20VC The Services Model of Venture Capital is Broken, The Best Founders Do Need Help, The Most Important Signals to Assess When Meeting Founders & Why Kids Bring Less Happiness and More Joy with Phin Barnes @ TheGP

Summary Notes


In a candid conversation on "20 VC" with host Harry Stebbings, Finn Barnes, co-founder and managing partner of the general partnership, reflects on his venture capital journey, including his decade at First Round Capital and his decision to leave for new challenges. Addressing the venture capital industry, Barnes criticizes the fee and carry model, arguing it's not conducive to scaling personalized services for founders, leading to diluted value as firms grow. He emphasizes the importance of one-to-one relationships in venture, a principle central to his new firm, which combines capital investment with hands-on support, earning equity through services provided to startups. Throughout the discussion, Barnes shares insights on founder dynamics, the significance of early traction, and the interplay of personal and professional life, advocating for a holistic approach to success.

Summary Notes

Fee and Carry Model in VC Firms

  • The fee and carry model is seen as a cost center in VC firm cash flow statements.
  • There is a trend towards scaling VC firms, which is believed to erode the value of venture services.
  • A sentiment exists that the best founders do not require assistance, which implies they don't need the specific help offered by the VC.

"The fee and carry model doesn't work because those services show up as a cost center on the cash flow statement of the VC firm itself."

The quote explains the financial perspective on why the fee and carry model is problematic for VC firms, as it appears as an expense rather than an investment.

Venture Capital Scaling and Founder Support

  • Venture capital scaling is seen to diminish the quality of services provided to founders.
  • The idea that top founders don't need help is challenged; it's suggested they might not need the speaker's help specifically.

"There's been this push to scale. It's eroded the product of venture. If someone says the best founders don't need help, what I hear them saying is the best founders don't need my help."

The quote critiques the scaling of VC firms and how it potentially affects the quality of support to founders, while also addressing the misconception that the most capable founders do not require assistance.

Introduction to the Podcast

  • Harry Stebbings introduces the podcast episode and guest Finn Barnes.
  • Finn Barnes has a significant investment background with First Round Capital.
  • The podcast episode is available on YouTube, and there are other resources mentioned for listeners.

"This is 20 VC with me, Harry Stebbings, and what a cracker we have."

Harry Stebbings opens the podcast, setting the stage for the conversation with Finn Barnes.

Investment Tools and Services

  • Tigas offers research and financial data for investors.
  • Mayfair provides a service to protect and grow company cash with FDIC insurance and interest.
  • Secureframe offers a platform for security and privacy compliance.

"With lightning-fast access to over 60,000 transcripts across 20,000 companies, you'll discover a wealth of unique insights to fuel your fundamental research on Tigus."

The quote highlights the usefulness of Tigas as a research tool for investors, providing extensive access to company transcripts and data.

Finn Barnes' Departure from First Round Capital

  • Finn Barnes left First Round Capital after considering his potential and desire to build something of his own.
  • The decision to leave was challenging due to strong relationships at First Round.
  • Barnes emphasizes the importance of doing difficult things with integrity.

"Leaving first round was a really, really hard decision. I think you find your greatest opportunities when you leave the best job you ever had."

The quote reflects on the difficult decision to leave a successful position in pursuit of personal growth and new opportunities.

Personal Motivation for Entrepreneurship

  • Finn Barnes discusses his intrinsic motivation to see what he is capable of achieving.
  • He believes that to answer questions of personal capability, one must step outside existing institutions.
  • Barnes partnered with someone who shared his vision, leading to the creation of the general partnership.

"For me, there's a question that eats at me about what am I capable of?"

The quote reveals Finn Barnes' internal drive to push his limits and discover his full potential, which led him to pursue his own venture.

Work-Life Integration

  • Hard work is essential, but integrating all aspects of life is also important.
  • Finn Barnes advocates for a life that is integrated, where work and personal life are not separate but interwoven.
  • He emphasizes the importance of being proud of your work and how it fits into your family life.

"Integrating your life and seeing how far you can go as a parent, as a spouse, as a friend, as a venture capitalist, all of those things they weave together."

The quote speaks to the holistic approach to life that Finn Barnes endorses, where work and personal life are not in conflict but complement each other.

Advice to Younger Self Entering Venture Capital

  • Finn Barnes would advise his younger self to be intentional about work and to focus on developing technical skills.
  • He highlights the importance of excelling in interviewing and coaching, which are critical skills in venture capital.
  • Setting realistic goals and focusing on daily work quality can lead to achieving aspirations.

"Don't set yourself a goal of being a partner in five years, because you probably have very little control over that."

The quote advises focusing on what one can control, such as day-to-day excellence, rather than setting goals that are dependent on external factors.

Founder Detection and Interviewing

  • Finn Barnes values understanding a founder's priorities and expressions during interviews.
  • He asks questions to determine what founders are excited about and how they approach problems.
  • The way founders frame challenges can be indicative of their leadership style.

"I think I've come to believe that your priorities and the way you express those priorities and explain them is probably the most important thing to understand when you think about partnering with a founder."

The quote emphasizes the significance of discerning a founder's priorities and motivations as a key factor in assessing their potential as a business leader.

Entrepreneurial Beginnings of Founders and VCs

  • Early entrepreneurial experiences are common among successful founders and VCs.
  • The narrative of how individuals started making money can provide insights into their entrepreneurial drive and creativity.

"How did you first make money?"

This question is used to gauge the entrepreneurial spirit and history of founders, which can be a predictor of their future success and innovation.

Impact of First Round Capital on Mindset

  • Finn Barnes reflects on the lessons learned during his time at First Round Capital.
  • The power of focusing on a niche and understanding the customer is crucial for success.
  • The challenge lies in expanding beyond the niche without eroding the brand or service quality.

"There's tremendous power in being able to focus on a niche."

The quote highlights the strategic advantage of specializing in a niche market, which was a key takeaway from Finn Barnes' experience at First Round Capital.## Focus and Brand Identity

  • Finn Barnes and Harry Stebbings discuss the importance of maintaining focus and brand identity in business ventures.
  • Stebbings reflects on his own experience of losing focus by deviating from his core content, which is venture discussions, to include pop stars on his show.
  • Barnes supports the idea of brand expansion but emphasizes the importance of doing so in a way that is true to the original brand identity and adds value to the community.

"I've never actually spoken about this, but I think actually I lost my way with the content that we did about a year ago."

This quote shows Stebbings' acknowledgment of a past mistake where he deviated from his core content, which had implications for his brand's focus and identity.

"On that a little bit because I think your push into 20 sales, 20 products, 20 growth, those are expansions that actually bolster the brand."

Barnes suggests that expanding into related areas can strengthen the brand if done in a way that aligns with the brand's core identity and value proposition.

Venture Capital Industry Evolution

  • Venture capital has evolved from a cottage industry with deep domain expertise to an industry seeking differentiation through service offerings.
  • The traditional fee and carry model is challenged by the need to offer differentiated services as a venture capital firm.
  • There is a tension between the cost of providing services and the desire to minimize costs and maximize profits.

"Venture, as an industry, has evolved tremendously from the 70s when it started."

This quote summarizes the historical evolution of the venture capital industry from its early days to its current state.

"But the challenge with the business model of venture, in a world where you need to differentiate with product, and if you choose to do it that way, then the fee and carry model doesn't work."

Barnes highlights the conflict between the traditional venture capital business model and the need to differentiate through services, which can be costly.

Differentiation and Scaling of Services

  • The venture capital industry has attempted to scale services, but this often leads to a dilution of the quality of service delivery.
  • The one-to-one relationship between venture capitalists and founders is crucial for delivering high-quality services.
  • There is a concern about the effectiveness of talent teams within venture capital firms and the need for a personalized approach to hiring and services.

"And so the result of that work to optimize for the GP business model is you end up with increasingly junior people paying increasingly fractionalized attention to a founder's most critical needs."

Barnes criticizes the current trend in venture capital where cost optimization leads to a decrease in the quality of attention and service provided to founders.

"The best searches are not, oh, you need an engineer. We know a lot of engineers. Here's a Google sheet with a bunch of LinkedIn links. Good luck. That's not recruiting."

This quote emphasizes the importance of a hands-on, personalized approach to recruiting, contrasting it with a more generic and less effective method.

The GP's Unique Business Model

  • The GP (General Partnership) has a unique business model where service delivery is seen as a revenue center rather than a cost center.
  • They provide detailed statements of work and engage in deep partnerships with founders to deliver high-quality services.
  • The GP's model is designed to maintain quality over scaling quantity, focusing on a smaller number of high-quality companies.

"But when the statement of work is delivered, then that engagement is over. And if they want to continue with ongoing recruiting support, we need a new statement of work, and that's a new investment for us."

This quote explains the GP's approach to service delivery, which is project-based and requires a new investment for each new engagement, ensuring quality and focus.

Founder Needs and VC Support

  • The best founders are always seeking the best advice and support, but they may not necessarily need it from venture capitalists.
  • There is a recognition that venture capitalists may not always be the best source of help for founders, leading to the creation of services like 20 sales, 20 product, 20 growth.
  • The GP's approach to venture capital is particularly appealing to more experienced founders who understand the value of high-quality early hires and product development.

"Every great founder has that support. And so every great founder needs help. They just don't need it from vcs."

Barnes argues that while founders need support, it does not have to come from the venture capitalists themselves; there are other valuable sources of support.

Competition with Mega Funds

  • There is a discussion about how smaller venture funds can compete with larger funds that can offer more capital.
  • The necessity for smaller funds to differentiate themselves through their product and service offerings is emphasized.
  • Barnes shares his experience of successfully competing against larger funds by focusing on the quality of what his fund offers rather than the size of the investment.

"If you can't convince a founder, partnering with you is what's best for their business, in the face of your competition, you need to do something different."

Barnes highlights the need for venture funds to have a compelling value proposition to win over founders, even when competing with larger funds.

"We're not winning on price. I think we're winning because we're offering something different."

This quote encapsulates the GP's strategy of differentiating through unique offerings rather than trying to compete solely on the size of the investment.## Venture Firm Design Philosophy

  • Finn Barnes and his partner Dan designed their firm with an "unbundled offering" philosophy.
  • They trust founders to identify their critical needs and selectively engage with the firm's services.
  • The firm has made 19 investments, 15 utilized services, while 4 initially did not; however, 2 of those later engaged with specific challenges.

"When Dan and I were designing the firm, one of the core things was that it would be an unbundled offering, because we trust the founders to know their critical needs and we want them to be able to choose where we have a unique product that gives them a specific advantage over the rest of the market and where we don't."

This quote explains the firm's approach to offering services to founders, emphasizing trust in the founders' judgment and the firm's selective value proposition.

Seed Investment Excitement and Market Dynamics

  • Finn Barnes acknowledges the cyclical nature of the market, with peaks and valleys.
  • He suggests that the competitiveness of seed investment raises the bar for founders and companies.
  • The abundance of capital and high valuations at the seed stage can lead to adverse effects on company culture if not managed well.

"I think that just raises the bar on how much of a standout you need to be as a founder and as a company, it elevates that urgency around execution and delivery."

This quote highlights the increased pressure on seed-stage founders to excel due to a more competitive investment landscape.

Investment Decision Factors

  • Finn Barnes ranks founders as the most critical factor in investment decisions.
  • He values early user engagement and traction, even if the number of users is small.
  • Market timing is crucial for early traction, while the total addressable market (TAM) is less important at the early stage.
  • The ability of a company to earn revenue efficiently is emphasized over the potential size of the market.

"I think founders are first... And then, second, if you're investing at a stage where traction can exist, I think that early, it doesn't have to be at scale... I think then it's about the market timing."

This quote prioritizes the importance of founders, early traction, and market timing in the investment decision-making process.

Market Structure vs. Market Timing

  • Finn Barnes distinguishes between market structure and market timing.
  • He agrees that emerging markets can pose structural challenges that affect investment outcomes.
  • He illustrates the importance of a founder's vision and ability to create value in a market, even if the market itself is not clearly defined.

"I agree. I think market structure... When I think of market, I think is Uber about owning the black car market, the taxicab market or the auto market, or the delivery of all things, and transportation market."

This quote discusses the difference between market structure and the broader concept of market potential, using Uber as an example.

Founder Vision and Adaptability

  • Finn Barnes believes founders do not need to foresee every future development of their company.
  • Founders should be passionate about their core product and open to expanding beyond it.
  • The ability to recognize and build upon foundational elements is crucial for long-term success.

"No, it's a great question. I've experienced both... They need to understand that this is the foundation of something, that then there will be another act."

This quote reflects on whether founders need to have a complete vision of their company's future from the start, suggesting adaptability is key.

Founder Detection Errors

  • Finn Barnes values founders' unique strengths or "spikes."
  • He admits that overlooking a founder's weaknesses can be a mistake if those weaknesses negate their strengths.
  • The impact of a potential weakness on a founder's ability to apply their talents is a common oversight.

"I think that my mistakes with founders have been missing the consequences of a weakness and being overwhelmed with the strength of a spike and not realizing how they won't even be able to apply that spike because they lack something else that will mitigate that strength."

This quote acknowledges the importance of assessing both a founder's strengths and weaknesses in the investment process.

Learning from Investment Hits and Misses

  • Finn Barnes reflects on his transition from a product-focused investor to understanding the broader implications of a product.
  • His experiences have taught him the importance of a product's role in driving distribution and growth.
  • He discusses learning from the success of companies like Notion and the importance of products that evolve with users.

"The work I did with notion, I think was really foundational in understanding the product is a piece of what you're doing."

This quote describes how past investment successes have shaped his overall investment strategy, particularly the role of product development.

Investment Approach Plasticity

  • Finn Barnes emphasizes treating each company as a unique case while learning from past experiences.
  • He advises against rigid investment rules, which can distort perception.
  • The importance of questioning assumptions and learning from both successes and failures is highlighted.

"It's very important to view every company, to the extent you can, as its own thing... But I think that the challenge with rules, they can distort your vision."

This quote promotes a flexible approach to investment, recognizing that each company has its own distinct characteristics and opportunities.

Portfolio Construction and Team Involvement

  • Finn Barnes and his team focus on building a concentrated portfolio.
  • The entire team is involved in the investment process, leveraging their expertise and networks.
  • They prioritize deep engagement with founders and a thorough understanding of their businesses.

"We need to find 30 amazing early stage companies. We don't need to be in every amazing early stage company."

This quote outlines the firm's strategy for portfolio construction, emphasizing quality over quantity and the involvement of the entire team in the investment process.## Venture Capital Technical Understanding

  • VC's without technical backgrounds struggle to fully understand technical aspects of a founder's work.
  • Non-technical VC's often rely on a technical person's judgment, which can lead to a "game of telephone" effect.
  • A deeper process involves the VC team engaging directly with the founder to identify challenges and assess alignment with the founder's vision.

"Think the traditional process of understanding what a founder is doing technically, is as a vc, that's not technical. You sit in that room, you do your best to understand."

This quote emphasizes the challenge non-technical VC's face in grasping the technical details of a founder's work during pitches or discussions, leading to a reliance on third-party technical evaluations.

Concept of Happiness

  • Happiness is a personal concept that can be defined by significant life moments.
  • Day-to-day happiness can stem from having a positive impact on respected individuals and receiving gratitude.
  • There's a distinction between happiness (freedom to do what you want) and joy (fulfillment from responsibilities like parenting).

"I think of it in a couple of ways, so I can imagine moments in life that would define happiness."

Finn Barnes reflects on happiness as a multifaceted concept, with different expressions in life-defining moments and daily interactions.

Parenting and Family Priorities

  • Consistency in prioritizing family is crucial for children's sense of security and boundaries.
  • Listening to children and responding to their needs, rather than wants, is key to good parenting.
  • Maintaining a strong relationship with one's partner is essential amidst the changes brought by parenthood.

"There's a consistency in prioritizing your family that really matters."

This quote underlines the importance of consistently making family a priority, which provides a stable environment for children to grow and feel secure.

Venture Capital Business Model

  • The traditional venture capital business model is seen as broken by some, leading to innovative approaches.
  • Sweat Equity Ventures, co-founded by Dan, is an example of offering services in exchange for equity.
  • The goal is to create a venture capital institution known for its taste in selecting founders and companies.

"Dan was the person who had the courage to do something about it in 2018."

Finn Barnes highlights Dan's innovative approach to venture capital, which challenges the traditional model by providing services for equity.

Daily Routine and Work-Life Balance

  • A structured daily routine is aimed at achieving work-life balance, including family time and personal health.
  • The routine includes exercise, family breakfasts, work, picking up children from school, and date nights.
  • Flexibility is necessary as actual life can deviate from aspirational routines.

"The daily routine kind of keeps me balanced on those values."

Finn Barnes discusses the importance of a daily routine in maintaining balance between work and personal values, including family and health.

Venture Capital Industry Changes

  • There is a desire to return to a craft approach in venture capital, focusing on one-to-one relationships.
  • The push to scale in venture capital has eroded the personalized nature of building companies.

"But I would love to see a return to the one to one relationships that build the best companies."

This quote expresses Finn Barnes's wish for the venture capital industry to refocus on individual, tailored relationships with founders to build successful companies.

Respect for Other Firms

  • Finn Barnes respects firms like Pace, HF Zero, Meritech, and Dorm Room Fund for their unique approaches and impact.
  • These firms are highlighted for their talent, focus, and community-building efforts.

"I think Meritech doesn't get talked about enough, Max, and mean. They're just unbelievable in their thinking and so much respect for their focus."

The quote showcases Finn Barnes's admiration for firms like Meritech, which he believes deserve more recognition for their strategic focus and thoughtful approach to venture capital.

Personal Inspirations

  • Finn Barnes is inspired by the founders of Nike, Bill Bauerman and Phil Nay, for their partnership and creation of the brand.
  • He aspires to one day be on the Nike board, reflecting his long-term professional goals.

"What they built their partnership, the way they understood each other's strengths, weaknesses, how they work together, what they created, is just stunning."

This quote highlights Finn Barnes's admiration for the partnership and success of Nike's founders, which serves as an inspiration for his own professional aspirations.

Exercise and Health

  • Finn Barnes runs between 40 to 60 miles a week and has incorporated cycling into his routine.
  • He values exercise as a form of meditation and prefers real food over specialized post-workout nutrition.

"So for me, exercise is the meditation."

The quote encapsulates Finn Barnes's view of exercise as not only a physical activity but also a mental and meditative practice that contributes to his overall well-being.

Vision for Success

  • Success for the general partnership would mean becoming a respected institution in venture capital.
  • The firm aims to be known for creating opportunities for talented individuals in Silicon Valley.
  • Success also involves personal satisfaction from the process and relationships built, rather than just outcomes.

"We will have achieved our North Star, which is to be the place that's known to create the best opportunities for the most talented people in Silicon Valley."

Finn Barnes defines success for his firm as becoming a key player in the venture capital industry, recognized for its ability to attract and support top talent.

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