20VC Homebrew's Satya Patel on The Key Components of Being A Great VC & The 3 Main Reasons Startups Fail At Seed

Summary Notes


In an insightful conversation on the 20 minutes VC podcast, host Harry Stebings welcomes Sacha Patel, partner at Homebrew, to discuss the venture capital landscape and the philosophy behind successful investing. Sacha, with a rich background at Twitter, Battery Ventures, and Google, delves into the importance of founder-market fit, the balance between growth and revenue, and the critical nature of establishing product-market fit. He emphasizes the necessity of founders having a narrow initial focus with a broad, long-term vision and the benefits of starting a company in the current competitive funding environment. Sacha also touches on Homebrew's hands-on approach to helping companies, advocating for a crafted, artisanal method to venture capital that reverts to the industry's roots.

Summary Notes

Introduction to Sacha Patel and Homebrew

  • Sacha Patel is a partner at Homebrew alongside Hunter Walk.
  • Homebrew has a reputation for being a new and exciting entrant in the VC market with a phenomenal portfolio.
  • Sacha's background includes roles as VP of Product at Twitter, partner at Battery Ventures, and early involvement with Google, specifically with AdSense.

"So joining me today is Sacha Patel, partner at Homebrew alongside Hunter Walk."

This quote introduces Sacha Patel and his partnership with Hunter Walk at Homebrew, setting the stage for the interview.

"Sacha was VP of product at Twitter, building and leading the product management and user services teams."

The quote provides a brief overview of Sacha's professional experience and his role at Twitter, which is relevant to understanding his expertise and perspective on venture capital.

"Before Twitter, Satchel was a partner at Battery Ventures where he co-led the seed and early stage investing practices."

This quote further elaborates on Sacha's background in venture capital, emphasizing his experience with seed and early-stage investing.

"In 2003, Satcha joined Google and was responsible for Adsense, product management and partnerships."

The quote highlights Sacha's early career contributions, particularly at Google with AdSense, underscoring his long-term involvement in the tech industry.

Sacha Patel's Career Journey

  • Sacha believes careers cannot be architected and should be based on what feels right at the moment.
  • His career started in consulting, followed by a balance of operating and investing roles.
  • Sacha's entry into venture capital investing was through a proactive approach, sending snail mail letters to venture firms.

"I've always been of the opinion that you can't architect your career. You kind of have to do what feels right in the moment."

This quote reflects Sacha's philosophy on career development, suggesting that it is shaped by seizing opportunities rather than following a strict plan.

"My first investing job happened because I literally sent 50 plus snail mail letters to venture firms looking for a job."

Sacha's quote illustrates his determination and hustle in breaking into the venture capital industry, which is a trait he values highly.

Hustle as a Key Component of a Great VC

  • Hustle is linked to an insatiable desire to learn and is essential in the competitive world of VC.
  • Sacha emphasizes the importance of exposure to new knowledge and experiences to educate oneself in the venture capital field.

"I think the key component of a great VC is an insatiable desire to learn."

This quote identifies the core characteristic Sacha believes is crucial for success in venture capital: a relentless pursuit of knowledge.

"Hustle gets you a long ways."

The quote succinctly states that in the venture capital industry, a strong work ethic and proactive approach can significantly contribute to one's success.

Homebrew's Origin and Focus on the Bottom-Up Economy

  • Homebrew was founded not with the initial idea of starting a fund but from a desire for Sacha and Hunter to work together.
  • The focus of Homebrew is on the bottom-up economy, where technology serves as a democratizing force.
  • Homebrew aims to be the type of seed-stage investor that is accountable and actively involved in supporting founders and companies.

"The second decision, after spending a lot of time thinking about our past experiences, what we care about all those kinds of things, was that we wanted to focus on this idea that we now refer to as the bottom-up economy."

This quote explains the guiding principle behind Homebrew's investment focus, which is the belief in technology's democratizing power and its impact on various levels of society and industry.

"We decided to do that because our belief was that at that time, there were many, many sources of capital... But there were very few investors at the seed stage in particular, who were willing to raise their hand and say that, I'm the investor of record, I'm going to be accountable for this company and for these founders."

Sacha's quote reveals the rationale for starting Homebrew: to fill a gap in the seed-stage investment landscape by being a committed and supportive partner to startups.

Homebrew's Investment Strategy and Evolution

  • Homebrew's first investment was in a company called Clementine, which was a collaborative effort between the founders and Homebrew.
  • The investment approach at Homebrew has been refined over time, with a focus on seed-stage companies and a hands-on partnership with founders.

"Our first investment for homebrew was a company called Clementine."

This quote marks the beginning of Homebrew's investment journey, noting Clementine as their first venture and its eventual acquisition by Dropbox.

"And in terms of how our investment criteria has"

Although the quote is incomplete, it suggests that Homebrew's investment criteria have evolved, likely becoming more sophisticated and targeted as they gained experience.

Investment Criteria Evolution

  • Homebrew's investment criteria have evolved from a rigid ownership percentage to a more flexible approach.
  • Potential outcome of a startup is now a larger focus than initial ownership.
  • The firm holds strong beliefs but remains open to learning and adapting its investment strategies.

"Probably the number one change that we've made in terms of our investment criteria. We originally started with the idea that we needed to have a specific ownership percentage in order to drive meaningful returns, and that's become more flexible where we think about the potential outcome and less about ownership out of the gate."

The explanation of this quote is that Homebrew has shifted its primary investment criterion from securing a certain percentage of ownership in a company to considering the potential success of the company as a more significant factor.

Valuation in Investment Decisions

  • Valuation is significant but not the sole determinant in investment decisions.
  • The approach to valuation is nuanced and does not overshadow other considerations.

"Valuation is an important component, but it's not the only consideration."

This quote emphasizes that while valuation is a critical factor in Homebrew's investment process, it is not the only factor they consider when deciding to invest in a company.

Emotional Resonance in Fundraising

  • Emotional resonance is crucial for seed-stage fundraising.
  • Founders' personal stories and the mission of the startup are key to establishing a connection with investors.
  • Founders should have a narrow near-term focus but a broad long-term vision.

"I use this term called emotional resonance, and I think the key to successful fundraising at the seed stage is really establishing that emotional resonance with an investor."

The relevance of this quote is to highlight the importance of creating an emotional connection between the founders and the investors, which is termed "emotional resonance," and is seen as essential for successful fundraising.

Founder Market Fit

  • Homebrew focuses on the "why" behind companies and the founder-market fit.
  • Understanding what motivates founders and why they chose their market is critical.
  • Fit is not just current but also considers the founder's journey to that market.

"It's the founder market fit. Yeah. And even more than just the founder market fit, it's what led them to choose the market that they're attacking."

This quote underscores the importance of not only how well a founder fits with their chosen market but also the founder's history and reasons for selecting that particular market.

Founder's Personal Connection to the Problem

  • Founders' personal connection to the problem or opportunity they address is vital.
  • Founders should have experienced the pain firsthand or have a deep interest in solving the problem.

"Is it a pain that he or she has experienced firsthand? Is it a problem that he or she has seen from afar, but has a predilection and interest in solving because of the way that they view the world?"

The quote explains that a founder's personal experience with or interest in the problem they are solving is crucial in the investment decision-making process.

Follow-On Funding Philosophy

  • Homebrew believes in the importance of follow-on funding, provided there is alignment of expectations.
  • Transparency and ongoing dialogue with founders about what needs to be achieved for additional funding are essential.
  • The decision to provide follow-on funding is based on business sense and benefits to the founders.

"Follow on decisions are only problematic if you have misalignment of expectation."

This quote explains that follow-on funding decisions become problematic only if there is a mismatch in expectations between the investors and the founders.

Portfolio Management and Expectations

  • Homebrew maintains a smaller portfolio to manage expectations effectively.
  • Regular formal and informal communication with portfolio companies is a key part of their model.
  • The firm dedicates significant time and resources to each company.

"We tend to have a smaller portfolio than most investors."

This quote indicates that Homebrew intentionally keeps a smaller portfolio to ensure they can dedicate adequate time and attention to each of their investments.

Homebrew's Value Add to Startups

  • Homebrew's team has an operating background, which is considered their key value add to startups.
  • They believe their experience as operators allows them to provide practical and impactful support to their portfolio companies.

"I think our point of view is we're investors who come from an operating background."

The explanation of this quote is that Homebrew's team leverages their operational experience to provide valuable insights and support to the startups they invest in.

Venture Capital Assistance to Startups

  • Venture Capital firms provide targeted assistance to startups in key areas.
  • They help with establishing product-market fit, organizational design, hiring, process, culture, values, go-to-market strategies, pricing, distribution, and partnerships.
  • Companies are allowed to dictate the areas in which they require assistance.
  • Regular meetings are treated like stand-ups to discuss accomplishments, upcoming plans, and challenges.
  • Startups give "homework" to VCs to support their needs and focus areas.

"We think we can help around establishing product market fit. We think we can help around organizational design, hiring and process and culture and values and all that kind of stuff. And then we think we can help around go to market pricing, distribution, partnerships, all those kinds of things."

This quote outlines the comprehensive areas where venture capital firms believe they can offer expertise and support to startups, encompassing both the strategic and operational aspects of building a business.

Assessing Product-Market Fit

  • Product-market fit is assessed through active and sustainable usage of the product.
  • Startups must be narrowly focused, hypothesis-driven, and experimental.
  • The process involves formulating a question, predicting an answer, and validating that hypothesis quickly.

"Every company and every product is different in terms of the definition of product market fit, but effectively it comes down to active usage of the product and sustainable active usage of the product."

The quote emphasizes that while the definition of product-market fit may vary, the core indicator is the active and continued use of the product by customers, which is a sign of a product successfully meeting market needs.

Challenges for Seed-Stage Startups

  • Main reasons for seed-stage startup failures include founder disagreements, product-market misalignment, and running out of time or money.
  • Products often fail due to lack of narrow focus on use case or audience.
  • Achieving follow-on funding is a common hurdle.

"I think it boils down to probably one of three primary problems. One is that the founders disagree and they decide they don't want to be co founders anymore. Number two is the product that's been developed doesn't resonate with the market... And the third thing is they just run out of time or I e, run out of money."

This quote summarizes the three primary reasons why seed-stage startups may fail, highlighting the importance of founder alignment, product focus, and financial management.

Balancing Narrow Focus and Market Size

  • Startups should have a narrow initial focus but a path to a broad, long-term vision.
  • Successful examples include Facebook starting at Harvard and Uber with black cars only.
  • A narrow focus helps create a meaningful product that can later scale.

"Yeah, so we like to see, as I referenced earlier, kind of a very narrow near term focus, but in the founder's mind, a path to a broad long term vision."

The quote reflects the investment philosophy that while startups should start with a narrow focus to ensure product-market fit and love from early users, they should also have a clear strategy for scaling to a larger market in the long term.

Fundraising Challenges in Current Market

  • Raising any funding round is challenging, especially Series A and B.
  • Investors at later stages look for strong data to indicate a potential winner.
  • The current market makes it difficult due to overpriced assets and lack of liquidity.

"Raising any money is tough in this environment. More tough than another, I'd say a and b are particularly tough because at the seed stage you're investing and you're usually investing on the promise. At the a and b, you're trying to invest on more of the reality, and the reality has to stand out from everything else that those investors are seeing."

This quote captures the difficulty of raising Series A and B funding in a market where investors are more critical and cautious due to existing overvalued assets and a lack of market liquidity, requiring startups to present compelling and realistic data to secure investment.

Growth vs. Revenue for Startups

  • The relationship between growth and revenue is nuanced and depends on the startup.
  • VC firms look for clear unit economics or a path to viability from the start.
  • Extreme positions on growth or revenue are generally avoided by VCs.

"We tend not to invest in businesses where the unit economics are not clear out of the gate or the path to viable unit economics is not clear out of the gate."

The quote indicates a preference for investing in startups that have a clear understanding of their unit economics, ensuring that there is a viable financial model in place from the beginning, which is crucial for sustainable growth and long-term success.

Venture Capitalists and Unit Economics

  • VCs have always considered unit economics but are now more focused on the timing of achieving them.
  • The funding environment has shifted, requiring startups to reach economic milestones earlier.

"Yeah, I think people probably don't give vcs enough credit in terms of thinking about unit economics."

This quote suggests that while venture capitalists have always valued unit economics, the changing funding landscape has made the timing of achieving these metrics even more critical for startups seeking investment.

Investor Expectations and Profitability

  • Investors enter businesses with a hypothesis on unit economics and profitability.
  • There is an understanding that the hypothesis may not always prove correct.
  • Importance is placed on unit economics when considering investments.

"Investors don't go into a company thinking that this business is never going to be profitable. They have a point of view and a hypothesis around how a business will be unit economically profitable."

This quote emphasizes that investors have expectations of profitability based on unit economics when they choose to invest in a company, highlighting the importance of a business model that can demonstrate financial viability.

Views on the VC Market and Funding Environment

  • Skepticism and pessimism are present in the funding environment.
  • The current sentiment in San Francisco (SF) is that the venture capital (VC) market is tightening.

"What are your views on the entire VC market is collapsing, funding is tightening up raise award chest."

The speaker is asking for an opinion on the current belief that the VC market is in decline and that raising funds is becoming more challenging, reflecting concerns within the investment community.

Investment Opportunities in the Current Market

  • Current market conditions are seen as favorable for both investors and entrepreneurs.
  • An increase in investment activity and quality of companies compared to the previous year is reported.
  • Capital availability is highlighted, with an emphasis on credible founders with big ideas and traction.
  • Fewer funded competitors and easier talent attraction are seen as advantages for startups.
  • The importance of focusing on building the business rather than market noise is noted.
  • Chris Dixon's blog post is referenced as a supportive argument for the current opportunities in technology.

"I think it's a great time to be an investor and a great time to start a company."

This quote reflects optimism about the current investment landscape, suggesting that despite market skepticism, there are still ample opportunities for investment and entrepreneurship.

Content Consumption Preferences

  • A preference for consuming a large amount of content, especially from blogs and newsletters, is expressed.
  • CB Insights newsletter and blogs by Fred Wilson and Brad Feld are highlighted as valuable sources of information.
  • An "insatiable appetite for content" indicates a strong desire for continuous learning and staying informed.

"I'm a big fan of CB Insights. I think they do a really nice newsletter in terms of blogs, obviously, Fred Wilson and Brad Feld and a host of other vcs do incredible work from a blogging standpoint."

This quote shows a preference for specific industry newsletters and blogs, suggesting these are considered high-quality sources of information for investors and entrepreneurs.

Productivity vs. Busyness

  • The concept of being busy without being productive is critiqued.
  • Importance is placed on focusing on essential tasks that reduce business risk.
  • The value of having a hypothesis and testing it to build a great company is emphasized.

"The idea behind busy but not productive is that it's easy to fill your day with things that you feel like you need to do."

This quote criticizes the common practice of filling time with non-essential tasks, stressing the importance of focusing on activities that truly contribute to business success.

Respected Investors and Advisors

  • Admiration for various investors and advisors is expressed.
  • Learning from experienced investors is considered crucial for growth and success.
  • The speaker mentions having worked with and learned from notable investors at Battery Ventures and Geocapital Ventures.

"We are fortunate to have kind of as informal advisors, a couple of investors that I already mentioned, the group at Foundry and Fred Wilson, Mark Andreessen are all Kevin Compton are all amazing investors who have given generously of their time to us."

This quote acknowledges the value of mentorship and advice from established investors, indicating the importance of learning from others' experiences in the investment field.

Personal Favorite Book

  • The speaker's favorite book is "A Fine Balance" by Rohinton Mistry.
  • The book is valued for its storytelling and insights into life and striving for success.
  • The choice of a non-tech book reflects a broader interest in human stories and experiences.

"My favorite book is not a tech book. It's a book called a fine balance to authors name is Rohinton Mystery."

The quote shares a personal favorite book that is not related to technology or investing, highlighting the speaker's appreciation for literature that explores human struggles and resilience.

Most Used Apps

  • Regular use of Twitter, Uber, and Nuzzle is mentioned.
  • The speaker's involvement with Twitter and investment in Nuzzle are noted as reasons for frequent app usage.

"Phone, Twitter, obviously, having worked on the product, use uber every single day."

This quote identifies the apps that the speaker uses most often, providing insight into their daily digital habits and preferences.

Recent Investment Decision

  • The decision to invest in a recent, undisclosed company is based on respect for the co-founders and their vision.
  • The co-founders' personal connection to the problem they are solving is a key factor in the investment choice.

"Yeah, our most recent investment, not announced, but we said yes because one of the co founders is somebody who worked with me at Twitter, who I have a great deal of respect for."

This quote explains the rationale behind a recent investment, emphasizing the importance of the founding team's background and their passion for addressing a specific problem.

Podcast and Community Engagement

  • The host expresses enthusiasm for the episode and invites feedback from listeners.
  • Engagement with the community through social media and newsletters is encouraged.
  • The host also co-hosts the official Sasta podcast, which focuses on software as a service (SaaS).

"Now I'm going to do something very risky and stick my neck on the line today and say, that was my favorite ever episode of the 20 minutes vc."

This quote shows the host's personal investment in the episode's content and their desire to engage with the audience's opinions, illustrating the importance of community interaction in the podcasting sphere.

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