20VC NEA Partner, Dayna Grayson on Sourcing, Picking, Winning, Gut vs Data in Investment DecisionMaking & The Evolution of Entrepreneurial Expectations of Venture

Harry Stebbings interviews Dana Grayson, partner at NEA, a leading venture firm with a history of backing successful companies like Opendoor, Uber, and Workday. Grayson, with a background in engineering and product design, has led investments in Desktop Metal, Formlabs, and others. The conversation covers the importance of proactive sourcing, the role of intuition in early-stage investment, the evolution of founders' expectations from VCs, and the need for strategic advice beyond recruiting. Grayson also discusses her latest investment in Wirewheel, a data privacy company, highlighting the growing concern over data protection. Stebbings advocates for direct and honest feedback during the investment process and emphasizes the significance of board members aligning with CEOs to serve the company effectively.

• Dana Grayson is a partner at NEA, a leading venture firm.
• NEA's portfolio includes companies like Opendoor, Jet.com, Uber, Workday, Plaid, and Box.
• Dana has led investments in Desktop Metal, Formlabs, Onshape, Glam Squad, Framebridge, and Curelaid.
• Prior to NEA, Dana was an investor at Northbridge Venture Partners.
• She has a background as an engineer at iresponse Technologies and a product designer at Blackboard.
• Harry Stebbings expresses gratitude to Rebecca Caden at USV for introducing him to Dana.

"And so with that, I'm thrilled to welcome Dana Grayson, partner at NEA, one of the leading venture firm over the last four decades, with a portfolio including the likes of Opendoor, Jet.com, Uber, Workday, plaid Box, and many more incredible companies."

The quote introduces Dana Grayson and highlights her position at NEA, a prominent venture firm with a history of successful investments.

• Dana began her career in product development and design after majoring in engineering.
• She worked at a consulting firm before joining Blackboard, a software company.
• At Blackboard, she experienced the company's growth and IPO, which sparked her interest in company management.
• Dana pursued an MBA at Harvard Business School to learn about finance and company management.
• Post-HBS, she connected with the venture capital world and joined Northbridge Venture Partners.
• Dana joined NEA in 2012 after getting to know the firm over a year.

"I remember sitting at my desk and reading the s one that they filed to go public and understanding the company for the first time on a whole new level."

This quote reflects Dana's pivotal moment at Blackboard, where she gained a deeper understanding of the company's operations and goals, leading her to pursue a career in venture capital.

• Dana does not believe generalist investors are becoming obsolete, despite her focus on industrial and manufacturing tech.
• She emphasizes the importance of investing in people, which led her to the industrial space.
• Dana identifies parallels between trends in manufacturing and those previously seen in the SaaS software world.
• She discusses the miniaturization and commoditization of robotics and its impact on manufacturing.

"First and foremost, we're investing in people, in the actual entrepreneur, and that's frankly what then has led me into the industrial space."

Dana highlights the centrality of the entrepreneur in investment decisions, which has guided her career towards the industrial sector.

• Sourcing involves proactive research and networking, not passively waiting for ideas.
• Dana advises getting to know director and VP level individuals in respected companies, as they could be future company creators.
• Warm introductions, often from entrepreneurs in her network, play a significant role in deal evaluation.
• Dana splits her time between opportunistic introductions and proactive outreach.

"Actually, I spend the majority of my time proactively researching spaces, researching sectors, and getting to know networks of people."

The quote explains Dana's active approach to sourcing in venture capital, which involves in-depth research and networking.

• Early meetings with entrepreneurs are crucial for assessing their capabilities, even if the investment does not happen immediately.
• Observing the progress of a business over time allows investors to validate their initial judgments of an entrepreneur's potential.
• It's important to distinguish between the quality of the business idea and the quality of the entrepreneur behind it.

"If you take these meetings early on, frankly, you may not end up investing in those entrepreneurs. So you'll have a year or two after that to see how the business has played out."

The quote emphasizes the value of early meetings with entrepreneurs as a means to assess their potential over time, separate from the immediate success of their business.

• Genuine interest in the entrepreneur's history and the origin of their idea is key to building rapport.
• Understanding the entrepreneur's expertise and how it led to the creation of their company is valuable.
• The process of raising capital should be straightforward, not treated as a dating game.

"I love to hear from the entrepreneur of how they started the idea, how they came up with the idea, what led them to become an expert in this field."

This quote highlights the importance of understanding an entrepreneur's background and the genesis of their idea in building a connection and evaluating their potential.

• Both the approach of starting with a strong founder-product fit and the approach of evolving towards it can lead to successful outcomes.
• The key is the founder's focus on solving a significant market problem and their ability to inspire others and adapt quickly.

"I think really the best entrepreneurs are out to solve a huge problem... And here are the one or two or three other founders who are going to join me in this journey."

The quote illustrates the speaker's belief that a founder's dedication to solving a major problem and their ability to rally a team are critical indicators of potential success.

• Personal conviction is often formed quickly, based on intuition from initial meetings with entrepreneurs.
• Some successful investors make decisions to invest within the first few minutes of meeting an entrepreneur.

"I have a ton of respect for this approach, and I try to really hone my knowledge, hone what I'm looking for, and be able to recognize what's great in an entrepreneur so that I can do this myself."

The speaker expresses admiration for the ability to quickly form a personal conviction about an entrepreneur's potential and the importance of refining their judgment to do so effectively.

• After the initial excitement, it is crucial to conduct thorough market research and due diligence.
• Feedback should be shared with the entrepreneur, especially if it could lead to a better business model.
• Over-reliance on 'expert references' can be misleading, as disruptive ideas often face skepticism from industry veterans.

"We do try to go into meetings with the most current knowledge about the space so that we can be prepared to make a decision on the spot if we want to or certainly if we need to."

The quote emphasizes the importance of being well-informed about the market and prepared to make investment decisions, while also cautioning against placing too much weight on traditional expert opinions.

• Associates and principals with expertise in specific areas are brought in early for their insights and to help build relationships with entrepreneurs.
• Investment decisions are made by smaller teams of experts within larger firms, rather than requiring consensus from all partners.

"We break up into smaller teams based on the experts around the table, the investors inside NEA, who are prone to know something about that space."

This quote explains the process of involving team members with relevant expertise in the investment decision-making process within a large firm.

• The current trend of compressed fundraising rounds may not allow sufficient time for investors to thoroughly research or for founders to build relationships with investors.
• Entrepreneurs should not rush the fundraising process and instead build relationships with potential investors over time.

"I would absolutely encourage them not to rush that process. And I don't know anyone who would disagree with me on the entrepreneur side."

The speaker advises entrepreneurs to take their time with fundraising to ensure they choose the right investors, highlighting the importance of the investor-entrepreneur relationship.

• Entrepreneurs must discern the right investors and firms to help build their business over time.
• Building relationships with investors is crucial, even if they haven't expressed an investment interest yet.
• The alignment between investor and entrepreneur should ideally match both parties' timelines and interests.

"So it would be strange to go reference check them, but to really hone in on who is the right firm, who is the right partner, who's the right set of people to help me build my business over time."

This quote emphasizes the importance of entrepreneurs identifying the most suitable investors and firms that align with their business goals and growth trajectory.

• Investors, especially those on the board, should advise founders on potential investors for future capital raising.
• The process should be collaborative, with investors providing suggestions and being receptive to the entrepreneur's ideas.
• Investors leverage their network and experience to assist CEOs in identifying and connecting with suitable funding sources.

"If you're an investor and you've taken a board seat and the next stage of the company is to go raise capital, you absolutely want to have an open discussion with your founder and your CEO about who the best people would be to raise capital from."

Dana Grayson underscores the investor's advisory role in fundraising discussions and the importance of open communication between the investor and the CEO.

• Investors should provide honest and succinct feedback to entrepreneurs when deciding not to invest.
• Reasons for not investing could be due to competitive conflicts within the investor's portfolio or fundamental business concerns.
• Sharing detailed feedback is more constructive than vague rejections, and investors recognize they can make mistakes in passing up opportunities.

"I try to be as upfront and honest and succinct as quickly as I can about the feedback."

Dana Grayson highlights the need for transparency and promptness in communicating the reasons behind investment decisions to entrepreneurs.

• Investors should maintain open communication with entrepreneurs, indicating serious investment intent and outlining remaining steps.
• Internally, investors collaborate with colleagues to assess the investment and conduct due diligence, especially for later-stage companies.
• Building rapport with the entrepreneur is crucial to ensure mutual interest and agreement on deal terms.

"Then internally, I will do just that. I will grab the four or five or six people here at NEA who have an opinion or have expertise in that space, sit down with them and talk to them about the investment."

Dana Grayson describes the internal process at NEA for evaluating potential investments, emphasizing teamwork and expertise within the firm.

• Price sensitivity varies with the investment stage; at early stages like Series A, the focus is on potential for outsized exits rather than the exact investment amount.
• Entrepreneurs should consider the implications of current valuations on future funding rounds.
• For later-stage investments with higher valuations, financials and potential for significant growth are scrutinized more closely.

"It really doesn't matter if you pay 20 or 30 or 40 or more sub, let's say 100 million or so, I don't think it matters."

Dana Grayson expresses the view that at the Series A stage, exact valuations are less critical than the company's growth potential and future prospects.

• The venture capital landscape has evolved significantly, with a shift towards a more institutional approach.
• Seed funds and large funds like NEA have become more specialized, offering tailored advice and resources to entrepreneurs.
• Full-service support from investors, including strategic advice and operational assistance, is increasingly expected.

"And I think it's incumbent, and it will be more and more incumbent on these funds and perhaps the size requirement will come down even as smaller funds, you really should be expected to be more full service."

Dana Grayson discusses how the role of venture funds has expanded to provide comprehensive support, reflecting the maturation of the venture industry.

• The board's relationship with the CEO is critical, with the board serving as advisors rather than direct decision-makers.
• The CEO is seen as the leader who guides the company, with the board providing informed advice to support key decisions.
• The board's service to the CEO is equated with serving the company, as the CEO's success is integral to the company's success.

"Because the CEO is the ultimate leader of the company. Yes, you could say hierarchically, I guess the CEO works for the board, but the CEO is guiding the board and their management team on the critical decisions."

Dana Grayson clarifies that the board's role is to support the CEO, who is ultimately responsible for leading the company and making critical decisions.

• Board members should listen, show up, give advice, but not make decisions.
• Strive for sync with other board members and resolve any conflicts or differences in opinion.
• Board members should proactively help the CEO resolve conflicts to empower them to make the best decisions.

"My first, I would say many people have also said this to listen, to show up, to give advice, but not make decisions."

This quote emphasizes the advisory, rather than the decision-making, role of board members. They should be present and provide guidance but let the CEO make the final calls.

"I think it's incumbent on board members to really recognize when there are just little bits of conflict on the board or little bits of differences in opinion."

Board members must be aware of and address any conflicts within the board to ensure a unified direction for the CEO and the company.

• Dana Grayson enjoys biographies and stories about company formations over traditional business books.
• The book "Dope Sick" is highlighted for its exploration of the opioid crisis and systematic failures, such as aggressive sales tactics and overprescribing.

"I love books like Buffett, about Warren Buffett and his biography. But right now, the most recent, or I should say, over the past couple of years, the book that really stands out for me is a book called Dope Sick."

Dana appreciates biographies for their insights into successful individuals and companies. "Dope Sick" stands out for its examination of a significant societal issue.

• Dislikes the concept of "signaling" in venture capital; prefers seeking truth.
• Importance of understanding the intentions behind actions and investments in the early stages.

"I hate the word signaling. I think if we could change that word about signaling and just try to get to truth in everything we do."

Dana Grayson criticizes the emphasis on signaling in VC and advocates for a more truthful and transparent approach to decision-making.

• Seed funds should consider the implications of taking multi-stage money.
• It is crucial to understand the motivations behind a CEO's desire to take early-stage money from multi-stage funds.

"Yes, that's a great example of signaling. But I think you have to be upfront."

The quote advises seed funds to be clear about the potential consequences of taking multi-stage money and to seek genuine reasons behind such decisions.

• Effective board members seek alignment and support the CEO.
• They are present, prepared, and knowledgeable about the industry.
• Notable board members include Josh Coppelman and Brad Feld for their engagement and helpfulness.

"However, the things I said before about board members who seek alignment, who seek the best ways to support the CEO, who are certainly present, who are prepared."

This quote describes the qualities of effective board members, emphasizing alignment with the CEO, preparedness, and industry knowledge.

• Invested in Wirewheel, a company in the data privacy and protection space.
• Believes privacy is a critical issue and sees technology as a solution to the problem.
• Interested in differing approaches to privacy regulation between the EU and the US.

"My most recent investment is in a company called Wirewheel, that is in the data privacy and protection space."

Dana's recent investment reflects her concern for privacy issues and her belief in the potential for technology to address these challenges.