20VC How To Think Through Portfolio Construction and The Business Model of VC, Why You Cannot Grow Ownership In Your Best Companies Over Time & How To Make The Space for Serendipity To Strike in VC with Adam D'Augelli, Partner @ True Ventures

In this episode of "20 Minutes VC," host Harry Stebbings interviews Adam D'Augelli, a partner at True Ventures, an early-stage fund with a stellar portfolio including Fitbit, Peloton, and Ring. Adam recounts his journey from teaching business finance at the University of Florida and founding Perfect Wave Records to joining True Ventures, emphasizing the importance of mentorship in his career. He explains True Ventures' investment strategy of leading initial rounds with significant ownership stakes to align with founders' ambitious visions, even in unconventional markets. Adam also discusses the firm's hands-on approach to supporting startups through various growth stages and the significance of creating space for serendipity in venture capital. The conversation highlights the nuanced decision-making process for initial and follow-on investments, the value of strong founder relationships, and the critical role of portfolio construction in achieving consistent returns for limited partners.

• Harry Stebbings introduces the episode of "20 minutes VC" and encourages listeners to follow behind-the-scenes content on Instagram.
• Adam D'Augelli is introduced as a partner at True Ventures, highlighting his successful investments and previous roles.
• Adam's background includes being an instructor at the University of Florida and founding Perfect Wave Records.
• Acknowledgments are given to individuals who provided questions and suggestions for the episode.

"And so with that, I'm thrilled to welcome Adam Dalgelli, partner at True Ventures, one of the west coast leading early stage funds with a portfolio including the likes of Fitbit, Peloton, Hashicorp, Trade, IO, Ring Automatic, the makers of WordPress and many more amazing companies."

This quote introduces Adam D'Augelli as a significant figure in venture capital, emphasizing his association with a prestigious firm and its impressive portfolio.

• Harry Stebbings promotes Clearbank, Dell Tech Capital, and Silicon Valley Bank, discussing their services and contributions to businesses and startups.
• These promotions highlight the value of financial support and partnerships in the growth and success of companies.

"Clearbank is here to help. They offer fast, affordable investments for online businesses." "Dell Tech Capital is the venture capital arm for Dell Technologies." "Silicon Valley bank has been the bank for visionaries of all kinds."

These quotes serve as promotional mentions of the sponsors, emphasizing their roles in supporting and investing in businesses and startups.

• Adam joined True Ventures in June 2010, when the firm was small and investing in their second fund.
• He had previously worked for B stock Solutions, a portfolio company of True Ventures.
• His initial role at True was undefined, but he was given the opportunity to work in various functions within the firm.
• Adam emphasizes the importance of working with great people and aligning with their values.

"But ultimately Phil offered me a role at the firm. At the time, it was mostly undefined, but effectively, we like you. We've never hired someone junior at the firm, but come here and we'll figure it out together."

This quote explains how Adam D'Augelli's role at True Ventures began with an undefined position that evolved over time, reflecting the firm's willingness to take a chance on his potential.

• Adam views venture capital as a mentorship business and credits his partners at True Ventures for being patient teachers.
• He acknowledges the steep learning curve in venture capital and the value of learning from experienced partners.

"I'm a believer that venture capital is very much a mentorship business, and I couldn't have asked for a better group of partners to work with."

Adam's quote highlights the significance of mentorship in venture capital and his appreciation for the guidance he received from his colleagues at True Ventures.

• Adam discusses the business model of venture capital as an asset allocation business.
• True Ventures manages funds of around $300 million, focusing on leading the first round of institutional capital with target ownership percentages.
• True Ventures is transparent with founders about the type of investments they make.

"Our median initial investment is roughly 2 million for 22.2%."

This quote details True Ventures' investment strategy, including their typical initial investment size and desired ownership percentage, which shapes their portfolio construction approach.

• Adam addresses the challenge of achieving desired ownership percentages in the current investment climate.
• He explains True Ventures' upfront approach with founders regarding the type of deals they pursue.
• The goal is to make great investments that lead to predictable returns for limited partners.

"We don't have to do every great investment in the world, but if we only do great investments over time, we will consistently outperform and generate, I would say, predictable returns for our lps, which I think is important."

Adam's quote conveys True Ventures' selective investment philosophy, aiming for quality over quantity to ensure consistent performance and predictable returns for their investors.

• True Ventures aligns with founders by investing early and taking significant ownership.
• They aim for a 20-25% stake, constraining downside risk and enabling substantial upside potential.
• True Ventures encourages founders to take risks on product, market size, and timing.
• They support founders even if initial ventures fail, often reinvesting in their subsequent projects.
• True Ventures can provide significant follow-on capital for successful companies.

"We do one thing. We do that one thing really well. We back really great founders early. We invest one to 3 million, where we tend to own 20% to 25%."

This quote explains True Ventures' core investment strategy, focusing on early-stage investments with a substantial ownership target to align interests with founders.

"We back 28 people twice. We've fact eight people three times. Often in the first thing didn't work. What do you want to spend time on now?"

This quote highlights True Ventures' commitment to founders, showing a willingness to reinvest in individuals even if their initial ventures are unsuccessful.

• True Ventures selects founders who understand the inherent risks and are willing to trade ownership for capital and support.
• Founders often prefer a trusted partner who can provide significant capital over time, understanding that their venture may not succeed.
• True Ventures educates founders on raising less capital to encourage risk-taking and acknowledges the high opportunity cost of a founder's time.

"We also self select into a type of founder... they tend to see something that others don't."

Adam D'Augelli suggests that True Ventures looks for founders with unique insights and the willingness to make unconventional decisions based on their vision.

"The best founders do kind of view the opportunity cost of their time more than their dollars, so to speak, in a lot of cases."

This quote emphasizes that the most effective founders prioritize the potential impact of their work over the financial aspects, aligning with True Ventures' investment approach.

• True Ventures focuses on leading pre-seed or seed rounds to secure significant ownership early on.
• They have a bias towards single-lead, priced equity rounds and are open to collaborating with emerging managers that founders wish to include.
• True Ventures maintains ownership through follow-on investments, aiming for 17-20% at exit.

"Our main product is we will lead a preceder seed round with that investment amount and target that ownership."

Adam D'Augelli clarifies True Ventures' primary investment product, which is to lead early rounds and secure a target ownership percentage.

"Our model really is predicated on idea that we will lead the round... and really working with people that are truly special."

This quote further explains the investment model, emphasizing the leading role in early rounds and the focus on working with exceptional founders.

• True Ventures makes between 45 and 50 initial investments per fund and reserves capital for follow-on investments in the best-performing companies.
• Their decision-making focuses on inputs such as founder quality, product risk, and market potential.
• Investments are often driven by an individual on the team, with a firm culture that supports embracing early-stage risk.

"Our goal isn't to be certain about individual investment success, but rather focus on the inputs to each investment."

Adam D'Augelli discusses how True Ventures prioritizes the factors that contribute to a potential investment's success rather than trying to predict the outcome.

"Decisions are driven by an individual protagonist on the investment team... but are often made in a non consensus way."

This quote reveals the internal process at True Ventures, where individual team members champion investments, and decisions are made without requiring full consensus.

• True Ventures focuses on the initial stages of investment, often when a company is hiring its first 8 to 10 employees.
• Early data on product shipping and customer or revenue feedback are crucial to evaluating the market potential.
• Investment decisions are based on the analysis of this data, the market's response, and the company's ability to secure further funding.
• True Ventures often continues to invest in subsequent rounds, maintaining or increasing their stake based on these factors.

"Once we make the investment, we get really good data. Quality of hiring. So often during the time they'll hire the first eight to ten employees, we'll see some data on product."

This quote emphasizes the importance of early data on hiring and product development as indicators of a startup's potential success.

"And then our subsequent investment decision is ultimately made based on our understanding of the data, how we're excited by it, and their ability to continue to raise downstream capital."

This quote explains that subsequent investments are contingent on the analysis of early data and the startup's capacity to attract further investments.

• True Ventures has a large team to manage a portfolio of companies, ensuring personalized attention.
• The firm adds value by connecting portfolio companies with domain experts within its founder network.
• Engagement is not just about sourcing candidates but helping with interviewing, understanding what good looks like, and closing hires.
• True Ventures' approach to hiring support is informed by their experience with numerous companies, which aids in identifying what constitutes a quality hire at different stages.

"Part of it is our team is really big, so there's ten of us who invest for true, which means that just on a math basis, we will have less portfolio companies per person."

This quote explains that a larger investment team allows for a more manageable number of portfolio companies per team member, facilitating deeper engagement.

"One of the things we at founder camp is, whatever you need, the answer is in the room."

This quote highlights True Ventures' philosophy that within their network, there is a wealth of knowledge and expertise available to support their portfolio companies.

• True Ventures believes in having frequent and honest conversations with founders about the progress and success of their business.
• The firm sets clear expectations and aligns with founders early on to avoid surprises regarding investment decisions.
• These discussions can lead to strategic pivots or even help founders transition from one venture to another, with True Ventures' support in both scenarios.

"The founder, early and often."

This quote underscores the importance of regular and transparent communication with founders regarding the performance of their company and investment decisions.

"I have not yet had an experience where someone was surprised when we said it wasn't working."

This quote reveals that due to the ongoing dialogue, founders are usually not caught off guard by decisions to withhold additional capital.

• True Ventures adapts its board involvement based on the startup's stage, from informal "board coffees" to structured meetings as the company grows.
• The firm's philosophy is to provide support in a way that best suits the founder's needs at each stage of the company's development.
• True Ventures takes a flexible approach to board meetings, focusing on enabling founders to move quickly and efficiently.

"And what we have found to be successful there is either you set up a monthly call for an hour, you may or may not keep it, but as you have it on the calendar, you feel good about it."

This quote illustrates True Ventures' flexible approach to board involvement, prioritizing the founder's need for support over rigid meeting schedules.

"The goal is to enable the founders to move really, really quickly the board seat."

This quote emphasizes the objective of True Ventures' board involvement: to facilitate rapid progress and decision-making for the founders.

• True Ventures acknowledges the need to eventually transition away from board positions as the portfolio expands.
• The firm's select funds allow them to promise continued support and investment throughout a company's lifecycle.
• Discussions about board transition focus on what is best for the company, with the aim of maintaining alignment with founders' visions.

"So part of the reason we raised our select funds in 2013 is a reality that our pitch to founders is, listen, we're going to be here day one."

This quote explains the rationale behind True Ventures' select funds, which are designed to provide ongoing support to their investments.

"What's best for the company at this stage more than anything else."

This quote reflects the guiding principle for board transitions, prioritizing the company's needs over the firm's involvement.

• True Ventures has learned from successful investments like Ring that growth can exceed expectations and that taking calculated risks can be highly rewarding.
• The story of Ring's domain purchase demonstrates the value of asymmetrical risk and the importance of brand identity in a startup's early stages.

"How fast you can grow is much faster than you think."

This quote conveys the lesson that startups have the potential to scale more rapidly than commonly anticipated.

"200k is worth the experiment to go run it."

This quote from the Ring domain purchase story exemplifies the mindset of investing in significant, yet calculated, risks to potentially yield high returns.

• True Ventures believes that both the founder's vision and the market are critical to a startup's success.
• The firm considers the founder's motivations, experiences, and assumptions about the future as integral to evaluating an investment opportunity.

"I'm going to dodge a bit and say it's both are important. You can't have one without the other."

This quote captures True Ventures' stance on the debate, emphasizing the interdependence of a strong founder and a promising market.

• True Ventures takes differentiated risks that other firms may be uncomfortable with.
• They were not the first investors to meet the companies they invested in, and often those companies had been turned down by others.
• The decision to lead financing rounds was straightforward and happened relatively quickly.
• They look for great founders with ambitious visions, raising the type of money at their preferred price point.
• Even if the markets are unusual, the vision for a positive world impact and potential for large business is key.

"In both cases, we weren't the first investor to meet either company, and often they had been turned down by many other investors before us. But for us, the decision to leave their financing rounds was straightforward, happened relative really quickly."

This quote explains the criteria True Ventures uses to decide on investments, emphasizing the importance of the founders' vision and the potential for significant returns, rather than being the first to discover a company.

• Jamie's vision for improving home security starting with the front door was bold and ambitious.
• Despite initial product issues, his goal to lower crime in communities was a driving factor for investment.
• Steve chose a less popular category at the intersection of music and creator tools but had a strong product brand and vision for music creators.
• The market size for creativity is believed to be much larger than commonly perceived.

"But he had a vision for how you can improve home security, starting with the front door. It was bold and ambitious and big, if successful."

This quote illustrates Jamie's vision for his company, which was a significant factor in the decision to invest, highlighting the importance of a founder's ambitious goals in the investment process.

• Venture Capital (VC) is a job where increased activity doesn't always correlate with better performance.
• Having space in one's schedule for luck and serendipity is crucial for success.
• Building relationships over time can lead to investment opportunities, as seen with Mitchell from Hashicorp.
• It's difficult to plan for serendipitous outcomes, but creating opportunities for such events is essential.

"Some examples with Mitchell and Hashicorp Mitchell was the first engineering hire to fund two company. When he lost that company, he didn't plan to raise money, but we built relationships with him over time and worked really hard to be his earliest investment partner."

This quote highlights the significance of relationship-building and the role of serendipity in venture capital, demonstrating that success often comes from unplanned interactions.

• Knowledge and understanding of what constitutes a good investment take time to develop.
• New investors are often advised to focus on sourcing early, but it's also important to learn to recognize quality investments and have a differentiated viewpoint.

"It takes longer to build knowledge and feel of what a good investment looks like."

This quote underscores the learning process in venture capital, emphasizing that recognizing good investments is a skill that develops over time.

• True Ventures backs individuals with domain expertise and unique market insights.
• They avoid trying to match the depth of knowledge of their investees, as it can create a false sense of security.
• Investing in founders with strong convictions and knowledge is preferred over trying to become experts in their fields.
• The paper "Investing in the Unknown and Unknowable" suggests that knowing more in uncertain markets can lead to worse investment decisions.

"There was no amount of work I could do to catch up with him in his knowledge and ultimately his conviction on the opportunity and why he wanted to do it is what drove our investment decision."

This quote emphasizes the importance of backing founders with deep domain expertise and conviction, rather than attempting to outpace their knowledge as investors.

• Different board members bring varied strengths to the table.
• Knowledge on software metrics, embracing risk with a human approach, having a small syndicate of aligned co-investors, and depth of knowledge on being a good board member and partner to CEOs are all valuable traits.
• Aspiring to learn from and emulate effective board members is key to growth as an investor.

"Randy Glyin of DFJ growth as a growth investor, Randy's unique in the way he embraces risk, takes a very human approach in their business."

This quote describes the qualities that make Randy Glyin an effective board member, illustrating the diverse skills and approaches that contribute to successful board governance.

• Membio, the latest investment, manufactures red blood cells outside the human body.
• The decision to invest was driven by mission-driven founders with an ambitious idea that could have a significant positive impact if successful.
• The investment fit the criteria of being the right type of money at the right price.

"The most recent investment is a company called Membio, which manufactures red blood cells outside the human body."

This quote provides an example of a recent investment decision, highlighting the alignment with True Ventures' investment philosophy of supporting mission-driven founders with ambitious ideas.