20VC How to Build AntiFragile Venture Portfolios Today Why Diversification is Overrated in Portfolio Construction How to Think Through Sizing Investments, Market Sizing and Pricing in Today's Environment with Mike Chalfen @ Chalfen Ventures

In this episode of 20 VC, host Harry Stebbings interviews Mike Chalfen, the solo GP of Chalfen Ventures, a respected early-stage investor in Europe. Mike's portfolio boasts successful companies like King (Candy Crush creators), Tipality, Sneak, and Trade.io. He shares his journey from studying civil rights history to joining the venture capital firm Apex Partners in 1996, and eventually founding Chalfen Ventures. Mike discusses the importance of unit economics, the value of mentorship, and the challenges of venture partnerships. He also emphasizes the need for investor-founder alignment and offers insights on how to approach board roles and manage time across a portfolio. The conversation also touches on the current market correction, with Mike providing historical context and advice for new investors facing their first downturn. Harry and Mike explore the psychological aspects of venture investing, including handling rejection and the impact of personal challenges on professional growth.

• Harry Stebbings introduces Mike Chalfen, solo GP of Chalfen Ventures, as a wise mentor and brilliant friend.
• Mike Chalfen is highlighted for his successful early-stage investments in Europe, including King (makers of Candy Crush), Tipality, Sneak, and Trade IO.
• Mike's career achievements include a 15x career track record and a portfolio value of over $40 billion.
• Harry jokes about Mike joining the venture industry in the year of Harry's birth.

"I'm so thrilled to welcome Mike Chalfen, solo GP with Chalfen Ventures and one of the most respected and successful early-stage investors in Europe over the last two decades."

This quote introduces Mike Chalfen as a highly respected and successful early-stage investor in Europe, setting the stage for the podcast discussion.

• Harry Stebbings describes Notion as an essential tool for project management and organization.
• Notion consolidates multiple tools into one, saving money and streamlining processes.
• Over 70% of companies that start using Notion stop using at least two other tools.
• Notion's user base is large and collaborative, with templates and tutorials available.

"Notion has a worldwide network of millions of users creating templates, tutorials, and new inspiration."

Harry emphasizes the collaborative and supportive nature of the Notion user community, highlighting the value of shared resources and collective improvement.

• Harry Stebbings shares his positive experience with Angelist for managing investments.
• Angelist simplifies the complexity of fund management for SPVs, traditional venture funds, and rolling funds.
• Angelist Stack, a new product, is designed to help founders with incorporation, banking, cap table management, and fundraising.

"I just love using the Angelist platform because it abstracts away all the complexity and operational burden of fund management."

Harry's testimonial underscores the benefits of Angelist for investors, focusing on the platform's ability to simplify and streamline fund management tasks.

• Harry Stebbings praises Squarespace for its mobile optimization, email campaigns, and SEO tools.
• Squarespace is presented as an all-in-one solution for building an online presence and running a business.
• Harry offers a promo code for a discount on Squarespace services.

"Squarespace is the all-in-one platform to build a beautiful online presence and run your business."

Harry highlights Squarespace's comprehensive capabilities, positioning it as a convenient and effective solution for entrepreneurs and businesses.

• Mike Chalfen discusses his nomadic upbringing and interest in fairness and history.
• His unexpected pivot from a history fellowship to venture capital began at BCG and led to Apex Partners in 1996.
• Mike learned to handle various aspects of venture capital independently at Apex, which was valuable for his later solo work.

"I had to sort of do all my own legals, do all my own numbers, write my own recommendations."

Mike explains the hands-on experience he gained at Apex Partners, which provided him with a comprehensive understanding of venture capital operations.

• Mike shifted focus from business to entrepreneurs during his angel investing phase.
• He joined Advent Venture Partners to influence the firm but eventually decided to start Mosaic Ventures and later Chalfen Ventures.
• Mike values the ability to express himself fully as a solo VC, a sentiment influenced by his experiences and personal preferences.

"I can really express myself fully as a solo VC in a way that is a little harder as a partner in a firm with responsibilities to other people."

Mike reflects on the autonomy and self-expression afforded by operating as a solo venture capitalist, contrasting it with the constraints of being a partner in a larger firm.

• Mike shares insights on the misalignment between career management and optimizing investment returns.
• He recalls a missed opportunity at Apex due to prioritizing career over conviction in an investment.
• Mike discusses the potential misalignment between GPs and LPs in the current venture landscape.

"If you were a mid-level person at Apex, you would do the right thing in order to look good further your career rather than optimize returns."

Mike provides a candid perspective on how career advancement goals can sometimes conflict with investment decisions within a venture capital firm.

• Mike observes that most VCs may not excel at building firms due to the reflective nature of the role.
• The skill set required for VC work differs from that needed to operate and lead a team effectively.
• Mike admits to not being great at building a firm and prefers to focus on working with entrepreneurs.

"I think it's quite hard to combine being very, very good at that, very, very good at supporting companies, and being an operator with a plan who can lead large numbers of people."

Mike discusses the challenges of balancing the introspective aspects of venture capital with the operational demands of running a firm.

• Mike and Harry address the severity of the current market correction and compare it to past downturns.
• The speed of market changes has increased due to information flow, making the current correction feel more intense.
• Mike emphasizes the importance of focusing on fundamentally good businesses, regardless of market conditions.

"Good companies are still good companies, but it might just take longer and maybe more dilution for them to come out the other side."

Mike offers reassurance that strong businesses can endure market corrections, although the path to success may be prolonged and require more capital.

• Mike reflects on past busts and how they inform his current investment strategy.
• He stresses the importance of investing in businesses with fundamental value, not just market momentum.
• Mike has reverted to his typical investment pace after a faster deployment in 2021 but stands by the quality of his investments during that period.

"I don't believe in the fast payday. I sort of mentally just don't count on timing. You can't time a winner."

Mike shares his long-term perspective on investing, focusing on the intrinsic value of companies rather than attempting to capitalize on short-term market trends.

• Mike offers guidance to newer investors experiencing a market crash for the first time.
• He differentiates between natural uncertainty in VC work and feelings of insecurity or anxiety.
• Mike encourages embracing uncertainty and provides mentorship to help others navigate the challenges of the venture capital industry.

"There's a big difference between being uncertain, which is completely natural, and in fact, it's built into the experience of being a VC, and being insecure or anxious."

Mike advises newer investors on managing their emotions during market downturns, highlighting the distinction between the inherent uncertainty of VC work and the personal reaction to it.

• Anxiety in decision-making can be reduced by embracing uncertainty and having a framework.
• A framework helps determine which companies to engage with and why.
• Not all situations fit neatly into a framework; this can signal a potential rule-breaking decision.
• Communicating early with your portfolio ensures everyone understands the reasoning behind decisions.

"Everyone needs a framework, but you need a framework to figure out which way is up, which companies am I going to spend time with and why."

This quote emphasizes the necessity of having a personal framework to guide decision-making processes and prioritize time allocation effectively.

• Keith Rabois's "acid test" for good VCs involves having deals that are often laughed at by peers.
• There's a distinction between businesses that aim to take share in an existing market and those that aim to create a new market.
• A good service that appeals to the VC or their partners may indicate a market that is too small.

"Any business opportunity where I or my partners thought was a very good service that they would definitely use, that was almost certainly addressing way too small a market opportunity."

This quote suggests that personal appeal to a service by VCs or their partners is not always indicative of a large market opportunity, and sometimes the opposite is true.

• Solo VCs like Charlton Ventures aim to deliver value beyond the monetary investment.
• Charlton Ventures does not seek to dominate the cap table, allowing entrepreneurs to craft a syndicate that aligns with their goals.
• The firm offers flexibility to entrepreneurs, allowing them to choose the level of involvement they prefer from the VC.

"Chow from Ventures is the solution to a problem."

This quote introduces Charlton Ventures as a VC firm designed to address specific needs of entrepreneurs, focusing on providing value and flexibility.

• Founders should construct their cap table with each investor bringing a unique, world-class skill.
• The trend of inviting many angels to invest requires precise understanding of what each will contribute.
• An ideal cap table might consist of one lead, one smaller fund, and five angels, each with a clear role.

"I always say to founders, actually kind of construct your cap table like you would a sports team."

This quote advises founders to be strategic in choosing their investors, ensuring each brings a distinct and valuable skill to the company, similar to players on a sports team.

• Diversification for LPs is natural, but funds must consider the right construction for diversification.
• A well-constructed portfolio is antifragile, not by the number of investments but by the variety of risks.
• Different kinds of risks can include verticals, go-to-market strategies, and the amount of capital required to learn.

"I think what's important to me is that you sort of have a reasonably sort of antifragile portfolio construction, not by virtue of having 30 or 20 or whatever number of investments, but by virtue of having different kinds of risks that you're taking with your investments."

This quote highlights the importance of creating a robust and resilient portfolio through diversification of risk types rather than merely increasing the number of investments.

• The web is an efficient discovery mechanism for unmet needs, which can indicate market timing opportunities.
• It's essential to have evidence of an unmet need rather than just convincing oneself of its existence.
• Market timing risks involve both entering existing markets with vulnerabilities and creating entirely new markets.

"You can usually find some kind of indicator as to whether there's an unmet need that exists."

This quote points out that indicators of unmet needs can be found, which helps in assessing market timing for investments.

• The number of investments in a fund and the capital concentration per company are crucial considerations.
• Follow-on investments should be made with the belief that the new money is "ten x money."
• Reserves management involves probability weighting potential returns and aligning with the fund's size and strategy.

"But if you can pick two businesses which you want to become 15% to 20% of the fund, then that's sort of a very positive outcome."

This quote discusses the strategy of focusing on a limited number of businesses that have the potential to constitute a significant portion of the fund's value.

• Regular communication with entrepreneurs helps address problems collaboratively and with empathy.
• When trust or performance issues arise, it's crucial to present the facts and work together on a solution.
• Maintaining the entrepreneur's dignity while addressing issues is essential.

"You don't say, I don't trust you anymore. You say, this hasn't happened, and that's a problem."

This quote advises on how to approach sensitive conversations about trust and performance issues by focusing on facts and problem-solving.

• Parenthood and personal challenges can change how a VC communicates and empathizes with founders.
• Experiencing significant life events can lead to a greater understanding of others and reduce ego.
• The ability to relate to people's feelings and provide feedback with empathy is a valuable skill for VCs.

"Life's a great leveler. What worries me in the venture business, to a degree, is people for whom nothing's ever really gone wrong."

This quote reflects on how personal challenges can provide perspective and humility, which are beneficial qualities in venture capital.

• Managing ego is a challenge, especially for young professionals experiencing rapid success.
• Constructive feedback from experienced colleagues can help address behavioral issues.
• Self-awareness and the ability to stay grounded are important for long-term success in the industry.

"It was definitely a problem. And what made the difference was actually one of the most experienced people in the business...called me into his office and said, I just want to talk to you because I think you're very good, but if you continue as you are, that would be less important than whether we want you to stay here."

This quote highlights the importance of ego management and the positive impact that mentorship and feedback can have on personal growth within the venture capital sector.

• Harry Stebbings discussed his personal experience at Apex, where he felt isolated as the firm evolved away from venture focus.
• He recognized that his strengths did not align with the firm's direction, leading to his departure.
• The importance of aligning personal strengths with the right environment is emphasized.

"The question is not am I better than you. The question is, given what I think I'm very good at, is this place the right place for me?"

The quote highlights the need for individuals to assess their skills and ensure they are in a professional environment that values and utilizes those skills effectively.

• Mike Chalfen discussed the challenge of being dismissed from Apex and the impact on his identity.
• He credited a coach for helping him realize the issue was a matter of fit, not personal failure.
• The separation of work identity and personal identity is a key focus.

"It had been a long time coming just from a stage perspective, so it didn't feel unnatural. It was nevertheless pretty hard."

This quote reflects the difficulty of separating from a company, even when it is anticipated or makes sense from a business perspective, due to the intertwining of work and personal identity.

• Mike Chalfen shared how the dot-com crash influenced his investment decisions.
• He recounted a specific case of declining investment in a venture that later proved successful, highlighting the difficulty of making such decisions.
• Being upfront with entrepreneurs and clear decision-making are underscored as critical.

"It made me more upfront, having gone through that, there's a big difference between someone building a business and someone building a business you think you should put money in."

The quote captures the lesson learned from past investment decisions, emphasizing the importance of transparency and discernment in choosing where to invest.

• The conversation touched on the challenge VCs face in being upfront due to the social nature of the business.
• The potential need for more direct communication in the industry is discussed.

"For comfort companies, it may be that in the next year or two we all are a bit more upfront because we kind of have to be."

This quote suggests that market conditions might drive VCs towards more direct communication, which could lead to more honest and efficient interactions within the industry.

• Mike Chalfen explained his approach to due diligence, focusing on whether a business could become dominant and differentiated.
• He avoids businesses with low barriers to entry and seeks those with unique worldviews and technological advantages.

"To me that's always worth a look. I probably wouldn't take another look if it looks like it's the 10th business, making Salesforce data all freely available to salespeople or whatever it may be where there's a low barrier to compete."

The quote shows his investment strategy of looking for truly innovative businesses rather than those entering a saturated market with no distinctive advantage.

• Mike Chalfen discussed the pitfalls of overestimating the potential size of businesses and the importance of understanding the types of businesses that require different investment strategies.
• He emphasized the distinction between businesses with strong economics regardless of size and those that need to be large to be economically spectacular.

"The mistake in the last couple of years in our market has been a lot of businesses that could be good businesses are priced as if they could be enormous businesses with unbelievable economics."

This quote critiques recent market trends where businesses are overvalued based on unrealistic expectations, leading to overcapitalization and subsequent challenges.

• The importance of unit economics in building a sustainable business is discussed.
• Mike Chalfen described good unit economics as a company's ability to grow without relying on continuous capital injections.
• He explained the need to envision the emergence of good unit economics for a business, even at early stages.

"Good unit economics basically mean you can ultimately at some point choose to control your endestin."

The quote encapsulates the essence of unit economics—having the financial foundation that allows a company to be self-sustaining and not dependent on external funding.

• Mike Chalfen shared his experiences with businesses transitioning from services to software and the challenges they face.
• He noted that enterprise clients often prefer services, making automation difficult.

"A lot of larger businesses actually want services. Like, there's a reason workday and SAP have big services lines."

This quote indicates that the demand for personalized services in the enterprise sector can impede the transition to automated software solutions.

• Mike Chalfen discussed his approach to avoiding FOMO by focusing on providing quality service to entrepreneurs he works with.
• He believes in his ability to find potentially large, differentiated businesses without chasing every investment opportunity.

"I don't want to be chasing every possible investment because then I can't provide the service that I think is at the heart of my business to the entrepreneurs that I work with."

The quote reflects Mike Chalfen's philosophy of selective investment and dedication to adding value to the ventures he chooses to support, rather than succumbing to FOMO.

• The role and value of boards at different stages of a company's growth are examined.
• Mike Chalfen argues that boards are often inefficient and should focus on strategic issues rather than being reporting forums.
• He suggests that boards should leverage the collective expertise of their members to solve specific problems.

"At seed stage, a board is of limited value. The most value is weekly, biweekly, spending time with teams, helping them solve problems quickly so that they're not waiting for the board in order to say, by the way, I've got this problem."

This quote highlights the limited usefulness of formal board structures at the seed stage of a company, advocating for more frequent and direct support to address emerging challenges.

• Young board members often struggle to differentiate between strongly held opinions, questions, and advice.
• The importance of recognizing the appropriate context for each type of input is emphasized.

"Not distinguishing between opinions weakly held or strongly held, and not distinguishing between advice that they are in a good position to give or not in a good position to give."

The quote points out common errors made by inexperienced board members, underscoring the need for clarity and self-awareness in contributing to board discussions.

• Mike Chalfen discussed the balance between supporting winners and not abandoning struggling companies.
• He believes in the importance of a mature relationship where companies can call on early investors as needed.

"So you need to develop a good enough relationship. When companies mature, it's okay for them to spend less time with you and okay for them to pull you in when they need you."

The quote suggests that as companies grow, the nature of the investor-company relationship evolves, allowing for a more flexible and as-needed engagement.

• Competent teams in a company bring decision-making into the group, differentiating between internal business operations and the investor's perspective.
• Investors with good teams spend less time with winners because they can handle most issues independently.
• Problems brought to investors by competent teams are usually significant and suited to the investor's expertise.
• Companies should dictate the interaction with investors, not the other way around.

But the more competent people you have around you, the more you inherently bring decision making into the group, and you start to distinguish between stuff that happens inside the business and sort of working on the business, and the investor perspective is working on the business.

This quote highlights the distinction between the operational side of the business that competent teams can handle and the strategic side where investors can contribute.

So I spend less time with winners because they don't need me, because they have good teams.

This quote reveals that investors can focus their time more effectively by engaging with companies that have the most significant needs or challenges.

The company should basically determine when they want to talk to you.

This quote emphasizes that the company should be the one to initiate contact with investors when they deem it necessary, indicating a more passive role for investors in day-to-day operations.

• There is frustration over the accumulation of board members with each funding round without consideration for their ongoing contribution.
• Suggests a statute of limitation on board membership, where after three years, members should not have an automatic right to remain on the board.
• The idea is to allow the company to choose which investors provide the most value and should continue as board members.

But by the way, with boards, what drives me mad is everyone's accruing the right to be on the boards.

This quote reflects the speaker's frustration with the automatic accrual of board seats for investors without assessing their value to the company.

After three years, you no longer have the right to be on the board. Boom.

The quote proposes a solution to the problem of board seat accrual by suggesting a time limit on the right to board membership.

• Founders should be able to identify and communicate the most pressing issues to the board.
• Setting the board agenda with the founder is crucial, focusing discussions on current and anticipated problems.
• First-time founders may struggle with anticipating problems and need guidance from board members.

What we should discuss is direct result of the problems that they are encountering or that they can see coming over the hill.

This quote emphasizes the importance of addressing current and foreseeable challenges in board meetings, guiding the founder in setting the agenda.

• Comments from high-profile board members can disproportionately influence discussions.
• Recommends that founders collect comments in an isolated document to maintain the purity of independent thoughts.
• Encourages open and intellectually honest discussions, even if they involve disagreeing with prominent board members.

When they comment, it takes a very bold person to comment back.

This quote suggests that the stature of certain board members can make it intimidating for others to express dissenting opinions.

Comment in an isolated word, doc. Then you, the founder, can bring everyone's independent thoughts pure and then discuss them in the board together.

The quote provides a strategy to ensure that all board members' opinions are heard and considered equally.

• Founders should act in the best interest of shareholders without constantly seeking permission.
• Encourages founders to make decisions confidently, trusting in the investment and support they have received.

It's like you do what is in the best interest of your shareholders because they trust you and they invest in you.

This quote encourages founders to make decisions based on what they believe is best for the company and its shareholders, rather than seeking approval for every action.

• The entrepreneurial experience of venture partnerships can be repetitive and inefficient.
• The venture industry tends to prioritize stability, which can stifle dissent and lead to a lack of innovation in decision-making processes.

That's not a good customer experience.

This quote criticizes the repetitive nature of the fundraising process from the perspective of the entrepreneur.

Dissent is very, quite a big deal to have proper dissent.

The quote highlights the challenge of fostering open dissent within venture partnerships, which is essential for healthy decision-making.

• US VCs can be effective in European seed deals if they are willing to accommodate time differences and prioritize the investment.
• The remote-first world allows for flexible collaboration across geographies.

This is a remote first world.

This quote acknowledges the modern trend of remote collaboration, which facilitates cross-border investments.

• The decision to sell shares in a portfolio company should be based on strategic portfolio management, not emotional attachment.
• It's important to consider the potential for future returns and the needs of different LPs when deciding whether to sell.

You're backing your judgment about where in the portfolio will generate the most alpha today.

This quote explains the rationale behind selling shares in a portfolio company, emphasizing the strategic aspect of such decisions.

• Pro rata is often a neutral or default decision for venture funds.
• Not all funds have the capability to invest beyond pro rata, and not all companies can accommodate additional investment.

Pro rota is a lazy decision.

This quote criticizes the use of pro rata as an unthoughtful or automatic choice rather than a strategic one.

• Acknowledges that many things can go wrong in venture, but it's important to remain optimistic.
• Emphasizes the importance of treating people well and being honest with oneself during challenging times.

I think basically a lot goes wrong. It'll be okay.

This quote provides reassurance that despite the challenges in venture, things tend to work out in the end.

• There is a need for more mentorship in the venture industry despite the abundance of information available.
• Mentors provide valuable personal interaction and guidance that cannot be replaced by information alone.

I don't think there's enough mentorship.

This quote identifies a gap in the venture industry, highlighting the need for more personal guidance and mentorship.

• The company Opley is creating an ingredients marketplace with a focus on solving a messy data problem.
• The investment was driven by the potential of the data analytics and the dynamic founding team.

Opley is creating on the face of it, just an ingredients marketplace where small manufacturers of food brands or drinks brands source the ingredients they need to manufacture their products.

This quote describes the primary business of the recent investment and hints at the deeper data problem they aim to solve.