20VC Insight Managing Director, Deven Parekh on The Current Funding Mania, Compression of Round Timelines, Fund Deployment Speeds Increasing & How To Think Through Price and Time Allocation Across the Portfolio

In this episode of 20 VC, host Harry Stebbings interviews Devin Parrick, Managing Director at Insight Partners, a leading investment firm with over $30 billion in capital commitments. Devin has made over 90 investments, including Twitter, Alibaba, and WordPress, and has been named on the Forbes Midas List five times. They discuss the resilience of the software model, the challenges of quick decision-making in the current fast-paced investment landscape, and the importance of building trust in negotiations. Devin also shares his approach to board membership, emphasizing strategic input over operational intervention, and the necessity of continuous learning and adaptation in the venture industry. Insight Partners' culture of self-critique and improvement is highlighted, as well as Devin's personal motivation to keep learning and his view on time allocation across portfolio companies.

• Insight Partners is a leading investment firm with over $30 billion in capital commitments and more than 400 portfolio companies.
• Deven Parekh has made over 90 investments, including Twitter, Alibaba, and WordPress.
• Deven sits on several boards, including the Carnegie Endowment for International Peace and the Tisch MS Research Center.
• Deven has been named on the Forbes Midas List five times.

"In the hot seat, one of the biggest capital deployers in the market, with over 30 billion in capital commitments and over 400 portfolio companies."

This quote introduces Insight Partners as a significant player in the investment market, highlighting their extensive portfolio and capital commitments.

• Deven Parekh was originally a science geek interested in biochemistry before transitioning to economics and venture capital.
• His interest in economics was sparked by his roommates and an Econ class he took while studying biochemistry at Penn.
• Deven worked at Blackstone after college and later joined Baron Ellen Company, which led to his connection with Insight Partners.
• He joined Insight Partners in 1999, when they were raising their first institutional fund.

"I was a science geek in high school... went to Penn, was studying biochemistry... I had a bunch of roommates that were economics majors... I got a job on Wall Street after my freshman year and really liked that."

This quote explains Deven's academic background and his initial interest in science, which eventually shifted to economics and finance, leading him to Wall Street and venture capital.

• Deven has witnessed three major economic crashes: the dot-com bubble, the 2008 financial crisis, and the COVID-19 pandemic.
• Each crash had different characteristics, with the dot-com bubble affecting less established companies, the 2008 crisis impacting real companies, and COVID-19 accelerating digital transformation.
• These experiences have reinforced Deven's belief in the resilience of the software model and real companies.

"The software model is incredibly resilient... when you have real companies... the software model is incredibly resilient."

Deven's quote emphasizes the durability of the software business model through various economic downturns, which has informed his investment approach.

• The venture world has seen significant changes, with large funds deploying capital at unprecedented rates.
• Despite high valuations, the underlying belief is that the software model will continue to grow due to ongoing digital transformation and innovation.
• Deven suggests that if growth expectations are met, high valuations can be justified due to the compounding effect of growth rates.

"We have a line that we use internally, is that we never overpay. Companies miss their numbers."

This quote conveys Insight Partners' philosophy on investment valuations, emphasizing the importance of company performance over initial costs.

• Deven acknowledges the current market mania with some companies receiving high valuations at early revenue stages.
• While not every investment at these valuations will succeed, the focus is on identifying companies with strong execution and large market potential.
• The key is to invest in the right companies that can justify their valuations through exceptional growth.

"Our job is to make sure that we're getting in the right ones."

Deven's quote highlights the importance of careful selection and due diligence in making investment decisions amidst a market with high valuations and enthusiasm.

• Investment success is often measured by long-term growth and having a significant market share of unicorn companies.
• Some funds aim to own north of 25% of the total available market of unicorn companies.
• Insight Partners defines success by good returns for their Limited Partners (LPs) as well as potentially increasing their market share in unicorn companies.
• Insight Partners acknowledges the need to improve in getting comfortable with high-value deals.

"that the ones that we're paying up for are the ones where our long term growth underwriting is correct. And we won't always be correct, obviously, but we need to be correct enough."

This quote emphasizes the importance of accurate long-term growth predictions when making high-value investments, despite the acknowledgment that not all predictions will be accurate.

"How do you ultimately define insight and your success? Is there one of those kind of meta questions which is the guiding North."

This quote reflects the search for a fundamental principle or strategy that defines the success of Insight Partners.

"But what the person you spoke to yesterday said is another way of saying the same thing."

Deven Parekh indicates that aiming for a high market share in unicorn companies is synonymous with seeking good returns, which is Insight Partners' primary measure of success.

• The speed of decision-making in the current market is concerning, with decisions often made over a weekend or after a short video call.
• Quick decision-making may negatively impact both investors and founders due to the long-term commitment required in investments.
• Earlier-stage investments require more time to evaluate due to the emphasis on the individual founder rather than financial metrics.

"I'm more troubled by having to make that decision over a weekend or in three days without having spent a meaningful amount of time."

Deven Parekh expresses concern about the accelerated pace of decision-making in venture capital, which could lead to less thorough evaluations and potentially problematic long-term partnerships.

• Temporal diversification refers to spreading investments over time to mitigate risks associated with market fluctuations.
• Historical analysis at Blackstone showed that the year of investment was a significant driver of returns, indicating the importance of timing.
• Current market conditions have shortened the typical fund deployment period to about two and a half years, affecting temporal diversification strategies.
• Larger fund sizes would be required for longer temporal diversification, which might not align with LP preferences due to fee drag.

"So I think what you are seeing generally, we probably deploy funds in about two and a half years."

Deven Parekh notes that the current trend in venture capital is to deploy funds over a two and a half year period, which has become the new norm for temporal diversification.

• Successful negotiation is based on building trust and understanding each party's needs, not on gamesmanship.
• Transparency and honesty are crucial, as is the willingness to satisfy both parties' requirements.
• Good negotiations result in both parties feeling that they have gained something, rather than one side dominating.

"I think negotiation that works, to me, is one where you actually build a trust based relationship with somebody."

Deven Parekh believes that effective negotiation is rooted in trust and mutual understanding, rather than aggressive tactics.

"I think the key in a negotiation is making sure both sides really understand what's important to the other party, and everybody should walk away feeling like they got something."

This quote highlights the importance of a balanced negotiation where both parties feel that their needs have been met.

• Insight Partners does not have a minimum ownership percentage requirement and is willing to own a wide range of equity stakes in companies.
• The strategy is to own as much as possible once conviction in an investment is established.
• Insight Partners also engages in control deals, acquiring majority stakes in companies with strong growth profiles without using leverage.

"Once we decide we like something, we like to own as much as we can."

Deven Parekh explains that after deciding on an investment's potential, Insight Partners aims to acquire a significant ownership stake.

• The concern of signaling risk arises when a multi-stage investor does not participate in a company's subsequent funding round.
• Insight Partners rarely faces this issue as they generally continue to support companies they initially invest in.
• The market has shown that signaling risk is not as significant as once thought, and companies can still raise capital even if an early investor does not follow on.

"The reality is the markets I think David talked about this at his interview right I mean the market has shown that the signaling risk is not that significant of a risk."

Deven Parekh addresses the concern of signaling risk, suggesting that the market has demonstrated that the absence of a follow-on investment does not necessarily hinder a company's ability to raise further capital.

• Devin discusses his early experiences on boards and how his reactions to company issues have matured over time.
• The importance of maintaining emotional equilibrium in response to the highs and lows experienced by companies.
• The realization that a board member's role is to support, not operate the company.
• The value of strategic input and pattern recognition over operational advice.
• The shift from feeling the need to have an opinion on everything to focusing on areas where one can truly add value.

"So early on, I think I probably overreacted to the negative and probably overreacted to the positive." "You're there to help, you're there to be a devil's advocate, you're there to challenge thinking." "I know the areas that I think I can add value and I push on those, and where I can't, there's other board members and other people who are going to add more value than me."

These quotes illustrate the learning curve Devin experienced, highlighting the importance of emotional steadiness, understanding the advisory role of a board member, and the strategic focus over operational involvement.

• The distinction between board meetings that are engaging versus those that simply recite facts.
• The preference for splitting board meetings into a financial overview and a strategic session.
• The effectiveness of concise meetings focused on key highlights, lowlights, and strategic issues.
• The involvement of various functional areas in board meetings to gain broader management team exposure.

"I like to read history for fun, but I don't like people reading the history." "Tighter board meetings tend to focus the conversation on the things that matter."

Devin emphasizes the need for board meetings to be dynamic and strategically focused rather than a mere recounting of past events, advocating for structured and efficient meetings.

• The approach to raising concerns in board meetings varies based on the issue's nature.
• Strategic issues may benefit from open discussion, while sensitive topics may be better addressed in private.
• The tendency for individuals to be more receptive to feedback in one-on-one settings.

"I think if it's something around, I don't feel like our marketing strategy is really working here... getting broader kind of feedback... probably has value." "I think those conversations are better had one on one."

Devin differentiates between strategic discussions that can be beneficial in a group setting and personal or sensitive matters that should be handled privately to avoid defensiveness.

• The theoretical optimal time allocation for fund performance: minimal time with winners, more time with middle performers, and little to no time with underperformers.
• The reality that investors often spend time differently, with a preference for engaging with successful companies.
• The importance of not abandoning struggling companies and the long-term reputational benefits of supporting entrepreneurs through challenges.

"Actually, you spend almost no time with the winners... The middle, you actually probably can influence the outcome... spending almost no time on the capital returners or the losers." "I think you want to be referenced as somebody who, when there was a problem, you didn't abandon ship."

Devin outlines the ideal versus actual time spent with different categories of companies in a portfolio, highlighting the emotional and ethical considerations that influence investor behavior.

• Devin identifies with the term "insecure overachiever" and discusses the commonality of such feelings among successful investors.
• The constant challenge of finding high-performing companies and the pressure to keep up with successful peers.
• The motivation and drive that insecurities can provide in maintaining a competitive edge.

"I constantly am worried about, am I going to be able to still find companies that are going to perform really, really well?" "It definitely keeps me on my toes because I feel like... I got to find something just as good."

These quotes reveal Devin's personal insecurities and how they fuel his ambition and drive for continued success in the competitive investment landscape.

• The importance of learning from missed opportunities and not dwelling on past successes.
• The culture of constantly seeking improvement and analyzing competitive deals.
• The comparison to competitive athletes learning from their opponents to enhance performance.

"We spend way more of our time beating ourselves up on the things that we missed and why didn't we look at that area?" "We don't watch videos, obviously, but we..."

Devin discusses the introspective and competitive nature of the investment industry, emphasizing the need to continuously evaluate and learn from past decisions to improve future outcomes.

• Scaling firms often develop hierarchies that can affect the weight of individuals' words.
• It's important to create an environment where everyone, including junior staff, feels comfortable voicing their opinions.
• Hierarchies may unintentionally suppress diverse perspectives and insights.

When firms scale inherently, even if you want a meritocracy of ideas, hierarchies are created and people have different weight of words, I think the weight of your words are very impactful.

The quote highlights the challenge of maintaining a meritocracy of ideas in a growing firm where hierarchies naturally emerge, impacting the influence of each person's words.

• Deven Parekh describes a team-based approach to investment diligence at his firm.
• He emphasizes starting discussions with the most junior team members to ensure their insights are heard without bias from senior opinions.
• This method helps to integrate critical information gathered by junior members into the decision-making process.

And my approach on those is always to start with the most junior person and go to the most senior person, as opposed to start with the most senior person and go the other way.

Deven Parekh explains his strategy of reversing the typical hierarchy in meetings to empower junior staff to share their findings and opinions first, thereby promoting a more balanced and inclusive discussion.

• Documenting personal opinions before group discussions can prevent them from being influenced by others.
• Annie Duke's method of writing down thoughts before meetings is praised for fostering pure conversations.

She suggested that all ics are done where you essentially actually document your thoughts beforehand.

This quote refers to a method suggested by Annie Duke to document individual thoughts before group discussions to avoid influence by others and have more genuine conversations.

• Deven Parekh reads widely and on eclectic topics.
• He recently read about climate change, the history of eels, and the writing process.
• Reading diverse subjects contributes to continuous learning and improvement in skills such as writing.

Just as an example, just to show you the randomness of what I read the last three books I read.

Deven Parekh shares examples of his recent reading material, illustrating his broad interests and commitment to learning.

• Deven Parekh is motivated by the opportunity to learn new things, regardless of how long he has been in the business.
• Learning about new topics, such as cryptocurrency, requires starting from first principles.

I just love to learn. That goes back to topic one.

This quote reflects Deven Parekh's passion for learning as a primary motivator in his career, emphasizing the joy of discovering new things.

• Deven Parekh frequently reminds himself and others that nothing worth having comes easy.
• He believes in the value of hard work and perseverance, especially in a world that often expects quick success.

It's nothing worth having comes easy.

The quote is Deven Parekh's personal motto, which encapsulates his belief in the necessity of hard work for achieving valuable goals.

• The challenge for Insight is to continually reinvent to match the pace of market changes.
• Maintaining an entrepreneurial culture is crucial while adapting to new market opportunities.

I think it's constant reinvention.

This quote summarizes the ongoing challenge faced by Insight to stay relevant and innovative in a rapidly changing market.

• Deven Parekh acknowledges that one can never have 100% of the information needed for a decision.
• He trains his team to make decisions with the information available, accepting that there will always be unknowns.

You're never going to know the answer.

The quote expresses the reality of decision-making in venture capital, where complete information is unattainable, and decisions must be made with the best available data.

• Fast decision-making is about identifying common themes in successful deals and assessing if they are present in the current opportunity.
• Risk mitigation strategies, such as adjusting investment size, are important.

How do you get comfortable with quick decisions is, I think you just start thinking more and more about the history of what were the common themes about things that have worked, and are enough of those common themes in this deal to take the bet.

Deven Parekh discusses how to become comfortable with making quick decisions by relying on historical patterns of success and ensuring enough of those patterns are present in the current deal.

• Deven Parekh's most recent "hell yeah" investment was in Tetrascience, a company in the life sciences software sector.
• He believes that life sciences will experience significant growth and innovation in the coming years.

The most recent one that I've done is a company called tetrascience.

The quote reveals Deven Parekh's excitement and confidence in his recent investment in Tetrascience, indicating his positive outlook on the future of the life sciences industry.