20VC The 2 Core Roles Played By The Best Seed Investors Today, What To Look For In Potential CoInvestors & Why Seed Funds Can Grow Ownership in Their Best Companies Across Rounds with Ron Bouganim, Founder @ Govtech Fund

Harry Stebbings interviews Ron Bougainim, founder of Govtech Fund, the first venture capital fund dedicated to government technology startups. Ron discusses his journey from becoming a U.S. citizen and angel investor to launching Govtech Fund, driven by the desire to modernize government operations and influenced by his involvement with Code for America. Govtech Fund's portfolio includes SaaS startups transforming various government functions, and Ron emphasizes their rapid growth potential, short sales cycles, and the unique collaborative nature of government agencies that accelerates adoption. He also clarifies the distinction between Govtech and Civic Tech, highlighting Govtech's focus on technology for government operations, while Civic Tech centers on citizen engagement in civic duties. The conversation touches on the challenges and opportunities in Govtech investing, the importance of mission-driven founders, and the evolving venture ecosystem. Ron values co-investors who are deeply engaged and contribute beyond capital, helping startups achieve product-market fit and scale.

• Harry Stebbings hosts the 20 Minute VC podcast, engaging with various guests in the venture capital ecosystem.
• Ron Bougainim, founder of Govtech Fund, is introduced as a key player in government technology startups.

We are back for another week on the 20 minutes VC with me, Harry Stebbings at H Stebbings 90 96 with two b's on Instagram.

Harry Stebbings introduces the podcast and himself, inviting listeners to engage with him on Instagram.

• Ron Bougainim is the founder of Govtech Fund, the first venture capital fund dedicated to government technology startups.
• Prior to founding Govtech Fund, Ron was an active angel investor and advisor, as well as the accelerator director at Code for America.
• He has been involved with numerous startups and has a background in technology and investing.

Very, very excited to welcome a dear friend and wonderful player in the ecosystem. Ron Booganim, founder at Govtech Fund.

Harry Stebbings introduces Ron Bougainim and highlights his significant role in the venture capital ecosystem, especially in government technology.

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• Ron became a U.S. citizen in 2009, having moved to the U.S. in 1997 to enter the startup world.
• His personal connection to the U.S. and desire to give back to the country led him to explore the Gov 2.0 movement in Silicon Valley.
• Ron joined Code for America as a volunteer and helped launch a Govtech accelerator.
• Observing venture-backable growth rates in Govtech startups, Ron decided to start his own fund when he saw a lack of interest from traditional VCs.

Sure. So my story starts when I became a us citizen in 2009.

Ron Bougainim shares his personal journey to U.S. citizenship and how it influenced his path to founding Govtech Fund.

• The seed investing market has seen a significant increase in capital and participation.
• Platforms like Y Combinator and AngelList have democratized seed investing.
• Successful exits have led to a proliferation of new investors from the ranks of former startup employees.

Well, I think the infusion of capital has really shifted the entire space.

Ron Bougainim discusses the changes in the seed investing landscape, noting the increase in capital and broader participation.

• Ron's approach to investing has become more institutional with the responsibilities of running a fund.
• Despite the changes, his core investment philosophy remains focused on early-stage entrepreneurs and market potential.

Yeah, so my investing mindset has changed, I would agree, but perhaps without sounding trite, I guess I would say I've become more institutional now that I'm an institutional investor.

Ron Bougainim reflects on how his investment approach has evolved with his transition from angel investor to venture capitalist.

• Ron believes in the possibility of building ownership over time through follow-on investments.
• He has often increased his stake in portfolio companies beyond the initial round.

Yeah, so I'm in the second camp. Not of course against larger ownership stake in the first check, but I would say that if you looked at the 19 investments I've made to date through Govtech fund one and two, the overwhelming trend has been certainly taking a meaningful position with leading around or certainly being one of the co leads or significant investors in the earliest round.

Ron Bougainim provides his perspective on the debate regarding building ownership in startups, favoring a strategy of increasing ownership over time.## Venture Capital Strategy

• Venture capital engagement in portfolio companies is crucial for success.
• Pro rata rights are standard but not always necessary if the VC firm is highly engaged.
• Success is measured by founders seeking significant investment from the VC during new funding rounds.
• Founders often offer super pro rata rights to trusted VCs, indicating strong performance by the VC.

"Yes, we do sign pro rata rights and we have all those agreements as typical vcs, but honestly, we don't even need them."

This quote highlights the speaker's view that while typical venture capital agreements include pro rata rights, their active engagement with companies makes these rights less critical.

"My sign of success is that a founder has come to us as a round is coming together and basically, and this has happened often, said, how much do you want?"

This quote illustrates the speaker's belief that a true sign of a VC's success is when founders proactively offer them a significant portion of a funding round, demonstrating trust and satisfaction with the VC's performance.

• Govtech refers to technology used by government employees to perform their duties.
• Govtech is seen as B2G (Business-to-Government) and includes SaaS startups serving various government functions.
• Civic tech is technology that empowers citizens to perform civic duties like voting and community organizing.
• Civic tech is more B2C (Business-to-Citizen) focused.
• Urban tech, often confused with Govtech, pertains to technology related to urban development and mobility.

"So to keep it simple, just think of Govtech as the technology that government employees use to do their jobs."

This quote defines Govtech as technology that facilitates the work of government employees, emphasizing its operational role within government functions.

"Civic tech, by contrast, we think of as the technology that empowers citizens to do their civic duties."

This quote distinguishes Civic tech from Govtech by its focus on enabling citizens to participate in civic activities, rather than supporting internal government operations.

• The average sales cycle for Govtech in the speaker's portfolio is less than 90 days.
• Govtech startups are rapidly engaging with government agencies, challenging the misconception of long sales cycles.
• Factors contributing to shorter sales cycles include cloud adoption and lower technology costs.
• Government agencies often operate under procurement thresholds, allowing quicker sales processes for lower-cost solutions.
• The sales cycle varies across different levels of government and is not uniformly short.

"So the average sales cycle in our portfolio is actually less than 90 days."

This quote provides data to counter the common belief that Govtech startups face long sales cycles, indicating a more favorable environment for startups in this space.

"Governments are unique in that when they adopt innovation, one of the things they'll often do [...] is share their innovations."

This quote explains how government agencies actively share successful innovations with each other, creating a network effect that can benefit Govtech startups and reduce sales cycles.

• SaaS metrics are used to evaluate Govtech startups, looking for significant ARR growth within a few years.
• Startups in the speaker's portfolio show growth rates comparable to top SaaS companies.
• Government agencies promote innovations among themselves, aiding the growth of Govtech companies.
• This unique dynamic of collaboration and sharing within government agencies can drive rapid expansion.

"We think a lot about SaaS metrics. And so what we're looking for are companies that can hit $25 million of annual recurring ARR, annual recurring revenue within three to four years of our investment."

This quote describes the growth expectations for Govtech startups, which aim for aggressive revenue targets to meet venture capital requirements.

• Most founders in Govtech are young, often recent graduates from top computer science programs.
• There's a misconception that Govtech founders are older due to assumed familiarity with public sector issues.
• Many founders are mission-driven, opting for impactful work over higher-paying jobs at major tech companies.
• Strong personal connections to the problems being solved are common among Govtech founders.

"So the data is, I've got 19 companies in the portfolio. One is already exited. So of the 19 investments we've made, only two are founders who are over the age of 28."

This quote challenges the assumption that Govtech founders are typically older, highlighting that the majority are young and driven by a desire to make an impact.

"I think what's happened is there's a generation graduating school now [...] that are saying, look [...] they want to work on companies that matter."

This quote emphasizes the speaker's view that the current generation of graduates is seeking meaningful work, which is reflected in the type of companies they choose to start or work for, including Govtech startups.## Competitive Advantage in Recruiting

• Vertically focused funds can be a competitive advantage in recruiting.
• Choosing a large enough vertical is critical for supporting massive outcomes.
• Govtech is a massive space, with substantial government spending on technology, making it an attractive vertical.

"And that has been a major competitive advantage in recruiting."

The quote emphasizes the strategic benefit of focusing on a specific vertical when it comes to attracting talent and resources.

• Vertically focused funds are becoming more prevalent in venture capital.
• The importance of selecting a vertical with the potential for significant financial outcomes.
• Govtech is identified as a vertical with a massive market, justifying the focus of vertically oriented funds.

"One of them, and let's start with this one, being so prominent with you, is kind of the rise of vertically focused funds."

This quote introduces the topic of the growing trend of vertically focused funds in the venture capital industry.

• The US government's spending on technology surpasses other large markets, like online advertising.
• Global government spending on IT is substantial, rivaling other major industries.
• Govtech is comparable to the banking IT sector in size, indicating its vast potential.

"The US government alone this past year spent $150,000,000,000 on technology, IT and software that's bigger than the entire online advertising market."

This quote highlights the scale of government technology spending, illustrating the size and potential of the Govtech market.

• Confidence in capturing Govtech moonshots due to the sector's size and potential.
• Govtech is essentially enterprise SaaS, with typical exits ranging from $5 to $10 billion.
• Consumer products tend to have higher valuations, but Govtech still offers attractive risk-adjusted investment opportunities.

"But I would say a few things. First of all, I'm pretty confident we're going to hit the Govtech moonshots."

This quote expresses the speaker's confidence in achieving significant financial outcomes within the Govtech vertical.

• Govtech companies often evolve from SaaS to creating marketplaces.
• Marketplaces add value by connecting government with constituents, leading to higher valuations.
• Examples include companies connecting government procurement officers with vendors and food safety agencies with restaurants.

"So they will typically start as a SaaS business. So they're solving a workflow problem as most enterprise SaaS companies do."

The quote describes the initial focus of Govtech companies on solving workflow issues before expanding into marketplace roles.

• The Govtech fund is selective, investing in a limited number of companies per quarter.
• Companies that approach the fund typically have beta partners and some initial traction.
• The fund's due diligence often involves government agencies, which sometimes refer potential investments.

"So a typical company coming to us has a product, I wouldn't call it product market fit, but what they've got is half dozen agencies that have signed on to be beta partners, perhaps to give feedback."

This quote outlines the stage at which the Govtech fund prefers to invest in companies, which is beyond ideation but before achieving full product-market fit.

• The Govtech fund aims for a concentrated portfolio to maintain high engagement and impact.
• A more concentrated portfolio allows for intentional, complementary construction, enhancing the overall value proposition.

"I think the perspective that lps have is, well, it's a portfolio play and so you're going to make a lot of mistakes."

The quote addresses the limited partners' (LPs) concerns about diversification and the rationale behind maintaining a focused investment strategy.

• Intensity of engagement is crucial for co-investors, especially at the seed stage.
• Co-investors should contribute operational knowledge and help with achieving product-market fit and early scaling.
• The speaker values co-investors who provide in-depth, hands-on support across various aspects of the business.

"What I'm talking about is, let me just riff here for a moment, customer discovery process."

The quote emphasizes the depth of involvement expected from co-investors in the startup's development and growth processes.

• It is possible to maintain both professionalism and friendship in VC-founder relationships.
• The speaker believes in supporting founders personally and professionally, suggesting a more holistic approach to investment.

"Right. So I'm not dodging the question. I think you can do both."

This quote suggests that the speaker sees no conflict in maintaining a professional relationship while also being supportive on a personal level with founders.## Growth and Pressure in Startups

• Startups can experience rapid growth, going from a few employees to over 200 in just a few years.
• Such growth puts tremendous pressure on individuals, especially recent graduates.
• Personal dynamics and the ability to manage them are crucial in a startup environment.

"They're now well over 200 employees in just a few years. And that is a tremendous amount of pressure, I think, for anyone much less recent graduate."

This quote highlights the rapid growth and the pressure it can create within startups, emphasizing the challenge for those who are new to the workforce.

• Senior investors can play multiple roles, including being a coach to startup founders.
• It is possible to have personal conversations and offer advice while maintaining professionalism.
• Investors can be empathetic and supportive yet firm in business matters, such as during board meetings.

"You can be a coach. There's a difference between being my spouse, who I'm having obviously very direct and close conversations with. Of course, because we are married to each other and being a coach to someone, you can still have personal conversations and offer advice and be an empathetic ear and present context for that individual and help them."

This quote illustrates the dual role an investor can have, providing both personal support and professional guidance without crossing unprofessional boundaries.

• Balancing personal empathy with professional expectations is key.
• Founders recognize the investor's role and responsibilities, including obligations to limited partners (LPs).
• Managing the professional line has not been problematic for the speaker.

"But I think the founders are doing the same. They're not forgetting the fact that I'm an investor and that I have LPs and I'm an institutional investor and all the rest of it."

The quote conveys that founders understand and respect the investor's position and the professional boundaries that come with it.

• The speaker has co-invested with various firms, including Lowercase, First Round Capital, General Catalyst, and Cowboy Ventures.
• Appreciation for different investment models and support systems that help entrepreneurs.
• The portfolio has raised significant follow-on capital, indicating successful co-investment relationships.

"I'm fortunate to be co-invested actually with lowercase in both Mark 43 and Binti as well."

This quote indicates the speaker's positive experiences with and respect for co-investors, highlighting successful partnerships.

• Recommends Walter Isaacson's book on Leonardo da Vinci for entrepreneurs.
• Da Vinci exemplifies cross-disciplinary thinking and a relentless curiosity, qualities valuable to entrepreneurs.

"Da Vinci is the ultimate dreamer, Doodler, cross disciplined thinker, fact based scientist."

The quote suggests that entrepreneurs can learn from historical figures like Da Vinci, who embody the spirit of innovation and relentless inquiry.

• Govtech is often misunderstood as old-school government contracting requiring lobbyists.
• The speaker's companies do not engage in traditional government contracting or use lobbyists.

"Govtech is government contracting. I think a lot of people think that it's sort of the old school, custom built software that needs lobbyists to win contracts."

This quote clarifies a common misconception about Govtech, differentiating the speaker's approach from traditional perceptions.

• The speaker often recalls his father's saying, "Think, don't sink," which suggests finding solutions to problems rather than being overwhelmed.
• This motto emphasizes perseverance and problem-solving in challenging situations.

"He would say, think, don't sink. I think probably because it just rhymed."

The quote reveals a personal motto that serves as a reminder to maintain focus and find ways out of difficult situations, an approach applicable to both personal challenges and business obstacles.

• Establishing a new fund requires a unique vision and value proposition to create a competitive advantage.
• The same questions asked of startups about vision, uniqueness, and long-term competitive moats apply to new funds.

"Can you have a vision for a new product offering? Because I think the fund is effectively a new product in the context of a ton of competitors."

This quote underscores the importance of differentiation and strategic vision when launching a new investment fund, drawing parallels to startup challenges.

• LP meetings are often confidential, especially with high net worth individuals or family offices.
• Success in these meetings can sometimes be surprisingly straightforward and quick.

"Literally, I sat down, they said, okay, we're in for, I think it was 2 million or 3 million in fund one, which was 10% of the fund we're in."

The quote recounts a memorable LP meeting where the speaker's preparation met with a swift and positive response, highlighting the unpredictability and variety of investor interactions.

• The most recent investment was in SEMA, a company focusing on legacy code maintenance using AI and machine learning.
• Government agencies have a pressing need for such services, with outdated systems and a retiring workforce.
• The speaker sees this as a massive business opportunity and impactful within the Govtech space.

"SEMA. They're in broadly the space that they would define as legacy code maintenance, which is a mouthful, but basically it uses the often used AI and machine learning ML to automate the maintenance of code."

This quote explains the rationale behind the recent investment, identifying a critical need for modernizing legacy systems in government technology.

• The speaker expresses gratitude for the introduction to the podcast and the kindness shown since the interview.
• There is anticipation and excitement for the future of Govtech.

"Ron, as I said, I spoke to Matt many times before the show, and he said that Ron is an absolute mensch and he will be amazing."

The quote shows appreciation for the network and support system that facilitated the speaker's podcast appearance and reflects positively on the speaker's reputation.