20VC The Acceptable vs Unacceptable Risks To Take When Seed Investing, Why Loss Ratio Is Not A Consideration & Why Series A Is The Right Time To Establish A Board with Mike Hirshland, CoFounder @ Resolute Ventures

In this episode of the 20 minutes VC, host Harry Stebbings interviews Mike Hirschland, co-founder of Resolute Ventures, a prominent pre-seed and seed stage fund. They discuss Resolute Ventures' recent $75 million fund and its investment strategy, emphasizing the importance of fund size in determining investment approach. Mike shares his journey from working with the US Senate Judiciary Committee to venture capital and founding Resolute Ventures, highlighting the importance of early-stage investing and his preference for supporting teams pre-traction. They explore the nuances of early funding rounds, the challenges of board dynamics at the seed stage, and the critical role of founder-investor relationships. Mike also touches upon the need for clarity in the VC industry regarding investment stages and the importance of price sensitivity in investment decisions.

• Harry Stebbings hosts the 20 Minute VC podcast and invites listeners to engage via Instagram.
• Mike Hirschland, co-founder of Resolute Ventures, is the guest, highlighting the importance of fund size in venture strategy.
• Resolute Ventures is known for its precede and seed stage investments and has recently announced a new $75 million fund.
• Mike's prior experience includes founding Dog Patch Labs and being a partner at Polaris Venture Partners.

"We are back for another week in the world of the 20 minutes VC with me, Harry Stebbings at H Stepbings 90 96 with two B's on Instagram and it would be great to see you there."

This quote is Harry Stebbings introducing himself and the podcast, inviting listeners to engage on Instagram for future content suggestions.

"I'm so thrilled to welcome Mike Hirschland, co-founder Resolute Ventures, one of the leading precede and seed stage funds of the last decade, having recently announced their new $75 million fund."

Harry introduces Mike Hirschland and highlights Resolute Ventures' recent announcement of a new fund and its success in early-stage investments.

• The podcast often features experts who provide insights into trends, fundraising, and company growth.
• Stripe and Intercom are mentioned as resources that offer guidance for technology companies.
• Cooley is noted as a law firm specializing in startups and venture capital.

"A lot of what we do on the 20 minutes VC is talk to experts, pick the brains of founders and investors who tell us which trends to watch out for, offer tips on fundraising, and teach us how to excel at any company stage."

Harry describes the podcast's focus on providing valuable insights from industry experts to help listeners navigate the venture ecosystem.

• Mike's interest in venture capital was sparked by a meeting with VC John Doerr in the mid-1990s.
• At the time, Mike was a lawyer for the US Senate Judiciary Committee, working on antitrust issues in Silicon Valley.
• The transition to venture capital was a conscious decision followed by a move to Boston to join Polaris.

"One of my early meetings was with a VC who I'd never heard of and his name was John Doerr. And I had the opportunity to spend a couple of hours with John learning about VC and the industry where the Internet was going."

Mike recounts the pivotal moment when he met John Doerr, which led to his decision to pursue a career in venture capital.

• Mike's passion for early-stage entrepreneurship was realized through creating Dog Patch Labs while at Polaris.
• The challenges of early-stage investing from a large fund led to the decision to start Resolute Ventures.
• Mike emphasizes his preference for working with entrepreneurs at the inception of their companies over participating in board meetings.

"I realized that was really what I loved was spending time with entrepreneurs in the very earliest of stages, sometimes even before they were clear on starting a company."

Mike explains his passion for working closely with entrepreneurs at the very beginning of their journeys, which influenced his decision to found Resolute Ventures.## Investment Strategy at Resolute

• Resolute prefers investing in pre-traction companies.
• They focus on backing teams and ideas they believe in, without necessarily looking for early signs of traction.
• Occasionally, companies with traction approach Resolute, but their model prefers investing before traction.

"Our mo, what we really like to do is to be backing teams we fall in love with, with ideas that we fall in love with and just that."

This quote emphasizes Resolute's investment philosophy of prioritizing the teams and ideas they are passionate about over early market traction.

• Product market fit and market timing risks are acceptable for Resolute.
• They prefer backing strong teams with promising product development skills.
• The founding team is crucial; Resolute aims to be correct in their assessment of the team's potential.
• They are not comfortable with risks associated with the team and strive to make accurate judgments in this area.

"But if there's one thing we could be right about all the time, it would be the founding team."

The quote underscores the paramount importance Resolute places on the founding team when making investment decisions, as they see team assessment as the most critical aspect of their due diligence.

• Resolute does not prioritize loss ratio in their investment strategy.
• They accept that the loss ratio might be higher due to investing at an early stage.
• The focus is on a few venture-scale returns that can drive the fund's success, rather than minimizing losses across the portfolio.

"Honestly, when those conversations come up with lps, I tend to be very direct in that we really don't worry about loss ratio."

This quote reveals that Resolute's approach to investments is not heavily influenced by loss ratio concerns, which is communicated transparently to their limited partners (LPs).

• Resolute started with a strong focus on ownership as a core part of their strategy.
• They aim for significant ownership in their best-performing companies.
• The fund size was increased from $25 million to $45 million to better execute the ownership strategy.

"It's really going to be driven by that core group of companies that are successful and your ownership in them."

This quote explains that the success of Resolute's fund is driven by a core group of successful companies and the percentage of ownership Resolute maintains in those companies.

• Resolute's fund size has increased modestly with each iteration to optimize ownership levels at exit.
• The goal is to maintain enough capital for significant ownership while maximizing fund multiples.
• Resolute's approach differs from some other funds that gradually increase focus on ownership across successive funds.

"So we ended up bringing in another 20 million and being a $45 million fund."

The quote illustrates a strategic decision to increase the fund size to maintain their desired ownership levels in portfolio companies.

• Resolute's portfolio typically consists of 30 to 35 companies.
• They aim to balance diversification with maintaining significant ownership stakes.

"Yeah, so we pretty consistently end up. Each fund has a portfolio of 30 to 35 companies."

This quote provides insight into Resolute's portfolio construction strategy, highlighting their balance between diversification and ownership concentration.## Initial and Subsequent Investment Strategy

• Focus on achieving a 10% ownership with the initial investment.
• Employ vigilance and creativity for second and third investments to build ownership.
• Take advantage of opportunities to invest more in breakout companies before classic VC rounds.
• Provide capital for growth to help companies reach a more compelling venture round.

"In terms of our initial check, which we think is critical in terms of getting to 10% on that first check, and then we're, I would say, combination of vigilant plus creative in terms of our second and third checks, being able to really build up our ownership position, and not necessarily waiting until the classic VC rounds to do that."

This quote emphasizes the strategy of securing a significant stake with the first investment and proactively increasing ownership in subsequent investments, rather than waiting for traditional funding rounds.

• Aspiration to be the founder's first call for both good and bad news.
• Importance of building an authentic and supportive relationship with founders.
• Emphasis on the loneliness of being a founder and the value of a genuine partnership.

"Yeah, the way I like to sum that up is, I'd say our aspiration is to be the first call for a founder, and that means lots of different things in different instances."

The quote captures the goal of being the go-to person for founders, indicating a close and trusted relationship between the VC and the founder.

• Friendship between investors and founders is possible and beneficial.
• Friends may need to deliver tough news, similar to the investor-founder relationship.
• Difference between being "founder friendly" and having a truthful, direct relationship.

"I absolutely think there can be. But I would also say sometimes it's your friends who have to give you the toughest news."

This quote acknowledges the possibility and value of friendship in the investor-founder dynamic while highlighting the necessity for honesty and tough conversations within that friendship.

• Founders often rush the process of choosing investors.
• Importance of taking time to ensure a good fit with the investor.
• Advising founders to reference check and trust their instincts during the selection process.

"I think in many instances, yes. I think founders, with good reason want a very fast process, and they want to get back to work and are sometimes inclined really just to get the best deal as quickly as they can and get back to work."

This quote discusses the tendency of founders to prioritize speed over fit when selecting investors, suggesting that more consideration should be given to the relationship and alignment with investors.

• Appropriate to establish a board around the Series A funding stage.
• Boards are valuable for governance and assisting in building senior teams.
• Seed stage should avoid formalized investor-led boards to prevent time drag on founders.

"Well, I think it's around the series a. I think when you're raising a series a level amount of capital, I think that the investors have an understandable interest in governance."

The quote indicates that the establishment of a board is suitable when a company reaches a maturity level that aligns with Series A funding, emphasizing the role of governance and support in company growth.

• Building board intimacy is challenging.
• The right investor selection and trust can contribute to functional board dynamics.
• Authentic relationships outside of board meetings are essential.

"To be brutally honest, not really. I think it's tough. I think the board management dynamic is a little bit of a tough one to build intimacy into."

This quote expresses the difficulty in creating intimate relationships within the board context, suggesting that genuine connections and trust are more effective outside formal meetings.

• Formalized boards at seed stage can be counterproductive.
• Preparation for board meetings can be excessive and time-consuming.
• Board meetings can be lengthy and distract founders from core work.

"Well, it's kind of what I alluded to a minute ago. First, it ends up the board meeting leads the founders to dedicate amount of time preparing for the board meeting and putting together the right deck and doing the analysis."

The quote highlights the potential drawbacks of having formalized boards at the seed stage, including the excessive time commitment required from founders for preparation and meetings.### Productive Dialogues in Decision-Making

• Ineffective communication can occur when too many individuals share opinions without focus on critical decision-making.
• Decisions should be made quickly and crisply to maintain productivity.

"from on everything that comes up, and so you end up having these not very productive dialogues where lots of people are sharing their own opinions on something, but it's not that critical. Decisions are getting made quickly and crisply."

This quote emphasizes the importance of efficient decision-making over unfocused group discussions that can hinder productivity.

• Raising the first fund is the most challenging due to the absence of a track record.
• Creating a compelling narrative without a previous track record is difficult.

"Well, I think that raising the first fund is by far the most challenging thing to do. And if you don't already have a track record in a similar construct, then creating a narrative that's very compelling, that you're going to have a track record, I think is a critical thing and that's very challenging."

Mike Hirschland discusses the difficulties faced when raising an initial fund, especially without a prior track record to demonstrate potential success.

• The process of raising a fund becomes slightly easier with the second fund.
• It is with the third and fourth funds that fundraising becomes significantly easier, due to the development of an institutional LP base.

"From personal experience, I would say a little bit easier with the second fund, but it's really the third and fourth funds where I saw it get much easier."

Mike Hirschland shares his personal experience, noting that subsequent funds are easier to raise as investor relationships and a track record are established.

• There is a desire for clarity on investment stages within the VC community.
• Confusion exists around the definitions of seed, pre-seed, post-seed, and Series A funding stages.
• Transparency on who is willing to invest at each stage would be beneficial.

"I think what it would be would be just clarity on who really is investing when, as you said earlier, there's lots of confusion right now."

Mike Hirschland expresses a wish for clearer definitions and transparency regarding investment stages in the venture capital industry.

• "A Little Life" is a novel recommended by Mike Hirschland for its profound depiction of humanity.

"I would say there's a book called a Little Life, which I read about a year and a half ago and nothing to do with tech or business."

Mike Hirschland recommends a novel that had a significant emotional impact on him, despite it not being related to technology or business.

• Attribution is not considered as important as the partnership and responsibility within VC firms.
• The focus should be on the partnership and the responsibility of the point partner to be actively engaged with the deal.

"I think not so important. I think for us, we'd like to think of everything as a partnership."

Mike Hirschland speaks to the culture of viewing ventures as partnerships rather than focusing on individual attribution within his firm.

• Price sensitivity is a major consideration when evaluating potential investments.
• The investment model seeks early-stage companies with valuations that allow for a significant ownership percentage.

"For our model, we're looking for companies that are early and where the valuation is in a band that will allow us to get our 10%."

Mike Hirschland discusses the importance of valuation in investment decisions, highlighting the need for a balance between opportunity and cost.

• A recent investment in a New York-based SaaS company was driven by belief in the founders.
• The decision was influenced by the founders' potential and was a founder-led decision.

"There's a New York based SaaS company that we just recently invested in, and for us it was just a classic example. Two young first time founders who we just think have the right stuff and really got found compelling and was very much of a founder led decision."

Mike Hirschland shares excitement about a recent investment, emphasizing the importance of the founders' qualities in the decision-making process.

• Appreciation is expressed for Mike Hirschland's participation in the podcast.
• Stripe and Intercom are highlighted as valuable resources for technology companies.
• Cooley is noted for its extensive experience with venture capital funds and startups.
• The podcast aims to provide insights from experts to help listeners build successful businesses.

"And I want to say huge thanks to Mike for giving up his time day to appear on the show."

Harry Stebbings thanks Mike Hirschland for his contribution to the podcast, highlighting the value of sharing expertise with the audience.