20VC Roundtable Why Early Stage Founders Should Not be Investing, Why Great Founders Have Low EQ, How the Structure of VC Firms Will Change, Will FounderLed Funds Compete with Sequoia & Is Investing a Team Sport

Summary Notes


In this roundtable discussion led by Harry Stabbings on "20vc," the rise of founder-led funds is examined, with insights from Jack Altman (Lattice), Oren Hoffman (Safegraph), and Jason Lemkin (SaaStr). The panel explores the unique perspectives and tactical advice that founder investors offer, the operational experience they bring to the table, and the potential for founder-led funds to scale and compete with established firms like Sequoia. They also touch on the impact of investing on a founder's time and effectiveness as an operator, with differing views on whether it detracts from running their primary company. The conversation shifts to the importance of brand and currentness in the rapidly evolving startup ecosystem, the pros and cons of full-stack investing, and the dynamics of team versus individual contributions in investment firms. Additionally, the debate covers the nuances of founder involvement and commitment, the power-law nature of venture returns, and the role of governance in founder-led funds. The discussion is interspersed with promotions for Canva, Mercury, and Coder, emphasizing the power of AI tools, seamless business banking, and collaborative workspaces.

Summary Notes

Founder Characteristics

  • Founders typically have lower emotional intelligence (EQ).
  • Good founders may have a direct and straightforward communication style.
  • Low EQ is not considered a top requirement for successful founders.

"Well, most good founders have low EQ."

This quote by Jack Altman suggests that successful founders often prioritize other traits over emotional intelligence, which may influence their communication and management style.

Founder-Led Funds

  • Founder-led funds are managed by founders who also invest in other companies.
  • These funds provide tactical advice and support to other founders.
  • Founder-led funds are considered to offer a current and hands-on perspective.

"A question is like is investing an individual sport or is it a team sport?"

Jack Altman poses a question about the nature of investing, which frames the discussion around whether investing is best done alone or collaboratively.

The Appeal of Current Operational Experience

  • Founders prefer investors with current operational experience.
  • Many aspects of running a company have changed significantly in recent years.
  • Founders value having investors who understand modern business practices.

"Almost everything in running a company has changed over the last seven years."

Oren Hoffman points out the rapid evolution of business practices, emphasizing the need for investors who are up-to-date.

The Role of Brand in Founder-Led Funds

  • Brand recognition is a significant factor in attracting founders to founder-led funds.
  • Sophisticated markets and more knowledgeable founders look for quality proxies.
  • Founder-led funds establish their own brands, which can be attractive to founders.

"I think it's actually about brand."

Jason Lemkin explains that the brand associated with founder-led funds plays a crucial role in their appeal.

Institutional Funds vs. Angel Investing

  • The role of institutional funds in comparison to angel investors is questioned.
  • Limited Partners (LPs) are increasingly interested in investing in successful angels and micro funds.
  • The amount invested by a founder-led fund can lead to a deeper engagement with the company.

"Maybe they don't, but these guys are pretty good investors."

Jason Lemkin acknowledges that while institutional funds may not be necessary, founder-led funds have proved to be effective investors.

Founder-Friendly Investing

  • The notion of "founder-friendly" investing is explored.
  • Founder-led investors may provide more honest and direct feedback to founders.
  • The idea of being "long-term nice" rather than "short-term nice" is introduced.

"A lot of founders give tougher love, or whatever you want to call it, than I've seen investors do."

Oren Hoffman discusses the tendency of founder-led investors to provide more straightforward and potentially harsh feedback, which can be beneficial in the long run.

Compensation and Equity in Founder-Led Companies

  • Founder CEOs are often undercompensated compared to hired CEOs.
  • Traditional VCs may not advocate for higher compensation for founder CEOs.
  • Founder-led funds might be more inclined to address compensation fairness.

"Most founder CEOs are very undercompensated."

Oren Hoffman highlights the disparity in compensation between founder CEOs and externally hired CEOs, suggesting that founder-led funds might approach this issue differently.

Operating Experience and Investment Acumen

  • The impact of operating experience on investment success is debated.
  • Historically, there has been no clear advantage for operators over non-operators in terms of investment performance.
  • Founders now have more choices in investors, which may influence their preferences.

"I remember a few years ago, I forget whose analysis was. There was no advantage to being an operator's were no better than professional."

Jason Lemkin recalls an analysis that showed no distinct advantage for operators as investors, but acknowledges that the landscape has changed.

Investing in Familiar Products

  • Investors often find themselves funding companies whose products they personally use and admire.
  • The personal experience with the product can lead to investment opportunities without a formal pitch.
  • A genuine connection with a product can spark a conversation with the CEO, leading to investment.

"This product's amazing. Like, you just see it, you've used it. You're like, this is incredible. And then you call up the CEO. You don't even know who the person is. You're like, hey, I'm your client, I'm using your product."

This quote highlights the organic process of discovering a product as a user, appreciating its value, and then pursuing an investment opportunity based on firsthand experience.

Understanding Customer Problems

  • Being immersed in a customer's environment allows investors to understand the challenges customers face.
  • This insight provides an advantage in identifying valuable software solutions and potential investment opportunities.

"I have a good general sense for what are their top few software solutions that they care about just because I'm living in it."

The quote emphasizes the advantage of having an intimate understanding of customer problems and the solutions they value, which can inform investment decisions.

Investing Based on Personal Expertise

  • Investing in problems personally encountered as a founder can be a successful strategy.
  • Recognizing shifts in industries from personal experience can reveal investment opportunities in seemingly tired categories.
  • Operators may have an advantage in early-stage investments by seeing how industries are evolving.

"I could see where spaces were changing because I was so deep in them."

This quote reflects the value of deep industry knowledge in recognizing opportunities for innovation and investment, even in well-established sectors.

Benchmarking CEO Quality

  • A heuristic for investing is comparing CEOs to oneself to gauge their potential for success.
  • Successful founders have the ability to recognize who is better than them, which informs their investment decisions.

"I measure every CEO against myself, are they better than I was?"

The quote suggests using personal benchmarks to evaluate the quality of a CEO, which can be a useful tool for investors with operational experience.

Individual vs. Team Approach in Investing

  • There is a debate on whether investing is an individual or team sport.
  • Awards in investing often recognize individuals, not firms, which may not reflect the collaborative nature of successful investments.
  • The full-stack investor model, where one person does everything, is compared to a team approach that plays to individual strengths.

"You're going to start to see different firms start splitting the stack a bit and they're going to have certain people who are going to be good."

This quote introduces the concept of 'splitting the stack' in investment firms, suggesting a move towards specialization and teamwork rather than individual full-stack investors.

Specialization and Brand in Venture Capital

  • Specialization and brand dominance can help investors see enough of the landscape to find the few companies that will matter each year.
  • The full-stack investor approach has value, but there are also successful examples of more specialized venture firms.

"I think specialization and brand dominance I think would be one which is like you go, I'm going to do early stage preceding seed SaaS and I'm going to have a massive brand and actually just to increase the aperture."

This quote discusses the strategy of specializing and building a brand to filter and attract high-quality investment opportunities.

The Impact of Investing on Operating

  • Investing can detract from operating a company, especially in the early stages when time constraints are significant.
  • As a company grows, the CEO's time may become less critical, allowing for learning opportunities from investing.
  • Balancing the main responsibilities of being a CEO with other activities, including investing, is crucial.

"Anytime a CEO is not spending on their company, it's bad for the business."

The quote addresses the trade-offs of a CEO's time and the potential negative impact of focusing on activities outside of their primary business responsibilities.

Responsibility to LPs and Companies

  • CEOs with investment funds have a responsibility to their company and their Limited Partners (LPs).
  • There is a tension between managing a fund and prioritizing the CEO's company, especially during challenging times.
  • LPs may have expectations regarding the focus and time commitment of fund managers.

"So I think for the lps in the fund, they're generally not happy when someone in the fund is also a CEO, but they should be, because that fund is going to end up doing so much better."

This quote reflects the perspective that being an active CEO can benefit a fund's performance, although it may cause concern among LPs regarding divided attention.

  • Fund managers must be aware of the legal provisions in LP agreements.
  • Exceptions are often made for fund managers who are also operators, but these must be negotiated and explicitly stated.

"If you read these LPAC agreements, which it's worth reading, I didn't read the ones I signed the first time. That was an error."

The quote underscores the importance of understanding and adhering to the legal agreements made with LPs and the potential need for exceptions for operator-investors.

LP Investment Preferences

  • Limited Partners (LPs) prioritize investing in managers with perceived edges or unique advantages.
  • LPs may take risks on unconventional or less credentialed managers if they demonstrate a competitive edge.
  • There is uncertainty about whether LPs will continue to invest in "hot" individuals, such as popular bloggers or founders, in 2024 as they did before.

"The last thing an LP wants is an undifferentiated manager. The last thing. And they'll cut corners and they'll invest in someone that didn't finish high school, and they'll invest in the 10,000th whatever. But if they perceive an edge, they'll take the risk rather than the person that slugs to the office."

The quote emphasizes that LPs avoid investing in fund managers who do not stand out and prefer those with distinct competitive advantages, even if their backgrounds are non-traditional.

LP Responses to Market Correction

  • LPs are not necessarily dropping well-regarded fund managers despite economic downturns.
  • LPs seek differentiated investment opportunities, especially during times of financial correction.
  • Existing relationships and unique offerings are key to retaining LP interest.

"I'm not really seeing them drop great names. Some of them are downsizing, significant downsizing, but they're not dropping great names. They're still open for business."

This quote suggests that despite market corrections, LPs maintain investments with top-performing managers and remain active in the market, looking for differentiated opportunities.

The Future of VC Fundraising

  • There is a trend of LPs becoming more discerning about which VCs to back, especially after several rounds of funding.
  • The future may see stricter criteria for VCs to secure ongoing LP investment, particularly if performance is subpar.

"Well, I do think there were a lot of VCs with subpar returns that were still raising their third, 4th, 5th, 6th, 7th funds. That is very unlikely going to happen in the future."

This quote indicates a shift towards greater scrutiny by LPs in future VC fundraising, with less tolerance for underperformance across successive funds.

Shifts in LP Capital Allocation

  • The reallocation of LP capital from China to the US and Europe is a significant trend.
  • The rise of investment from the UAE is noted as an increasingly important source of venture capital.
  • There is optimism about the venture capital landscape despite general pessimism.

"The migration of LP capital that was going to China, which was about 20% to 25% of US venture dollars used to go to venture in China. Well, that's migrated out."

The quote highlights a major shift in investment flows from China back to Western markets, which is reshaping the venture capital environment.

Work-Life Balance and Company Culture

  • Employee retention is valued for its long-term benefits over maximizing short-term work hours.
  • Companies that allow employees to engage in other activities can benefit from higher retention rates.
  • There is debate over whether additional work activities enhance or detract from an employee's contribution to the company.

"I think there's a lot to be considered here. I think you might be right that on some level you can get more out of somebody if they are burning the candle on both ends. That's probably true. What I've also seen, though, is things like employee retention for long periods of time is extremely valuable."

This quote discusses the trade-off between demanding high work hours from employees and fostering a work environment that supports long-term retention.

Employee Engagement and Productivity

  • The impact of employee engagement on productivity is a concern, with many companies not effectively utilizing their workforce.
  • The importance of inspiration and passion in driving employee performance is highlighted.
  • There is a suggestion that more experienced employees can achieve the same output in fewer hours.

"If you can get a good 40 out of somebody a week, that's amazing. Most companies are not getting anywhere close to 40."

The quote reflects on the challenge companies face in maximizing the productive hours they get from their employees each week.

Employee Retention and Company Performance

  • Company performance and stock appreciation can be strong drivers of employee retention.
  • However, absolute compensation is not always the primary factor for employee retention today.
  • Special considerations apply to companies with significant market dominance and rapidly appreciating equity.

"Leaving was losing. Is performance above all in company stock the ultimate driver of retention?"

This quote questions whether company performance and stock gains are the most significant factors in retaining employees, suggesting that this may not be the case in the current environment.

Recruiting and Team Building

  • Over-recruitment can be an issue, leading to inefficiency and excessive growth.
  • The type of VP needed in a smaller company differs from that in a larger one, requiring a more hands-on approach.
  • Companies should focus on achieving more with fewer people and increasing ARR per employee.

"We hire too many people. So there's like, you're just growing too fast."

This quote addresses the problem of over-hiring, suggesting that companies need to be more strategic and efficient with their growth and staffing.

Scale of Founder-Led Funds

  • There is skepticism about the scalability of solo GP or founder-led funds to very large sizes.
  • Building a sustainable and competitive venture or SaaS company typically requires a team effort.
  • There is an analogy between the scalability challenges of SaaS companies and venture funds.

"I think if it's just a solo GP, whether it's founder led or not, I think in the end some of these things are team sports."

The quote reflects on the limitations of scaling a venture fund or company with a solo founder or GP, emphasizing the necessity of a team-based approach.

Team Building and Scaling

  • Building a team is necessary for scaling a business.
  • The complexity of large investments requires thorough diligence and a team effort.
  • Insight, a successful late-stage investor, uses a 20-person team to evaluate deals.
  • Deploying large sums, such as $100 million, is not as simple as it seems; making consistent returns is the challenge.

"Eventually you are going to need to build some sort of team if you want to scale it."

This quote highlights the necessity of team building when scaling a business for greater success and capacity to handle larger operations.

"Yeah, but I think if you're successfully deploying 100 billion dollar checks, just the amount of diligence that you need to do on a company and just the amount of work... It's a huge, huge deal."

Jack Altman emphasizes the significant workload and due diligence required when dealing with large-scale investments, which necessitates a capable team.

Founder-led Funds vs. Traditional VC

  • There's debate over whether founder-led funds can compete with traditional VC firms like Sequoia.
  • Founder-led funds may be more niche and require a substantial team to manage effectively.
  • A founder's involvement in the fund can vary, influencing the fund's dynamics and success.
  • Flex Capital's success is partly attributed to having a full-time CEO rather than the founder in that role.

"I think the question is, can a founder led fund compete with sequoia?"

Jason Lemkin raises the question of whether founder-led funds have the capacity to compete with established venture capital firms.

"Is a crossover point where it's niche, where you would need a huge team."

Jason Lemkin suggests that at a certain point, founder-led funds may become too large to manage without a significant team, which could alter their founder-led nature.

Investment Approach and Founder Behavior

  • Founder-led funds may approach investment and governance differently than traditional VCs.
  • Founders of such funds may not react as dramatically to fluctuations in their investments.
  • The personal constitution of the founder can influence their reaction to investment outcomes.
  • Negotiations with founder-led VCs may focus less on inconsequential terms compared to traditional VCs.
  • Concerns exist about governance and board involvement in founder-led or solo GP funds.

"Their neck's on the line. I was just on with the CEO today at one of my most successful companies."

Jason Lemkin discusses the personal stakes for traditional investors compared to founder-led investors, who may not face the same level of personal risk.

"The outcomes of the matter different. They still are very important to me, but it's hard for me to say because I'm like a bad example for this because I just don't get upset enough."

Oren Hoffman reflects on his personal disposition affecting his reaction to investment outcomes, suggesting a more composed approach compared to other investors who may get more upset.

Power Law Dynamics in Venture Capital

  • Venture capital returns are often power law driven, with a few large successes defining the success of the fund.
  • Early detection of winning investments is challenging, and involvement may not significantly change outcomes.
  • The focus for investors may be more on supporting mid-performing companies rather than the sure winners or losers.
  • A founder's full commitment to their company is seen as a key indicator of at least achieving a 1x return.

"I don't know how much oversight matters if it's really power law driven."

Jack Altman questions the impact of oversight on investment outcomes in a power law driven venture capital environment.

"This power law and venture thing, if you're an early stage investor, here's what I've learned."

Jason Lemkin shares his experience that identifying early winners is difficult and may not be actionable in time to influence outcomes significantly.

Investment Outcomes and Founder Commitment

  • Full commitment from founders is a strong predictor of at least a 1x return.
  • The distinction between a complete failure and a moderate success can have significant financial implications for a fund, especially if in carry mode.
  • The decision to stay involved or step back from a company is influenced by the founder's level of commitment and the company's performance.

"What you just said is profound, Jason, which is that if you ever see a scenario where a founder is putting more than 100% in, I have never seen that company do less than a one x ever."

Jack Altman agrees with Jason Lemkin on the correlation between a founder's commitment and the company's success, highlighting the importance of founder dedication.

Betting on Future IPO Performances

  • A bet is proposed to predict whether specific companies will be above their IPO price by October 2024.
  • The speakers express skepticism about the likelihood of all selected companies being up.
  • The bet becomes a playful part of the conversation, with a burger and $2,000 on the line.

"The bet is October, Halloween 2024, are the trifecta of the newest ipos arm, Instacart and Clavio, one of my all time favorites."

Jason Lemkin sets the terms of the bet, focusing on the future performance of recent IPOs, indicating a common practice of speculating on market outcomes among investors.

Additional Topics and Listener Engagement

  • The host inquires about additional topics that should be discussed, showing openness to covering more ground.
  • The conversation concludes with a call for listener feedback on roundtable discussions and YouTube content.
  • The importance of audience engagement and content improvement is emphasized.

"Is there anything that I haven't discussed that you think we should discuss?"

Harry Stebbings shows a willingness to explore further topics, demonstrating a commitment to thorough discussion and listener value.

"I always really want to hear your thoughts."

Harry Stebbings invites listener feedback, emphasizing the importance of audience engagement in shaping the content of the podcast.

What others are sharing

Go To Library

Want to Deciphr in private?
- It's completely free

Deciphr Now
Footer background
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon

© 2024 Deciphr

Terms and ConditionsPrivacy Policy