20VC Using Valuation As A Litmus Test, Why Valuation Does Not Matter At Seed Stage & How Seed Funds Can Serve Founders Better with Kent Goldman, Founder @ Upside Partnership

In this episode of the 20 minutes VC, host Harry Stebbings interviews Kent Goldman, founder of Upside Partnership, a leading seed stage investment firm. Goldman, previously a partner at First Round Capital and an early team member at Yahoo, shares his journey into venture capital and the philosophy behind starting Upside Partnership. He discusses the importance of aligning with founders, the strategic approach to seed-stage investing, and the innovative model of making founders partners in the fund. Goldman also emphasizes the significance of patient capital and the value of LPs who understand the long gestation period of seed-stage companies. The conversation touches on investment decision-making, the importance of team over product or market at the seed stage, and maintaining a deliberately small fund size to stay closely connected with portfolio companies and provide meaningful support.

• Harry Stebings introduces the podcast episode and his guest, Kent Goldman.
• Kent Goldman is the founder of Upside Partnership, a seed stage investment firm.
• Kent was previously a partner at First Round Capital and has a background at Yahoo.
• Pearl Rear Vision is advertised as a product that offers advanced automotive technology.

Welcome back to the 20 minutes vc with your host Harry Stebings at hstebings on Snapchat. Or for some hopefully more thoughtful and academic thoughts, you can find me on the appropriately named mojitovc.com. I hope you've had a fantastic Christmas with far too much food and booze. I know I have. But back to business today. And as I always say, venture capital sleeps for no man or woman. And I'm delighted to welcome today's guest to the show today. So joining us in the hot seat, we have Kent Gold one now. Kent is the founder at Upside Partnership, one of the leading seed stage investment firms in San Francisco with investments in the likes of Laurel and Wolf Digit and Lily, just to name a few. And in 2015 he was named to the Midas Brinklist. And prior to forming upside partnership in 2014, Kent was a partner at the prestigious seed stage investment pioneer First Round Capital. While there, he led investments in companies including Airwear, Hotel Tonight and MemsqL. He also served on the board of Mashery, which was acquired by intel. And earlier in his career, Kent was a member of Yahoo's corporate development team and also led business strategy for Yahoo products, generating $1 billion in annual revenue.

Harry Stebings introduces the guest, Kent Goldman, highlighting his current role at Upside Partnership and his previous experience in venture capital and at Yahoo.

• Kent Goldman discusses his transition into venture capital.
• He was working at Yahoo when Microsoft attempted a hostile takeover.
• Facebook Beacon inadvertently associated Kent with a First Round Capital ad seeking Yahoo employees for startups.
• This led to a dialogue with Josh Kopelman of First Round Capital, culminating in Kent joining the firm.

Sean Flynn, who connected the two of us. He and I shared a cube wall at Yahoo for many, many years. And while I was there, early 2008, Microsoft launched hostile takeover attempt of the company. And this was also sort of right around the time that there's this thing called Facebook Beacon, where if you had liked a brand or a company, that meant they could use your profile picture and any ads they ran. The intent being, if you liked Nike sneakers, Nike could show an ad to all of your friends. Kent likes Nike sneakers. Maybe you should try them too. And given the work I was doing at Yahoo at the time, I had sort of gone around and sort of liked every venture capital fund that I knew that had a presence on Facebook. And one of those was first round capital. So early one morning, I get a call from some friends on the east coast. Oh, my God. Have you seen the news? Microsoft is trying to take over Yahoo. I sort of roll out of bed at four in the morning, five in the morning, drive right to the office and sit there dazed and confused, just as many other people sort of at my level were. And throughout the day, I was just getting these messages from colleagues that said, I can't believe you. You're such an asshole. Fuck you. And I was sort of taken aback, and I didn't understand where the vitriol was coming from.

Kent describes the circumstances that led to his venture capital career, which began with an unexpected association with a First Round Capital advertisement due to Facebook Beacon's advertising mechanism.

• The seed investment landscape evolved significantly from 2008 to 2014.
• Kent observed new firms emulating established players' strategies.
• He contemplated how he might disrupt the status quo if starting a fund himself.
• This reflection led to the creation of Upside Partnership.

Well, there are a couple of things. One is, from eight to 2014, when I left, the seed world changed a lot, and I had sort of, like, been there in the earliest, sort of formational days, and sort of as groups like first round and baseline soft tech, floodgate, had Harrison Metal had success, other firms sort of began coming in. And I often sort of felt I would ask myself, as I saw new firms start, okay, if I were starting a fund now, how would I disrupt the established players? And increasingly, I kind of felt that people were sort of following the exact path that we had laid, where they would start with a small fund and then they would try to grow it to be a little bit larger and become a lead investor, or sort of, in the case of first round, which is, I think, sort of really better than anyone else in the venture universe, sort of pioneered the idea of. Of sort building a platform for their founders. You

Kent Goldman explains his motivation for starting Upside Partnership, influenced by the changing dynamics of the seed investment world and his desire to innovate within the industry.## Venture Capital Landscape

• Venture capital firms are expanding their platforms, but Harry Stebings believes Firstone has a superior approach.
• There is an opportunity to create and maintain a smaller fund that can operate differently from larger funds.
• Smaller funds can participate in early-stage funding, similar to friends and family rounds, which larger funds are less able to do.
• By not needing to lead rounds, smaller funds can avoid direct competition with larger funds and focus on providing value.

"I would hear firms talking about, we're going to have a platform, too. And I sort of had this feeling that Firstone was always going to have that side of the business done better than anyone else." Harry Stebings expresses confidence in Firstone's platform strategy, suggesting it will outperform other firms attempting similar approaches.

"There's this incredible opportunity to sort of build a smaller fund and keep it small." Harry Stebings identifies a gap in the market for a smaller, more agile fund that can operate differently from the larger entities.

• Being deliberately small allows a fund to focus on early-stage investments, where there is less competition.
• Smaller funds can provide significant value without leading investment rounds.
• A smaller fund size makes it easier to return capital to investors.

"I don't have a fund that forces me to write lead size checks. I can write smaller checks and instead focus on sort of punching above my weight in terms of the value we can bring to an investor." Harry Stebings discusses the strategic advantage of a smaller fund that can invest without the pressure of leading rounds and focus on adding value.

• A significant portion of the fund is allocated for follow-on investments to support successful portfolio companies through various funding stages.
• By pacing investments through each stage of a company's growth, the fund can allocate capital in a success-adjusted manner.
• The best due diligence can sometimes come from working with a company over time and getting to know the market and people involved.

"We actually have a large portion of the fund set aside for follow on investments." Kent Goldman reveals that a substantial part of their fund is reserved for follow-on investments, allowing for continued support of successful companies.

"If you can sort of pace putting in your dollars as they sort of clear through those stages, you can help make sure that your dollars increasingly are put to work in a success adjusted manner." Kent Goldman explains the strategy of pacing investments to align with a company's growth stages, optimizing for successful outcomes.

• The cultural foundation of First Round was about serving founders better at the earliest, most challenging stages.
• First Round emphasized innovation in the venture model, questioning established practices and seeking better ways to support founders.
• Upside Fund was inspired to innovate by creating a cohesive group of founders who are partners in the fund, fostering mutual support and stronger relationships.

"What I think first round really focused in on is they kept saying, what can we do to innovate?" Kent Goldman reflects on First Round's drive to innovate within the venture capital industry, which influenced his approach with Upside Fund.

• Upside Fund's successful fundraising is partly credited to the reputation and oversubscription of First Round and similar funds.
• Traditional LPs were interested in Upside Fund as a proxy for established, experienced funds.
• Upside Fund's innovative structure, which includes making founders partners in the fund, was part of the fundraising narrative.

"I want to sort of make sure that I acknowledge the fact that I benefited from the standpoint of having come from a peer group that was hard for a lot of new investors to the seed class to get involved with." Kent Goldman acknowledges the advantage of his association with First Round, which helped in fundraising for Upside Fund.

"I want to try this innovative structure of making founders partners in the fund." Kent Goldman discusses the unique approach of Upside Fund, which involves founders being partners in the fund, as a selling point to LPs.## Expression of Culture and Innovation in Fund Management

• Fund managers signal their willingness to innovate and express their fund's culture through their actions.
• Being innovative can involve setting aside some economic benefits in the short term for long-term success.
• Fund managers may give away certain advantages to demonstrate their commitment to shared success and values.

"It's a signal to them that you're willing to try different things and you're willing to innovate. It's really sort of an expression of the culture you want to build and sort of that you're willing to be innovative."

This quote emphasizes the importance of signaling a willingness to innovate to stakeholders, which reflects the culture a fund manager wants to build and their readiness to embrace new approaches.

• Not all LP money is considered equal due to the strategic value some LPs can provide.
• High-quality LPs are patient and understand the asset class, which is crucial for seed-stage companies that require time to grow and return capital.
• LPs can offer valuable market feedback and insights that aid in the investment process.

"I think having the backing of people who really sort of understand the asset class is incredibly important."

Kent Goldman highlights the importance of having LPs who understand the asset class, as their patience and knowledge contribute significantly to the success of seed-stage companies.

• Kent Goldman invests $300k at a time, which raises questions about the role of valuation in his investment decisions.
• At the seed stage, valuation is less of a concern compared to later stages, like Series A and B.
• Valuation at the seed stage can serve as a litmus test for an investor's belief in a company's potential.

"If you think this is going to be a billion dollar company, is that really going to be the reason you let it get away?"

Kent Goldman challenges the focus on valuation at the seed stage, suggesting that if an investor truly believes in a company's potential, the initial valuation should not be a deal-breaker.

• Dilution is managed through founder alignment and becoming trusted advisors rather than solely relying on contractual rights.
• Being the first institutional investor to commit often creates a strong bond with founders, which helps in maintaining pro rata rights.
• Dilution concerns are more about valuation escalation without commensurate risk mitigation rather than the inability to maintain ownership percentages.

"So I worry about dilution. I worry about valuations escalating sort of more quickly than I've been able to sort of gather new facts to sort of understand and see whether or not the company has sort of like appropriately mitigated risks along the way."

Kent Goldman expresses his concerns about dilution and the rapid escalation of valuations, emphasizing the need to understand and evaluate whether a company has appropriately mitigated risks as it grows.

• The transition from a larger firm to operating independently has led to a more disciplined investment decision-making process.
• An investment decision checklist is used to ensure the right due diligence process is followed.
• The checklist is broken down into segments such as market, product, team, and risks, as well as a separate section for follow-on investments.

"It's not about sort of the metrics the company needs to show in order for me to sort of make an investment. But it's sort of like, have I followed the right process around making that decision?"

Kent Goldman reflects on the importance of having a structured process for making investment decisions, focusing on due diligence rather than just company metrics. This disciplined approach is crucial for independent operation.## Team Prioritization in Investment

• Kent Goldman emphasizes starting with the team when considering investments.
• He believes it's hard to be thematic at the seed stage.
• Identifying a theme at the seed stage might be too late.
• He looks for experts or those who have considered a problem long before it becomes widely recognized.
• The market potential is also assessed, but less heavily than the team.
• Product is the last consideration, as it reflects the team's thinking rather than being the investment focus.

"I always start with the team. I mean, upside is not a thematic investor." "Product is probably the last thing I worry about when I think about product, especially at the seed stage, or what the early vision of a product is."

These quotes underline the importance Kent places on the team when making investment decisions, and his view that product vision at the seed stage is less about the product itself and more about understanding the team's approach.

• Taking the first step is the biggest challenge in establishing Upside.
• Kent knew starting Upside would be risky but found it fulfilling.
• The first step involved a conversation with partners at First Round.
• After beginning, other pieces started falling into place.

"Just doing it. I think any founder will tell you when they start companies, they go into them knowing full well the risks ahead, and that was certainly the case with upside."

This quote emphasizes the decisive moment of initiating the establishment of Upside, acknowledging the inherent risks and the importance of taking action.

• Kent's favorite book is "A River Runs Through It" by Norman Maclean.
• The book is cherished for its language, messages, and personal connection to Kent's father.
• The physical copy he possesses has sentimental value due to his father's notes.

"Why a river runs through it by Norman McLean. Only about 100 pages... And then I also just love it because I have a physical copy of it that was my dad's."

The quote reveals Kent's personal attachment to "A River Runs Through It," highlighting both the book's literary qualities and its emotional significance.

• The vision for Upside is to remain a small fund.
• The second fund raised was $44 million.
• Upside may include additional GPs in the future.
• The focus is on maintaining the ability to offer great advice and collaborate well with other funds.

"The vision is for it to sort of continue to be a small fund somewhere where it is now."

This quote outlines Kent's vision for Upside, emphasizing a desire to maintain a small fund size that allows for effective support and collaboration.

• Kent drops everything to read Howard Marks' new quarterly letter.
• He enjoys reading Edge for long-term think pieces on the future and technology.
• These readings provide insights into market trends and investment strategies.

"Whenever Howard marks from Oaktree Capital publishes a new quarterly letter, I drop whatever I'm doing."

This quote indicates the high value Kent places on the insights provided by Howard Marks and his interest in deep, thoughtful analyses of technology and the future.

• Kent's most recent public investment is in Live Neighborly.
• The company was founded by Jonathan Kabira, a former Google Shopping Express team member.
• Live Neighborly addresses physical routing challenges, which Jonathan Kabira became passionate about.

"It's a company called Live Neighborly, which is founded by a fellow named Jonathan Kabira."

The quote highlights the recent investment in Live Neighborly and provides a brief background on the founder and his expertise, which aligns with Kent's investment philosophy of focusing on the team.

• Kent appreciates the opportunity to share his journey with Upside.
• Harry Stebings expresses gratitude for Kent's support and contributions to the show.
• Sean Flyn at Shasta is thanked for making the show possible.
• Harry promotes his Snapchat and website for further engagement.

"Thank you. Appreciate you having me."

This quote is Kent's expression of gratitude for being featured on the show, reflecting his appreciation for the platform to discuss his work and vision.