20VC: Investing Lessons from Fred Wilson and Why Small Funds Outperform Large Funds | Why the Secret to Winning in Venture is Splitting Deals |Learnings From the Biggest Hits and Biggest Losses | Why Anyone That Always Does Their Pro-Rata is Wrong with

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Summary Notes


In this episode of 20vc, host Harry Stebbings interviews Mo Kufman, the founder and general partner at Shine Capital. Kufman, who rarely appears on podcasts, discusses his journey from his early days at IAC to his tenure at Spark Capital, where he invested in companies like Plaid, Warby Parker, and Hive Mapper, and his angel investments at Moco Brands in firms like Coinbase. Kufman shares insights on the importance of strong yet flexible opinions, the nuances of venture capital fund structures, the value of constraints, and the significance of entrepreneur-driven investment decisions. He also touches on the impact of excessive capital in the startup ecosystem, advocating for a more disciplined approach to funding, and the future aspirations for Shine Capital to be a top-tier early-stage venture firm. The conversation delves into the dynamics of early-stage investing, portfolio construction, and the evolving venture landscape.

Summary Notes

Introduction to Mo Kaufman and Shine Capital

  • Mo Kaufman is the founder and general partner at Shine Capital.
  • Shine Capital recently announced Shine Two, a $200 million early-stage fund, and Shine Opportunities One, a $100 million vehicle.
  • Mo's previous experience includes angel investments at Moco Brands and being a general partner at Spark Capital.
  • Mo's background at IAC involved overseeing a group of companies including Vimeo, CollegeHumor, and Busted Tees.

"I'm thrilled to welcome Mo Kaufman, founder and general partner at Shine Capital, who announced earlier this year Shine Two, a $200 million early-stage fund, and Shine Opportunities One, a $100 million vehicle."

  • This quote introduces Mo Kaufman and his recent venture capital initiatives, highlighting the significant funds he is managing.

Mo Kaufman's Path to Venture Capital

  • Mo's entry into venture capital was accidental and not planned during college.
  • His family background, with an immigrant father and a software engineer mother, influenced his entrepreneurial inclinations.
  • Mo studied finance at Wharton and English literature, then joined Bear Stearns for its entrepreneurial spirit.
  • At IAC, he was part of a strategic planning team and transitioned to early-stage business building.
  • Mo joined Spark Capital in Boston, which propelled his love for early-stage investing.
  • After a period of angel investing and advising startups, he decided to start his own firm in New York City.

"I just put one dumb foot in front of the other... My entrepreneurial inclinations definitely come from my folks."

  • This quote reflects Mo's journey into venture capital, influenced by his family and a series of career steps that led him to his current position.

Lessons from Spark Capital and Founding Shine

  • Mo values early-stage investing and learned the importance of firm structure—partnerships versus clear leadership.
  • He prefers clear leadership and governance structures for durability and effectiveness in venture firms.
  • Mo's experience at Spark influenced his decision to establish a firm with a clear hierarchy, which he believes suits his style better.

"The more durable firms, in my experience, often have very clear leadership and governance structures."

  • This quote emphasizes Mo's belief in the importance of clear leadership within venture capital firms for long-term success.

Encouraging Team Input and Decision-Making

  • Mo lives by the mantra "strong opinions, weakly held," which allows for assertiveness but also openness to being proven wrong.
  • He encourages team members to challenge his opinions and seeks data to test assumptions.
  • Mo's approach aims to avoid groupthink and absolutism, focusing instead on making informed decisions.

"I am much more fundamentally interested in getting to the right answer than I am in being right."

  • This quote captures Mo's philosophy on decision-making and the value he places on accuracy over ego.

Mentorship and Personal Growth

  • Mo has mentors who challenge his views, providing diverse perspectives that contribute to his personal and professional growth.
  • He values the input from mentors, even when they offer conflicting advice, as it helps him consider different angles.
  • Fred Wilson from Union Square Ventures is mentioned as one of his mentors who is not afraid to confront Mo's ideas.

"I have a handful of mentors who challenge me on it... And in many ways, that's interesting."

  • This quote highlights the importance Mo places on having mentors who push him to question his beliefs and assumptions.

Theme: Embracing Risk and Authentic Feedback in Venture Capital

  • The speaker values direct and honest feedback, especially when it comes to identifying poor advice or strategies.
  • They appreciate when others, such as Fred, can openly challenge their ideas and encourage taking risks.
  • This candid approach is seen as essential within the venture capital industry.

"Fred, he knows with me he can just kind of let it loose and say what he feels. And I was sort of recounting to him something that another one of my mentors had shared and he was like, no, that is total bullshit. Absolutely not. Don't listen to that. You have to take risk. That's what venture is all about, et cetera, et cetera, et cetera."

  • The quote demonstrates the speaker's appreciation for Fred's straightforwardness and his emphasis on the importance of risk-taking in venture capital.

Theme: The Relationship Between Fund Size and Performance

  • The speaker discusses the inverse correlation between the growth of an investment firm and its performance quality, particularly in early-stage investing.
  • Larger funds may not always lead to better returns due to the lack of constraints that smaller funds experience.
  • Constraints in early-stage funds force more deliberate decision-making in deal selection and capital allocation.

"Larger early stage funds always lead to lesser returns. And it's not simply because it is harder to return larger pools of capital. What he was teaching me is that the reason in larger pool of capitals end up performing poorly or less well than smaller pools of capital in early stage investing is because of the lack of constraints."

  • The quote explains why larger early-stage funds may not perform as well as smaller ones, highlighting the importance of constraints in driving careful investment choices.

Theme: Portfolio Construction and Fund Management

  • The speaker's fund, Shine, manages a total of $435 million across different funds, with a focus on early-stage investments.
  • The fund size and number of deals are strategically chosen to balance the number of opportunities and the ability to lead or co-lead investment rounds.
  • The speaker reflects on the decision to cap their first fund at $125 million, influenced by the size of USV's first fund and a desire to maintain scarcity and commitment to their LPs.

"Our first fund was $125 million early stage fund. Our second fund is a $200 million early stage fund and we have $100 million opportunities vehicle that we can invest crosSf fund to lean into the companies in our broader portfolio that perform."

  • This quote outlines the structure and size of Shine's funds, indicating a strategic approach to fund management that allows for flexibility and support for high-performing portfolio companies.

Theme: Reserve Strategy and Allocation

  • The speaker introduces a unique approach to reserves, not allocating them per company but rather maintaining a fund-level reserve pool.
  • This method is intended to ensure that only deserving companies receive additional capital, thereby avoiding the pitfall of investing good money after bad.
  • The speaker's philosophy is to support companies that have demonstrated performance worthy of further investment.

"So I tried to structure it a shine where they actually were deserves. So when we make an initial investment, we actually don't attach formal reserves to the company. We do some math in the background and I work on that with my CFO. But we actually, we have a bucket of reserves that we apply to companies as they perform and that allows us to be a little more rigorous about who gets reserves because it very much is a haves and have nots game."

  • This quote explains the speaker's innovative reserve strategy, which prioritizes performance and merit over a fixed allocation per company, aiming to optimize investment outcomes.

Theme: Navigating Pro Rata Investments and Market Realities

  • The speaker challenges the notion that venture capital firms always offer pro rata rights to all companies and suggests that such commitments are often not genuine.
  • They believe in offering pro rata investments conditionally, based on the company's merit and the circumstances of the funding round.
  • The speaker emphasizes the importance of being honest with entrepreneurs about the viability of their business and the potential need for a pivot or shutdown.

"The only time I won't do pro rata is if I don't need to or I know it's the best thing for the company. So in hot markets, for instance, it turns out that over the last few years, you don't have to do your pro rata. You never had to do pro rata. Every new investor under the sun will gladly take your pro raa if you give it to them so they could put more capital to work and own more of the company."

  • The quote conveys the speaker's strategic approach to pro rata investments, which is guided by market conditions and the best interests of the company rather than a blanket commitment.

"The best thing you could do for an entrepreneur who is working on a project, who is working on a business that you know is not going toa work, is to tell them in the nicest, kindest, most genuine and sensitive way for the following reasons. You don't believe this is going to be successful."

  • This quote emphasizes the tough but necessary conversations that venture capitalists must have with entrepreneurs when a business is unlikely to succeed, advocating for honesty and directness in the interest of all parties involved.

Entrepreneurial Decision-Making and Opportunity Cost

  • Mature entrepreneurial decisions often involve recognizing when to stop investing in a project to avoid wasting time and resources.
  • Opportunity cost is a critical factor in these decisions, as resources could be allocated to more valuable endeavors.

"Watching you make that mature decision as an entrepreneur, rather than watching you piss that money down the drain over the next two years and actually, in many ways, waste two years of your life with a very high opportunity cost that you could put against something way more valuable."

  • This quote emphasizes the importance of making informed decisions to avoid wasting both financial resources and time, which could be invested in more promising opportunities.

Capital Allocation and Opportunity Cost in Venture Capital

  • Allocating capital to an average-performing company means diverting funds from potentially higher-performing investments.
  • The challenge lies in communicating the decision not to invest further, not because of a lack of belief, but due to comparative underperformance.

"Every dollar you allocate to an okay company is a dollar that goes away from a significantly high performing company."

  • The quote highlights the trade-off in capital allocation within the venture capital industry, where investing in one company means potentially missing out on a better investment.

Pro Rata Investment Decisions

  • Pro rata investment rights allow investors to maintain their ownership percentage in subsequent funding rounds.
  • Decisions on whether to exercise pro rata rights depend on market conditions, the quality of incoming investors, and the impact on the company's risk profile.

"If a company is able to get a quality VC to write a check, then in some ways, that in and of itself, makes that company better than it was before... putting another half million dollars or a million dollars into something that's getting funded by a good firm at a rational price and gives them more opportunity to win, all of a sudden, it's not a bad pro rata decision."

  • This quote explains that investing additional capital in a company that secures funding from a reputable VC can be a sound decision, as it can reduce the company's risk and increase the likelihood of success.

Ownership Levels and Venture Capital Strategy

  • Ownership levels are a significant consideration in venture capital; different investors have varying strategies regarding the importance of high ownership.
  • Balancing the need to own a significant portion of a company against the potential returns from a broad portfolio of smaller ownership stakes is a strategic decision.

"The only thing that matters, my friend, is high ownership levels." "The outperformance of the five that I've done... is so big that actually you should just be in everything with low ownerships because it's such high outcomes in the ones that work."

  • These quotes represent two opposing views on venture capital investment strategy: one advocating for high ownership in fewer companies and the other for broader diversification with lower ownership stakes.

Venture Capital Investment Approaches

  • There are various approaches to venture capital investing, ranging from seeking high ownership in a few companies to investing in many companies with lower ownership.
  • Success in venture capital requires getting into the biggest winners and owning enough of them when they succeed.

"The only thing that matters is getting into enough of the biggest winners. And the other thing that matters in venture capital is making sure that you own enough for those winners when they're really big."

  • This quote summarizes the dual focus of venture capital success: being part of the biggest winners and ensuring sufficient ownership to benefit significantly from their success.

Syndicate Building and Collaborative Ventures

  • Building strong syndicates and having collaborative investors can be crucial, especially during challenging market conditions.
  • The composition of the cap table and the cooperation between investors can significantly impact a company's resilience and success.

"Syndicate building, who's around your cap table, how they work together, all those things are going to matter now more than ever."

  • The quote stresses the importance of strategic syndicate building and investor collaboration for the stability and success of a company in the venture capital context.

Venture Capital Collaboration and Competition

  • The venture capital industry can be both collaborative and competitive, with behaviors varying across different firms and market cycles.
  • Some investors may be unwilling to collaborate or compromise on deal terms, reflecting a more competitive and less collaborative approach.

"I do agree that there has been just a lot of short sightedness in the business."

  • This quote acknowledges the presence of short-term thinking and a lack of collaboration in the venture capital industry, which can have long-term consequences.

Venture Capital Ethics and Founder Relations

  • Ethical considerations and the relationship between investors and founders play a role in venture capital dynamics.
  • Investors have different approaches to engaging with companies, with some prioritizing aggressive deal-making while others focus on adding value and supporting founders.

"If you're an index fund, you may get right on a few things, but how much luck versus how much skill at that?"

  • The quote questions the role of skill versus luck in broad, index-like venture capital investing and contrasts it with the targeted, skillful selection of individual companies.

Reflection on Investment Decisions and Ego

  • Personal ego can influence investment decisions, but it is essential for investors to prioritize the financial interests of their stakeholders.
  • Successful investors learn from experiences and maintain focus on their investment goals, setting aside personal feelings when necessary.

"My job is to make as much money for my investors as possible, period."

  • This quote encapsulates the investor's responsibility to prioritize maximizing returns for stakeholders, even when personal pride is at stake.

Learning from Success vs. Failure

  • Learning from successes is dangerous due to confirmation bias.
  • True learning comes from analyzing failures.
  • The speaker has learned consistently from misjudging entrepreneurs.
  • The firm, Shine, is entrepreneur-focused due to these lessons.
  • Understanding people and chemistry for long-term partnerships is crucial.

"Learning lessons from successes is extremely dangerous because of the risk of confirmation bias."

  • This quote emphasizes the danger of learning from successes due to the tendency to misattribute the causes of success.

"So I honestly believe you can only really learn from your failures."

  • The speaker expresses a firm belief that true learning is derived from failures, not successes.

"My biggest lesson is really to lean into and learn and understand people and figure out if you have the right chemistry to be partners over time."

  • The key lesson for the speaker has been the importance of understanding people and establishing the right long-term partnerships.

Venture Capital Investment Insights

  • The speaker's biggest venture win has been with a company called Plaid.
  • Key to investing in Plaid was a belief in the emerging fintech category and betting on great entrepreneurs.
  • The speaker advises to trust one's gut and instincts and to bet on people over following the crowd.

"My biggest venture win to date has obviously been Plaid."

  • The speaker mentions Plaid as their most significant investment success.

"It required two things. One, a belief in a new category called fintech... And the other was a bet on two great young entrepreneurs."

  • The investment in Plaid was successful due to early belief in fintech and trust in the entrepreneurs.

Multi-Stage Firms vs. Early-Stage Investment

  • Multi-stage firms are moving earlier into seed and pre-seed investments.
  • Founders should consider how much an investment means to an investor.
  • It's important to know the longevity and commitment of the partner at a firm.
  • Early-stage investment is a boutique business where the right investors can provide strategic guidance and open doors.

"At the end of the day, the more an investment matters to an investor, the better investor they will be for you."

  • The speaker suggests that an investor's commitment to an investment correlates with their effectiveness and support for the founder.

"These are businesses with hundreds of people working there. The odds that all those same people are going to be there in five years are zero."

  • The speaker warns about the potential instability and changes in personnel at large multi-stage firms.

Quick Fire Round Responses

  • The speaker's favorite book is "Portnoy's Complaint" by Philip Roth for its humor and intelligence within the American Jewish tradition.
  • A great burger, like building a company, requires simplicity, focus, and integrity.
  • The speaker wishes they had started their entrepreneurial journey sooner.
  • The startup world should have fewer investors and less capital to encourage focus and discipline.
  • The speaker anticipates a rationalizing of capital in the venture world and a separation of winners and losers in the coming years.
  • Desired traits for children: relentlessness, integrity, and generosity.
  • In five years, the speaker aims to build a top ten early-stage venture capital firm.

"My favorite book has to be 'Portnoy's Complaint' by Philip Roth because it is the most notorious talked about novel in the American Jewish tradition."

  • The speaker shares their favorite book and the reasons for its significance.

"The thing people get wrong when they make burgers... is they try to do too much."

  • The speaker draws a parallel between making a great burger and building a company, emphasizing simplicity and focus.

"Honestly, just that I could do it."

  • Reflecting on their entrepreneurial journey, the speaker expresses the wish that they had believed in their ability to succeed earlier.

"Fewer investors? No, really, I think we should have fewer investors and some less capital in the system."

  • The speaker suggests that the startup ecosystem would benefit from a reduction in the number of investors and the amount of capital available.

"Relentlessness, integrity and generosity."

  • These are the three traits the speaker hopes their children will adopt.

"I hope to build a top ten early stage venture capital firm."

  • The speaker outlines their professional goal for the next five years with their firm, Shine.

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