20VC How MultiStage Funds Changed The Game For Seed Rounds, Why Signalling Risk is BS, The Three Most Important Variables for Founders When Raising Rounds & A Debate on Portfolio Construction Does Ownership Matter with David Tisch

In a dynamic conversation on "20 VC" with host Harry Stebbings, David Tisch, the managing partner of Box Group, delves into the intricacies of portfolio construction and venture investment strategies. Tisch emphasizes the importance of agility and flexibility in seed funding, advocating for backing founders with conviction rather than adhering strictly to fund math or ownership targets. He argues against the overemphasis on signaling risk and stresses the CEO’s critical role in mastering fundraising. Tisch also predicts a return to fun, innovative consumer social products, underscoring the need for founders to stay true to their unique visions. The discussion touches on the persistent presence of multi-stage firms in seed rounds, the potential impact of market downturns on future investments, and the ethical responsibilities of venture capitalists towards founders.

• The CEO's primary responsibility is to excel at fundraising.
• Multistage firms offer products for seed funding that can transform the market.
• Signaling risk is often overemphasized within the industry.

"The CEO specifically. Their job is to become great at fundraising. The multistage firms have a product for seed that change the market. The signaling risk, I feel, is the single most overstated part of the ecosystem."

The quote highlights the idea that a CEO's main task is to be proficient in raising funds, and that products offered by multistage firms for seed funding can be market-changing. It also suggests that the perceived risks associated with signaling in the investment community are exaggerated.

• Harry Stebbings is known for not pushing back enough in debates, which he plans to change in this episode.
• The debate will cover portfolio construction.

"This is 20 vc with me, Harry Stebings, and if there's one criticism of 20 vc is that I do not push back enough. Well, today that ends with this fantastic and really quite fiery debate."

Harry Stebbings acknowledges feedback on his debate style and sets the stage for a more contentious discussion on portfolio construction, indicating a shift in his approach for this episode.

• David Tisch is a managing partner of Box Group, a leading early-stage venture firm.
• Box Group has invested in over 500 seed stage startups, including notable companies.
• David Tisch and Harry Stebbings have differing opinions on portfolio construction.

"For a debate on portfolio construction than a dear and long term friend in the form of David Tish, managing partner of Box Group, one of the leading early stage venture firms of the last decade, having invested in over 500 seed stage startups including plaid Ramp, stripe, Flexport, airtable and more."

This quote introduces David Tisch as an experienced investor with a significant track record in seed stage startups, setting the stage for a debate on portfolio construction with Harry Stebbings, who has a different perspective.

• Secureframe offers a platform for automated security and privacy compliance.
• Deal provides a platform for global team management, payments, and HR.

"Secureframe simplifies and streamlines the process of getting and staying compliant to the most rigorous global privacy and security standards like SoC two, ISO 2701, HIPAA, GDPR and others."

Secureframe's service is described as a solution for businesses to efficiently achieve and maintain compliance with a range of global privacy and security standards.

"Well, deal does exactly that. It handles all things for global teams. It allows you to easily consolidate contractors, EOr employees and local workers in one platform."

Deal is presented as a comprehensive solution for managing global teams, simplifying various HR and payment processes.

• Retool offers a platform to build custom internal software quickly using Javascript and SQL.
• The platform is designed to save time and resources for companies.

"Most teams build custom software to make business processes work better, but building these internal tools from scratch takes time and engineering resources. And that's why teams at thousands of companies like Amazon, DoorDash and NBC build internal tools using retool."

Retool is described as an efficient alternative to building custom software from scratch, highlighting its adoption by major companies and the time and resource savings it provides.

• David Tisch's passion for the internet led him to venture capital.
• He started with Techstars and later focused on Box Group full-time.
• His journey reflects a non-traditional path into the venture capital industry.

"Yeah, I grew up loving the Internet and that's what I fell in love with as a kid. And I never understood what the career path into this world is. And I actually don't think there is a traditional one. I think everybody finds their own way."

David Tisch shares his personal journey into venture capital, emphasizing his love for the internet and the unique paths individuals take to enter the industry.

• David Tisch discusses his individual ambitions and goals.
• He acknowledges the benefits of coming from a successful family but maintains his personal identity and career path.
• His view on success is centered around contentment in life and supporting founders' journeys.

"I'm an individual and I have my own ambition and desires and goals that are not necessarily attached to the history of my family."

David Tisch expresses his personal drive and ambition, distinguishing his career choices from his family's success and emphasizing his individuality.

• Box Group's investment approach is flexible, focusing on working with the best founders.
• The firm does not let fund math interfere with investment decisions.
• They aim to invest appropriate amounts based on the stage of the company and available allocation.

"Our goal is to work with the best founders we're able to have the opportunity to work with. And I think more than anything, it's not putting our business in front of the founder and not making our needs important enough to stop us from investing in a company."

David Tisch describes Box Group's founder-centric approach to investing, prioritizing the relationship with founders over rigid fund metrics.

• Valuation is a factor in investment decisions but is not controlled by the investor.
• The focus is on investing in companies with the potential for significant growth.
• Patience, consistency, and a long-term perspective are key to Box Group's investment strategy.

"If a founder gets enough optionality for their round that they're able to raise at a valuation that you as an investor don't like, you have two options. Invest or don't invest."

David Tisch discusses the reality of valuation in investment decisions, emphasizing that investors must choose to participate based on the opportunities presented.

• The fund's size is justified if it can produce outlier returns.
• Portfolio construction is considered on an individual and collective basis.
• The goal is to achieve the most ownership in the most successful companies.

"My fund's too big. If I can't produce outlier returns, that's my job. So I need to produce outlier returns."

David Tisch explains that the fund's size is appropriate if it can generate exceptional returns, highlighting the responsibility to investors to achieve this goal.

• The approach to venture capital investment shifts depending on economic conditions.
• In good times, the focus is often on investing in the best founders, which can lead to significant fund returns.
• During tougher economic periods, meticulous portfolio management becomes crucial to secure positive returns.

"It doesn't seem to be much math other than just, let's just invest in the best founders. Yeah, but actually also, Dave, the thing you study in venture, which, you know, this I'm sure is in the good times."

This quote highlights the common perception that venture capital is about backing top founders, particularly in favorable economic times.

"But in the bad times, when you do the studying, actually, the intense portfolio managers are the difference between one x or zero, seven x and two x, because they've religiously managed a huge amount from reserves, liquidity and everything in between."

This quote emphasizes the importance of active portfolio management in challenging times to achieve positive investment outcomes.

• The macroeconomic environment affects prior investments more than future ones in seed investing.
• Seed rounds invested today will become relevant in the customer and venture markets in a few years.
• Current macroeconomic conditions do not immediately impact seed business but may influence reserve allocations for existing investments.

"My job is to fund a ten year journey. And so the macro change in the environment impacts our prior investments much more so than our future investments."

David Tisch explains that seed investing is a long-term commitment, and current economic changes affect existing investments rather than new ones.

• Venture capital, especially at the seed stage, should not be evaluated on a short-term basis.
• The focus is on supporting founders through all market conditions and helping them navigate challenges.
• Short-term fluctuations in valuations are less significant compared to the long-term journey of building a company.

"It is an incorrect use of energy and mind if you're investing over our fund. Life is a ten year plus fund."

David Tisch argues that short-term market movements are not a primary concern for a venture fund with a decade-long investment horizon.

• Venture funds must thoughtfully deploy capital and support companies they are most excited about.
• Details of managing reserves and follow-on investments are considered less important in abstract discussions, as they lack the context of specific decision-making processes within a fund.

"Our job is to deploy follow on capital into ideally the best places we can."

David Tisch highlights the role of venture funds in strategically allocating additional capital to their most promising investments.

• The venture market has seen high entry prices in recent years, which could lead to challenges as companies seek further funding.
• High valuations are not inherently problematic if companies can overcome obstacles, but they become an issue if the business does not meet market expectations.

"If you don't build a product, you don't build a business model. If you don't build revenue growth that the market views as good enough, that's the problem."

David Tisch points out that the core issue for startups is not valuation, but rather their ability to build a sustainable business.

• Downrounds and company shutdowns are part of the venture landscape, and they are expected to increase in the coming years.
• While downrounds can be demoralizing, they are not necessarily disastrous if managed well.
• The venture community must acknowledge the emotional impact of failed startups on founders and early employees.

"There's been down rounds and sideways rounds in so many of the long lasting great companies of prior vintages as well."

David Tisch acknowledges that downrounds have occurred even among successful companies and are not always catastrophic events.

"And I assume we're going to have that throughout our portfolio. And I assume that's going to happen in everybody's portfolio."

David Tisch anticipates an increase in company shutdowns and downrounds across the industry due to previous high funding rates.

• Founders must consider the amount of money needed, valuation expectations, and the choice of investors when raising funds.
• Some founders may still have high valuation expectations despite market changes.
• The advice to founders is to be realistic with initial valuation expectations and understand that market dynamics can influence the final terms.

"If somebody gives them that, then the market is that everybody can ask for whatever they want and everybody can say yes or no."

David Tisch emphasizes that the market ultimately determines valuation based on what investors are willing to pay.

• Multi-stage firms have been increasingly participating in seed rounds, offering significant funding with higher valuations.
• This trend has not changed despite the market downturn and continues to shape the seed investment landscape.
• Founders must navigate the dynamics of raising from multi-stage firms versus other investors and consider the trade-offs involved.

"Since 2018, multistage firms figured out that the competition for series A is so steep and there's only one winner, that if you don't take risk on seed, you might not have a shot at the a."

David Tisch discusses the strategic shift of multi-stage firms to invest earlier in seed rounds to secure a position for future investment rounds.

• Founders should prioritize finding the right investors, securing sufficient funding, and considering valuation in that order.
• The choice of investor is crucial, and founders should aim to work with a group of people who can offer diverse perspectives.
• While valuation is important, it is often the most flexible variable and can be compromised if the other two priorities are met.

"It matters. The gap between who. If you're talking about my top choice versus my fifth choice, that's a fine compromise."

David Tisch advises founders to prioritize the quality of their investors, acknowledging that some compromise may be necessary but should be limited.

• Despite expectations of lower valuations due to market shifts, seed and pre-seed pricing has not significantly decreased.
• The venture market is experiencing a bifurcation, with multi-stage firms offering one type of deal and other investors offering different terms.
• Founders with strong track records may secure better terms, reflecting the varied landscape of seed funding.

"I agree generally with that. I think there's too much soundbites on Twitter saying, I'm seeing crazy cheap valuations, we're seeing a bifurcation of the market."

David Tisch agrees that seed and pre-seed valuations have not dropped as much as some may claim, pointing out the complexity of the current market.

• Box Group is flexible with investment positions, willing to be the lead or second biggest check.
• They provide operational support, but their strength lies in helping companies raise subsequent rounds.
• Success in fundraising is not solely dependent on the type of firm (multistage or seed) but on how well the company is built.

"If you want to work with a seed lead, a traditional seed firm, we're also happy to be the second biggest check in that round." "And our job is to help you get to the next round and then help you get to the next round and the next round."

The quotes emphasize Box Group's readiness to adapt to different funding roles and their commitment to assisting companies through multiple rounds of financing. Their focus is on the company's development as the primary driver for successful fundraising.

• David Tisch does not agree with the common concern over signaling risk.
• He believes that subsequent investors form their own opinions and that signaling risk is overstated.
• Signaling risk might be more relevant at Series B or later stages, especially if a Series A lead does not follow on in Series B.

"The signaling risk, I feel, is the single most overstated part of the ecosystem."

This quote reflects Tisch's opinion that the market overemphasizes signaling risk, suggesting that investors rely on their own judgment rather than being influenced by the actions of previous investors.

• Tisch acknowledges that multistage firms may have different incentives when leading seed rounds.
• There is no one-size-fits-all approach; each company's circumstances dictate the advice given.
• The goal is to provide nuanced, specific advice to help companies achieve their objectives.

"Every single company is very different and each specific variable in that company drives to how to build it."

The quote underscores the importance of personalized advice for startups, as generic advice may not apply to the unique situation of each company.

• Tisch believes that CEOs need to excel at fundraising as a core competency.
• A CEO's fundraising ability can significantly impact the company's valuation and success.
• The approach to fundraising should be tailored to the CEO's strengths and the company's needs.

"The CEO specifically, their job is to become great at fundraising, and they need to view that as a core competency."

This quote highlights the critical role of the CEO in fundraising efforts and the need for them to develop this skill as part of their responsibility to the company.

• Tisch advocates for founders to build long-term relationships with potential customers, partners, acquirers, and investors.
• He criticizes the transactional nature of fundraising that has developed due to market speed and panic.
• Tisch advises against blindly following generic advice and encourages founders to make informed decisions based on their unique circumstances.

"I believe very strongly founders should consistently be building great relationships at every step of the way on their journey, in every single category."

The quote emphasizes the importance of building and maintaining relationships across all business aspects, which can lead to more informed and beneficial partnerships and investments.

• Tisch stresses the importance of customized advice for founders based on their individual preferences and company's situation.
• He encourages founders to be self-reliant and trust their vision, using external advice to inform but not dictate their actions.
• Founders should focus on creating their unique path, not replicating others' successes.

"Don't compromise the bet on yourself because that's the binary thing that you did that you should lean into."

This quote captures the essence of Tisch's advice to founders: to have confidence in their own decisions and to use advice as a tool, not a rule.

• Tisch reflects on the challenges of starting a company and the changing market conditions.
• He discusses the transactional nature of recent investment practices and its impact on relationship building.
• Tisch emphasizes the importance of aligning with founders and being responsible with LPs' capital.

"Starting a company is hard. It's hard in every single market because the market isn't consistent."

The quote serves as a reminder of the inherent difficulties in entrepreneurship and the need for founders to be prepared for market volatility.

• Tisch talks about the complexity of managing fund reserves and the timing of new funds.
• The Box Group aims to be responsible with LPs' capital and typically operates on a three-year fund cycle.
• The strategy for reserves is closely tied to the fund's investment model and the deployment of initial dollars.

"We are tried to be super responsible with our lps capital, so three years."

This quote indicates Box Group's commitment to prudent capital management and their strategic approach to fund deployment over a set period.

• David Tisch observed a decline in compelling investment opportunities at the seed stage.
• Box Group's capital deployment per quarter has decreased.
• David plans to monitor the situation over the next few quarters before deciding on any strategic changes.

"Past couple of quarters is there's been a slowing of what we view as like, opportunities that we're excited enough to invest in at the seed stage. And so our deployment capital per quarter has gone down."

This quote explains the recent trend Box Group has noticed in the seed investment landscape, leading to a reduction in their investment activities.

• Investments from the opportunity fund must have the potential for outlier outcomes.
• The fund cannot rely on modest returns (e.g., 3X) due to the imperfection of underwriting and the need for significant upside.
• Investments are assessed based on their risk profile and potential for upside.

"Every single investment out of our opportunity fund needs to be able to have an outlier outcome because it's a net new investment, it's not attached to the pro rata of the seed fund."

David Tisch clarifies that the opportunity fund is designed for high-potential investments that are distinct from the seed fund's pro rata investments.

• Box Group aligns its business and structure with the interests of LPs.
• The firm seeks LPs who feel aligned with their strategy.
• David emphasizes the importance of alignment rather than coercion.

"Our investors are aligned with the strategy that we go after the business with and I feel very much our job is to have a business and a structure that aligns with LPs and find LPs that feel aligned with."

David discusses the alignment of interests between Box Group and their LPs, highlighting the strategic harmony they seek.

• David Tisch's primary role is to support founders.
• Misalignment occurs when founders are dishonest or renegotiate agreements.
• Box Group values honesty, keeping their word, and working with like-minded people.

"My job is to work for founders. We get upset when founders are dishonest or renegotiate agreements."

David expresses his commitment to founders and the importance of honesty and integrity in their relationships.

• David Tisch differentiates between the portfolio approach and focusing on individual companies.
• He respects the founder's autonomy and offers advice without imposing decisions.
• The cost of a mistake is greater for the founder than for the VC.

"No, on a portfolio basis it's my problem. On an individual deal basis, it's their company and I'm here to support them."

David highlights the distinction between his overall responsibility for the portfolio and his supportive role in individual company decisions.

• David anticipated crossover funds entering the seed stage if market trends continued.
• He believes multistage firms will persist in seed investing, while "tourists" will exit.
• Box Group aims to maintain consistency and alignment with long-term founders.

"We are going to run, whether you like it or not, the same model for a long time."

David discusses Box Group's commitment to their investment model and their alignment with founders' long-term visions.

• David wishes for a way to expose and police unethical behavior by VCs towards founders.
• He emphasizes protecting founders from harmful intent and predatory actions.

"I would like that the ability for founders who are treated unethically by venture capitalists to be able to confidently discuss that publicly."

David expresses his desire for greater transparency and accountability in the VC industry to protect founders from unethical practices.

• David observes a shift in consumer engagement from products to content platforms like TikTok and YouTube.
• He sees an opportunity for new, fun consumer social businesses tailored to younger generations.

"The trend to me that's most interesting is that people are bored with today's consumer products."

David identifies a trend where consumer interest is shifting away from products towards engaging content.

• David highly regards Sequoia and values recommendations from founders in their portfolio.
• He believes in the strength of the feedback loop from portfolio founders.

"Sequoia. They're good at this business. I would take Sequoia."

David acknowledges Sequoia's proficiency in venture capital, indicating his trust in their recommendations.

• David hopes Box Group remains consistent, focusing on seed and pre-seed investing.
• He emphasizes the importance of trust, loyalty, and mutual respect in both professional and personal relationships.

"I truly hope box group is exactly where we are today. We don't want to be different than who we are today."

David shares his vision for Box Group, emphasizing the value of consistency and specialization in their investment approach.