20VC Homebrew's Hunter Walk and Satya Patel on Why $100M is Not Enough To Execute a Seed Strategy Today Why They Decided not to Raise New External Funds Where Are We in the Cycle & What is Truly F Why Founders Should Take Secondaries Earlier

In a candid conversation on 20vc, Harry Stebbings discusses with Hunter Walk and Satya Patel their bold decision to shift from managing Homebrew's external funding to investing their own capital through Homebrew Forever. They delve into the intricacies of venture partnerships, emphasizing the importance of shared visions, the energy dynamics between partners, and the crucial alignment on investment strategies. As they reflect on their ten-year journey, they highlight the importance of maintaining a strong partnership through regular check-ins and shared definitions of success. The duo also touches on the venture landscape's future, considering fund sizes, investment strategies, and the evolving nature of startup success. They candidly discuss the pressures of fund deployment, the significance of relationships in venture capital, and how their own financial security has allowed them to prioritize long-term value over immediate gains.

• In the current market, seed stage investment funds face a dilemma with fund size.
• A fund of a hundred million dollars is considered a "tweener," requiring a choice between larger checks and ownership or smaller size for flexibility.
• The fund size affects the ability to obtain desired ownership percentages and check sizes for investments.

"In today's market, at the seed stage in particular, a hundred million dollar fund is a bit of a tweener."

This quote highlights the challenge seed stage funds face in balancing fund size with the strategic approach to investments. It implies that a middle-sized fund may struggle to achieve the desired impact in either direction.

• Homebrew decided not to raise further external funding and instead invest personal funds.
• This move is considered unique in the venture capital industry.
• The discussion includes Homebrew's learnings, venture partnership dynamics, and future investment strategies.

"Last year Hunter Walk and Satya Patel, two of the greats of the seed investing landscape with Homebrew, announced they would not raise any further external funding and they would be investing their own money from this point on through Homebrew forever."

The quote announces a significant shift in Homebrew's funding strategy, emphasizing the unique decision to use personal funds for future investments, which is uncommon in venture capital.

• The partnership between Hunter Walk and Satya Patel began with discussions in 2012.
• They focused on ensuring a shared definition of success and understanding each other's strengths and weaknesses.
• The decision to work together was solidified by the end of 2012.

"On this one summer of 2012, Hunter and I were getting together for one of our normal breakfasts. And that's when we first started talking about doing something together."

This quote marks the initial conversations that led to the formation of Homebrew's partnership, indicating the importance of regular interactions and mutual interests as a foundation for collaboration.

• It's crucial for partners to align on a shared vision and understanding of roles and responsibilities.
• Partners should agree on what constitutes an investment opportunity for their firm to prevent conflicts.
• Homebrew operates on a consensus decision-making model, avoiding deal attribution and focusing on partnership unity.

"We talked about that shared vision, but I think just as important is understanding what gives energy and saps energy for each person within the context of the day to day."

The quote stresses the importance of alignment on both vision and the day-to-day dynamics of partnership energy, implying that understanding these elements is critical for a successful partnership.

• Consensus decision-making unites partners and ensures joint commitment to entrepreneurs.
• Homebrew's approach ensures that investments represent the firm as a whole, not individual GPs.
• They have not identified missed outlier investments due to the consensus model.

"We both have to be above the yes threshold."

This quote explains Homebrew's threshold for investment decisions, where both partners must agree to proceed, symbolizing their commitment to unanimous support for investments.

• Homebrew selected LPs who appreciated equal partnerships and did not focus on deal attribution.
• They avoided LPs who preferred a single key person in charge of the fund.
• The partnership's success is attributed to the collective efforts rather than individual deal credits.

"The self selecting group we ended up with at the time, this was 2013, we got introduced to a bunch of institutional LPs by our friends at the first generation of seed fund soccer."

The quote explains how Homebrew's LP selection process was influenced by their foundational principles, leading to partnerships with LPs who shared their values on equal partnership and collective success.

• Long-term partnerships face challenges, similar to a marriage.
• Homebrew's partnership has endured by committing to understanding each other and evolving together.
• They conduct regular off-sites to ensure the health of their relationship and alignment on happiness and goals.

"So much like a marriage, we invest in making sure that the relationship remains healthy."

This quote draws a parallel between business partnerships and marriage, emphasizing the need for ongoing investment in the relationship to maintain its health and success.

• Equal salary and carry are essential for maintaining an equitable partnership.
• Homebrew has been an equal partnership from the start, with mutual success and happiness as the core focus.
• The partners' financial comfort allowed them to prioritize long-term success over short-term gains.

"Every decision we've made is consistent with the idea that it is a partnership that is oriented around the two of us being mutually successful and mutually happy."

The quote encapsulates Homebrew's philosophy on partnership economics, highlighting that mutual success and happiness have guided their financial decisions, reinforcing the equal nature of their partnership.

• Satya Patel and Hunter Walk prioritize long-term relationships and a supportive environment over immediate financial gains.
• They believe that focusing on their model will lead to financial success for everyone involved.
• Their approach is not to maximize dollars but to create a meaningful work environment and strong partnerships.

"deferrals on optimizing for short term economics because of our individual and collective successes. And we were starting at the same place in our lives with the same types of material goals, which was like, we don't have to maximize for dollars, we want to maximize for spending time together, want to maximize for the people we work with."

The quote emphasizes the decision to prioritize long-term partnership and quality of life over immediate financial rewards. This approach is rooted in their personal life situations and collective experiences.

• Open conversations about personal finances can help alleviate stress for founders and allow them to focus on their businesses.
• Hunter Walk believes that addressing the personal financial needs of founders can lead to better outcomes for the company.
• Being transparent and supportive about personal financial needs is seen as an important part of the VC-founder relationship.

"sometimes that meant salary bump, sometimes that meant a little bit of early secondary."

Hunter Walk explains that financial support for founders can vary from salary increases to early secondary sales, which can help them concentrate on their business without personal financial distractions.

• Satya Patel and Hunter Walk support the idea of providing secondary liquidity to founders in moderation.
• They believe that small amounts of liquidity can significantly help founders to perform better without the stress of personal financial concerns.
• The timing and amount of liquidity need to be carefully considered and discussed openly with the founder.

"But small amounts of liquidity can really free up a founder to do their best work."

Satya Patel emphasizes that while excessive liquidity is not encouraged, smaller amounts can be highly beneficial in enabling founders to focus on their work without personal financial worries.

• Homebrew made a strategic decision to not focus on gathering fees and instead move towards a family office model.
• The decision was made based on the belief that either larger funds are necessary for substantial ownership or smaller funds for flexibility, and they chose the latter.
• Satya Patel and Hunter Walk wanted to maintain a small partnership without building a large firm infrastructure.

"Fees were never part of the conversation."

Satya Patel clarifies that their decision to transition to a family office model was not driven by a desire to collect management fees but by their long-term vision and strategic considerations.

• Homebrew's investment strategy involves careful resource allocation, with a focus on making a certain number of investments each year.
• They have shifted from having ownership targets and reserve holdings to a more flexible investment size ranging from $100k to $500k.
• The goal is to fund investments through savings initially and then through carried interest and investment returns.

"Let's do the math. What's ten to twelve investments a year? Time 100 to reserve model, and let's budget that for the first two years."

Hunter Walk explains the mathematical approach to budgeting for investments based on their desired cadence and the adjusted check sizes without setting ownership targets.

• Homebrew's new model allows them to collaborate with multistage funds and to be flexible in terms of investment size.
• They no longer need to lead rounds but can still influence the formation of investment rounds due to their credibility and relationships.
• The focus is on working with founders and investors they believe in, rather than just filling a portfolio.

"We can still be first person to commit to a round, and we can form an institutional round around us in a second."

Hunter Walk describes how Homebrew's reputation and network enable them to be a key player in investment rounds, even with smaller check sizes.

• Satya Patel and Hunter Walk believe that the size of a fund dictates its strategy and influences investment decisions.
• They argue that a larger fund size can lead to less collaborative and more impatient investment behaviors.
• Homebrew's decision to operate with smaller funds is driven by a desire to maintain happiness and focus on building companies patiently.

"Like, your fund size is your strategy, right?"

Hunter Walk states that the size of a fund inherently shapes its investment strategy, impacting how VCs approach deals and the expectations for returns.

• Homebrew's new investment model makes them agnostic to price and terms, focusing instead on the strategic aspects of financing.
• They value the quality of the lead investor and the financing structure's impact on the company's future.
• The shift to investing their own money has not changed their standards for venture-scale outcomes.

"We care about whether somebody is pricing themselves to perfection."

Hunter Walk discusses how Homebrew considers the implications of a company's valuation and terms on its long-term success and ability to attract future financing.

• Hunter Walk reflects on the pressure to deploy capital when managing a large fund and how their new model alleviates this concern.
• The decision to switch to a smaller, self-funded model was influenced by the desire for happiness and alignment with their long-term strategy.
• Homebrew's shift allows them to focus on investments that align with their values and goals without the pressure to meet fund deployment targets.

"We didn't know if we could be happy doing it."

Hunter Walk expresses that while they could have successfully managed a larger fund, it may not have aligned with their personal happiness and the strategic vision they had for Homebrew.

• LPs (Limited Partners) are not just passive investors; they actively influence fund size and investment pace.
• Institutional LPs have a long-term perspective and are less concerned about immediate investment returns (Internal Rate of Return - IRR).
• Discipline in fund management is challenged by LPs desiring to increase their investment in successful funds, which can lead to larger funds that may not align with the GP's (General Partners) abilities or market strategy.

"Lps are complicit in this. We love our lps. We've always had a small group of institutional lps, and we used to joke with them, especially when the first fund started to become a really high performer and we held to our model in fund two, and everybody was congratulating us for being so disciplined. When we'd go to fundraise, they'd want to double their super prorata in the next fund, I'd be like, you just complimented us on being disciplined. How do we give you double prorata and stay disciplined?"

This quote emphasizes the tension between maintaining a disciplined investment approach and accommodating LP requests for larger allocations in subsequent funds following successful performance.

• Vintage diversification, spreading investments across different market periods, is crucial for mitigating risk.
• The last decade saw less importance on vintage diversification due to uniformly high returns, but it's expected to matter more with market normalization.
• In bull markets, there's pressure to deploy capital, especially to maintain pro-rata in follow-on rounds, which may lead to participating in overvalued or premature rounds.

"I think vintage diversification, you really see the benefits in this next. Like, I look at mine now, and it's like, I'll have some 2021 pricing in there, but I'll also have 23, 24 pricing in there. And I think that's really where you see it, because vintage diversification didn't matter over the last ten years because the vintage was all ridiculous."

This quote suggests that vintage diversification will become more relevant as market conditions normalize and past years of consistently high returns are no longer guaranteed.

• Feeling pressure to deploy capital is nuanced and depends on the market conditions and the nature of the investment opportunities.
• GPs must balance being supportive of portfolio companies with the risk of overcommitting to rounds that may not be justified.
• The strategy of fund deployment changes when investing personal money versus LP capital, with considerations for reserve ratios and the desire to maintain relationships with LPs.

"The good news is, again, there's not a fixed fund size. There's not necessarily an expectation that we're leading the round and hence are a signal in the market. And I think it's going to depend on the situation. We're effectively the co-lead in a couple of investments that we've done. We're smaller checks in a lot of the investments that we've done. It's going to depend. But we don't have to think of it as a fund and a fixed pool of capital."

This quote highlights the flexibility afforded to funds that do not have a fixed size or a mandate to lead rounds, allowing for a more adaptable investment strategy.

• Building long-term relationships with portfolio companies and LPs is fundamental to venture capital success.
• Utilizing Special Purpose Vehicles (SPVs) and other vehicles to support portfolio companies in later stages can be part of a relationship-focused strategy.
• The venture capital business is fundamentally about relationships, not transactions, and being non-consensus and right is more valuable than following market momentum.

"I'm sure we're going to talk about this, but I think over the last decade there's some fundamental things about this business that people have forgotten first is like it's a relationship driven business, it's not a transactional business. And being long term greedy and good long term partners makes a difference in your performance over time."

This quote reiterates the importance of relationships in venture capital and suggests that focusing on long-term partnerships rather than short-term transactions leads to better performance.

• Valuations are influenced by market conditions, and GPs must navigate the expectations of auditors and LPs.
• Homebrew's approach is conservative, only marking up or down based on new financings or significant changes in a company's trajectory.
• The pressure to mark up valuations comes from auditors, not LPs, highlighting the arbitrary nature of valuations and the importance of transparent reporting.

"We don't mark things up or down unless there's, like a new financing or a radical change in a particular company's trajectory that deserves it. But we get pressure, not from our lps, but from our auditors. To be like, all these numbers are arbitrary."

This quote explains Homebrew's conservative valuation policy, which resists arbitrary markups and markdowns, emphasizing the challenges of accurately valuing companies in the venture capital space.

• Decisions on when to sell or hold positions are based on risk-adjusted return expectations and GP's assessment of future potential.
• The timing of liquidity events, such as secondary transactions, is influenced by the need to return capital to LPs and the GP's own financial interests.
• Homebrew considers both the financial implications and the potential impact on portfolio companies when deciding to sell.

"Ultimately, I think we're always asking the question, are we a buyer or a seller at this moment in time? You're a buyer if you believe that the risk adjusted return is going to exceed your expectation for the return at that time, and you're a seller if it's the opposite."

This quote captures the decision-making process around liquidity events, where the decision to buy or sell is based on whether the expected returns align with the fund's investment objectives.

• There can be misalignment between GPs and LPs regarding liquidity events, especially when GPs need to demonstrate returns to raise new funds.
• Quality LPs understand the long-term implications of premature liquidity events and trust the GP's judgment.
• GPs must balance the need for demonstrating performance through Distributed to Paid-In (DPI) with the potential long-term gains of holding onto successful investments.

"It depends on, one, the quality of your lps, and two, there's a difference between your existing lps and new lps. I think if you've got the right lps, they've seen enough in this business to understand generating DPI through pressure isn't the best long term outcome for them and for the GP."

This quote discusses the potential conflict of interest between GPs seeking to raise new funds and LPs' long-term return expectations, highlighting the importance of LP quality and alignment in investment strategy.

• Many startups are facing a reality check regarding their financial health and future prospects.
• Companies with significant capital are struggling to decide on the best course of action.
• Layoffs, low-value acquisitions (aqua hires), and potential collapses are likely outcomes for many startups.
• It is a favorable time for new entrepreneurs to start building companies with a clear vision and value proposition.
• Some companies are delaying going public to strengthen their balance sheets and P&L predictability to avoid market punishment post-IPO.

"For most of those companies, layoffs are going to turn into silent disappearance, low value aqua hires, or noisy collapses."

This quote emphasizes the grim fate awaiting many startups that cannot adapt to the current market conditions, highlighting the importance of financial prudence and strategic planning.

"We have a few that I think could have been public already, but have decided for various reasons to hold off. And I think when they become public, they'll be even stronger."

This quote suggests that some companies are strategically postponing their IPOs to ensure they are more resilient and better prepared for the volatility of public markets.

• There is skepticism about the value of equity for employees who joined unicorn companies in 2021 or 2022.
• The distinction between companies that raised money based on momentum and hype versus those that raised on solid fundamentals is significant.
• Companies that relied on market conditions to raise capital are now facing the reality of demonstrating actual business value.
• The VC overhang is causing funds to concentrate on a small set of companies, potentially skewing capital distribution.

"For employees, join companies, unicorn companies, in 2021 or 2022, they will make nothing from their equity."

Harry Stebbings questions the value of employee equity in recent unicorn startups, highlighting concerns about the potential lack of financial return for these employees.

"I think that's definitely true for a lot of unicorn companies, but that's the difference between companies that raise money on momentum and hype and companies that raised money on fundamentals."

Satya Patel acknowledges the issue and differentiates between companies with superficial growth drivers and those with strong business fundamentals.

• Employees should evaluate whether their efforts will be recognized and rewarded in their company's success.
• It's critical for employees to ask tough questions and make decisions based on pragmatism, not just loyalty or hope.
• Founders and investors should ideally share success with their teams, not just amongst themselves.
• There is a desire for enduring success and value creation post-public exit rather than short-term gains.

"The question if this company succeeds to some extent, am I going to participate in that success?"

Hunter Walk prompts employees to consider their potential gains from a company's success and whether the company's structure will allow them to benefit.

"It's the happiest moment in my existence as an investor when I see a promising company cross a threshold where I believe that it's going to change the lives for a lot of the team members, not just for us and the founders."

Hunter Walk expresses his belief that team members should share in the success of a company, emphasizing the collective achievement over individual gains.

• The primary motivation for joining a startup should be the experience, learning opportunities, and fair compensation, not just the prospect of getting rich.
• The bull market has skewed perceptions, and expectations need to be realigned with reality.
• Founders and investors should be cautious of entitlement and focus on creating real value.

"Over the last decade we moved into a world where people joined startups because they thought they were going to get rich."

Satya Patel comments on the shift in motivation for joining startups, suggesting that the expectation of wealth is unrealistic.

"It's the byproduct of the bull market where you have your perception reshaped by outliers."

Hunter Walk explains how exceptional success stories have distorted the general expectations of wealth from startups.

• Investors should be willing to have honest conversations with founders about the viability and direction of their companies.
• There's a cultural tendency among some investors to avoid acknowledging failure or returning capital, even when it might be the prudent choice.
• The power law in venture capital suggests that a few successful investments will outweigh many losses, but this doesn't mean investors should avoid tough decisions.

"There's one company I'm in that's not very good, and it's got far too much money and no product market fit."

Harry Stebbings shares his experience with a struggling company, illustrating the challenges investors face when a company does not meet expectations.

"As VCs, we're in the business of losing money. There's a reason that the power law is a thing."

Satya Patel provides a counterargument, implying that venture capital involves high risk and potential failure, which is part of the investment landscape.

• Excessive capital can lead to misallocation of resources and avoidance of fundamental issues like product-market fit.
• Startups need to focus on building their product and team, rather than relying on fundraising to solve problems.
• Some companies may benefit from the market slowdown as it allows them to concentrate on essential aspects of their business.

"When you have a lot of capital, you end up trying to use money to solve problems that money shouldn't be solved for."

Hunter Walk critiques the misuse of capital in startups, emphasizing that money cannot buy crucial elements like product-market fit.

"I'm so happy to have a reset for those folks because we can actually focus on product building and team building, not on fundraising."

Hunter Walk expresses relief that the market slowdown is refocusing startups on their core mission and product development.

• Wealth can alleviate stress and provide stability, but it may not necessarily lead to happiness.
• There are diminishing returns on happiness as wealth increases beyond a certain point.
• Success is defined by the freedom to spend time as desired and to make a positive impact on others and the world.

"Does money make you happy? For me, it's been a step function."

Hunter Walk discusses the nuanced relationship between wealth and happiness, suggesting that while it can provide comfort, it's not the sole determinant of happiness.

"Money has afforded me the freedom to not have to worry about the basics and allow me to spend my time the way I want to spend my time with the people I want to spend it with."

Satya Patel reflects on how money has enabled him to focus on what he values most in life, such as time with loved ones and contributing to society.

• There is optimism about the democratization of access to capital and the potential for startups to thrive.
• Concerns exist that those with the power to effect change may insulate themselves from societal issues.
• Success in the startup world can be about more than financial gain; it's about creating opportunities and understanding the history of innovation.

"I'm most optimistic about the democratization of access to capital, including expertise that allows startups to thrive."

Satya Patel shares his professional optimism for the future of startups and the increased accessibility of resources for diverse founders.

"I worry that some of the people most empowered to make positive change also have the wealth and comfort to protect themselves from the changes occurring."

Hunter Walk expresses his concern that those who could drive positive change may choose to shield themselves from societal challenges instead.