved in the operating side of startups, including an advisory role at Concept IO (Swell), which was acquired by Apple.

"He scaled his fund from 1 million to $50 million in just six years." This quote highlights the rapid growth of Semil Shah's fund, Haystack, emphasizing its success within a short period.

• Brax built the corporate card specifically tailored for startups.
• It achieved unicorn status faster than any other company in history.
• Founders Henrique and Pedro faced rejection for corporate cards in the States, leading them to create Brax.
• Brax offers no personal liability, higher card limits, and rewards on various services.
• The company is a response to the broken consumer experience for corporate cards.

"Brax founders Henrique and Pedro built a payments business in Brazil but kept getting rejected for a corporate card in the States." This quote explains the origin story of Brax, highlighting the founders' personal struggles which led to the creation of their solution for startups.

• Pilot provides bookkeeping services, giving businesses the freedom to focus on their operations.
• Offers detailed monthly financial reports and works with Quickbooks online.
• Clients work with the same account manager each month for consistency.
• Pilot aims to simplify bookkeeping and financial management for businesses.

"Pilot for bookkeeping gives you back the freedom to focus on your business." This quote captures the core benefit of Pilot's service, which is to allow business owners to concentrate on growing their business rather than managing bookkeeping tasks.

• Dialpad is a communications platform for voice, video, messages, and meetings across devices.
• It features voice intelligence to provide insights into customer conversations.
• Used by innovative companies like Stripe, Uber, and HubSpot.

"Dialpad allows you to connect your team with a communications platform that powers voice, video messages and meetings across your existing devices." This quote describes the functionality of Dialpad and its role in enhancing team communication within companies.

• Semil Shah transitioned from working at startups to becoming a venture capitalist.
• His writing on the tech industry and Silicon Valley resonated with many, leading to consulting roles with VC firms.
• After being turned down for roles post-Apple acquisition, he was advised to start his own fund and become a venture partner.
• Shah credits luck and his enjoyment of the venture process for his success.

"I got hit by the lucky truck." Semil Shah acknowledges the role of luck in his successful investments, reflecting on his journey in venture capital.

• Semil Shah observes that talented founders are increasingly bypassing traditional seed rounds.
• Founders now seek brands that can help with recruitment, larger funding amounts for less dilution, and access to extensive networks.
• Larger VC funds are providing these benefits, which seed funds struggle to match.
• Seed funds need to adapt to the changing landscape where founders have different priorities and access to resources.

"The pedigree of what people look for as a signal of talent now has shifted." This quote indicates the changing criteria for identifying talented founders, moving beyond traditional indicators like educational background to real-world experience at leading companies.

• Seed funds face the challenge of competing with larger VC funds that offer more capital and resources.
• Founders may not prioritize partner time or operational support if they have strong networks from previous companies.
• Seed funds must reconsider how to provide value to founders in a landscape where larger funds can offer more attractive terms.

"A lot of entrepreneurs already have operational support from the companies that they're being birthed from." This quote explains why founders may not value the traditional support offered by seed funds, as they already have strong support systems from their previous roles.

• The success of early-stage investing hinges on relationships with talented entrepreneurs, adding value early, and meeting them early.
• Keeping fund size small can increase the chance to catch more promising startups.
• Competing against established funds like Founders Fund or Lightspeed is challenging for seed-level investors.
• A select few seed investors, such as Mike Maples, can compete at the highest level.

"But if you're trying to win and compete against a friend like Keith Raboy at Founders Fund, or against RfJan Mohammed, who's done three or four seeds, two of which have gone on to billion-dollar companies from Lightspeed or ping Li at Excel, very few GPS at the seed level can compete at that level."

This quote emphasizes the difficulty of competing with well-established investors at the seed level and highlights the small number of investors who can effectively do so.

• Today's investment pricing can be steep, with significant valuations for companies pre-launch or with minimal revenue.
• Investors may accept higher pricing due to the exceptional talent of founders, especially those with experience from leading companies like Stripe.
• Pricing becomes secondary to the potential of building a long-term relationship with a talented founder.
• Portfolio construction involves placing larger bets on proven companies and smaller, speculative bets on seeds.

"And so it just seems like it doesn't really matter what the pricing is, what the funds are saying is, do I need to work with this person? Even if this one doesn't work out? Do I want to have a chance to do their second company and the pricing becomes a secondary question?"

This quote suggests that the potential for a long-term relationship with a founder is more important than the initial pricing of the investment.

• Maintaining relationships with founders is crucial for securing participation in future funding rounds.
• Experienced general partners (GPs) at funds build relationships by taking significant ownership stakes and engaging with startups.
• Strategies to mitigate investment risk include splitting seed deals between firms or choosing different investors for subsequent rounds.
• Larger funds may split deals defensively to narrow competition for follow-on rounds.
• Founders have significant control over the choice of investors.

"It's a great question, as usual, Harry. I think it really depends on the actual partner."

This quote acknowledges the importance of the individual partner's approach to building and maintaining relationships with founders.

• Fundraising timelines are compressing, with larger funds returning to the market more quickly.
• This compression can make it difficult for newer or smaller funds to raise capital.
• Long-term portfolio construction benefits from diversifying investment timing.
• Market corrections can provide opportunities to invest at lower valuations.
• LPs might need to standardize terms to encourage time diversity in investment cycles.

"I think from what I hear from talking to LP, so this is secondhand for you, is that they do see funds, and especially it hurts with the larger funds when they start coming back every two years versus every three years."

This quote reflects concerns about the impact of accelerated fundraising cycles on the venture capital ecosystem and suggests the need for standardized terms to manage this issue.

• Newer funds and managers use guardrails for portfolio management.
• Time diversity in portfolio construction is beneficial for LPs (Limited Partners).
• Haystack's fund strategy involves consistent participation in seed rounds with increasing check sizes and reserves.
• Semil Shah credits Duvos for learning about increasing check size and reserves while maintaining round participation.
• Haystack aims to earn the right to be a significant but not overwhelming presence on a company's cap table.
• The progression of Haystack's funds shows a deliberate increase in check sizes from fund one to fund four.
• Fund management involves a learning curve, with a need for credibility and understanding of long-term systems thinking.

I think it's more a case of newer funds and newer managers kind of putting them a little bit on these not trading wheels, but kind of guardrails, so that they at least have a chance, as they're managing the money, to get a little time, diversity in the portfolio.

This quote explains the concept of newer funds using "guardrails" to ensure they have an opportunity for time diversity in their portfolio management, which helps in mitigating risks associated with market timing.

What she said is that the median round size that we participate in and the median valuation band is extremely consistent and tight.

Semil Shah expresses pride in Haystack's consistent investment strategy, focusing on specific round sizes and valuation bands, which suggests a disciplined approach to fund management.

I've been staying in the same rounds. I've been increasing the check size, I've been increasing the reserve, and now I'm going to increase the time diversity.

Semil Shah outlines the strategic changes in Haystack's fund management, including increasing check sizes, reserves, and time diversity while participating in the same funding rounds.

• Semil Shah is direct and understands his limitations, aiming to maintain a significant but reasonable share on a company's cap table.
• Haystack avoids overpromising on check sizes to maintain credibility and relationships with founders and co-investors.
• The market's force and boutique nature of Haystack influence its conservative approach to cap table percentages.
• Fund size growth requires a different mindset and process in fund management.
• Semil Shah is still learning fund management but draws on his passion and experience with successful LPs and venture partners.
• Haystack's philosophy is to be part of the initial funding rounds and selectively participate in later rounds based on various considerations.

I felt like what I could offer people as founders is to earn the right to be five to ten points on their cap table and maintain that over time and not really try to do more.

Semil Shah discusses his strategy of earning a meaningful but not excessive share on a company's cap table, which aligns with his understanding of market dynamics and relationship management.

I think founders who are going to give up more of their cap table 15, 20% to some of these larger seed funds, perhaps that's why they're looking at the market and looking at less dilutive capital, too.

This quote reflects Semil Shah's perspective on founders' decisions when considering giving up equity, suggesting that they may prefer less dilutive capital options.

I'm still learning. I think that there's a long way to go, but I feel like in five or six years, I've really tried to study it.

Semil Shah acknowledges his ongoing learning process in fund management and his dedication to studying the field over several years.

• Semil Shah's investment philosophy involves participating in early funding rounds and selectively in later rounds.
• The decision to follow on in later rounds depends on the fund's competency, the quality of the lead investor, and the company's growth potential.
• Reserves are allocated to defend positions and are influenced by factors such as market valuations and relationships.
• The transition from consumer to enterprise investments was partly due to changes in network, customer acquisition costs, and market dynamics post-2016.

I want to be in that first million or two that the company raises.

Semil Shah highlights his desire to participate in the initial funding stages of a company, emphasizing the importance of being part of the early growth journey.

It's kind of like learning an offense if you're an athlete and you're moving to a new team or a new league, and you have to understand the system, and it takes a while to kind of understand the system and embody the system.

This analogy compares fund management to learning a new sports offense, emphasizing the need for understanding and adapting to complex systems over time.

The second wave of a's is coming.

Semil Shah indicates that Haystack is preparing for a new wave of Series A funding rounds, which will influence their investment and reserve allocation strategies.

• Harry Stebbings discusses the perceived plateau in major platform growth and the implications for consumer-focused startups.
• The cost of customer acquisition (CAC) and the lifetime value (LTV) of customers have become less favorable, leading to concerns about capital inefficiency in consumer businesses.
• Despite this, Stebbings expresses a strong interest in consumer deals and details his strategy of making discovery checks in consumer companies with the hope of converting one into a core investment.

"Kind of hit a ceiling where I felt the cost of acquiring these customers. And the LTV, according to it, would make the businesses very capital inefficient."

The quote explains Stebbings' observation that the growth of major platforms has reached a point where the economics of acquiring and retaining customers may not justify the investment, leading to inefficient use of capital in consumer startups.

• Speaker C questions how to effectively allocate time across different stages of a venture portfolio.
• Semil Shah describes his personal experience with time allocation, noting that his involvement with companies from earlier funds has evolved into more of a friendly, advisory role.
• Shah's current focus is on the most recent fund, where he spends significant time preparing companies for funding rounds and advising founders on strategic decisions.

"Most of my time is on the fund four portfolio."

This quote highlights Shah's current priority, which is to concentrate his time and efforts on the latest fund, indicating that time allocation in venture capital is dynamic and shifts according to the lifecycle stages of the investments.

• The conversation touches on the differing opinions within the venture capital community regarding the allocation of time and resources.
• The importance of maintaining relationships with both portfolio companies and limited partners (LPs) is emphasized.

"And it's time allocation, regardless of sector, one always needs to spend time with the portfolio and with the founders."

This quote underscores the universal need in venture capital to invest time in supporting portfolio companies and building relationships with founders, regardless of the specific industry sector.

• Semil Shah offers advice to LPs, suggesting that they should be amiable and supportive to remain competitive.
• He stresses the importance of LPs being a helpful resource to general partners (GPs), especially given the increasing competition for GP capital.

"I better be extra nice, have fun with my gps, and be available to answer questions around fund management, connecting them to new people, giving hard feedback when it's needed, but being a really friendly interface to the capital."

The quote provides guidance for LPs, recommending a collaborative and supportive approach to their relationships with GPs, which is crucial in a competitive environment with abundant capital.

• Semil Shah advises new graduates to adopt an investor's mindset in all aspects of life.
• He encourages thinking of every action as an investment, whether it's learning a new skill, socializing, or making financial decisions.

"Everything you do is an investment."

This quote encapsulates Shah's advice to approach life decisions with an investment perspective, considering the potential returns on time and resources spent.

• Shah identifies the discipline around entry price as a significant challenge in early-stage investing.
• He discusses the randomness of outcomes and the importance of remaining disciplined despite the ease of following trends.

"The biggest challenge is staying disciplined around entry price."

This quote reflects the difficulty of maintaining investment discipline in a market where norms are loosening and capital is plentiful, emphasizing the need for careful assessment before committing to an investment.

• Shah reflects on his career, suggesting either starting small or partnering with a capital partner from the beginning.
• He highlights the severe opportunity cost of spending years raising funds without significant capital.

"Start off with a real capital partner, because a capital partner helps save you time and a lot of cycles and it can help you scale to deploy capital quickly."

The quote advises new entrants to the venture capital industry to consider the benefits of having a capital partner to expedite the process of raising and deploying funds.

• Shah discusses the decision to not publicly announce investments, citing the potential for distraction to entrepreneurs from unsolicited VC interest.
• He prefers to announce funding rounds in smaller circles when entrepreneurs are ready to engage with investors.

"We don't really announce the investments... it can just be super distracting for the entrepreneur before they're ready."

This quote explains the rationale behind the decision to keep investments discreet, prioritizing the entrepreneur's focus and readiness over public disclosure.

• Harry Stebbings expresses gratitude to Semil Shah for his contributions to the venture ecosystem.
• Stebbings and Shah share a mutual appreciation for each other's work and support.

"As I said at the beginning, just such a special member of our ecosystem and I couldn't be more thrilled to see the continued success of Haystack."

The quote conveys Stebbings' admiration for Shah's impact on the venture community and his excitement for the future success of Haystack.