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.
"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 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 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 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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
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.
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.
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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.