20VC Why Investors Have The Biggest Problem with Bias, Why Our Job Is To Maximise Risk & Why It Is Essential To Get Good at Losing with True Ventures Founder, Jon Callaghan

Summary Notes


In a conversation with Harry Stebbings on "The Twenty Minute VC," John Callaghan, co-founder of True Ventures, shares his journey from entrepreneur to venture capitalist. With a career that began with founding Mountain Bike Outfitters Inc. in 1986, Callaghan transitioned into VC, starting at Summit Partners and eventually co-founding True Ventures. He emphasizes the importance of early-stage VC firms empowering and aligning with founders, enabling them to take bold risks without fear of failure. Callaghan advocates for a reimagined approach to startup board meetings, focusing on strategic support over mere reporting. His recent investment in Brava, led by John Pleasance, underscores his belief in backing strong teams in emerging markets. True Ventures, known for early investments in companies like Fitbit, Peloton, and WordPress, continues to prioritize creative founders and transformative ideas.

Summary Notes

Introduction to True Ventures and John Callaghan

  • True Ventures is a leading early-stage franchise in Silicon Valley.
  • Phil Black, the co-founder of True Ventures, was featured in a previous episode.
  • John Callaghan, the other co-founder of True Ventures, has a successful career in venture since 1991.
  • John has led deals and sits on the boards of companies like Fitbit, Brightroll, and Peloton.
  • Prior to True Ventures, John founded three companies and held roles at Summit Partners, AOL's venture incubator, CMGI's venture group, and Globespan Capital.
  • Tony Conrad, John's partner at True Ventures, facilitated the introduction for this podcast episode.

"We are back on the 20 minutes VC with your host Harry Stebings at h stepbings with two B's on Snapchat for part two of this very special feature of True Ventures, one of Silicon Valley's leading early stage franchises." "With True Ventures cofounder Phil Black, then that really is a must, because today we're joined by Phil's other half, his cofounder at True, John Callahan." "John has enjoyed an incredible career in venture since 1991, and at True, John has led the deal and sits on the board of Fitbit, Brightroll and Peloton."

These quotes introduce True Ventures, its significance in the venture capital landscape, and John Callaghan's role and achievements within the company.

John Callaghan's Entrepreneurial and VC Journey

  • John started his first company at the age of 18 in the mountain bike industry.
  • He became an entrepreneur before fully understanding what it entailed and learned significantly from his experiences.
  • After college, a friend introduced him to venture capital, which led to his entry into the industry in 1991 with Summit Partners.
  • John's career is a blend of entrepreneurship and investment experience.
  • He emphasizes the blend of being a founder and having operational experience as formative for his approach at True Ventures.

"I've started three companies as a founder throughout my career, the first of which when I was 18." "So I became an entrepreneur before I really could even define necessarily [...] I started a business that I owned for eight years and ran directly for really about four of those and learned more from the ages of 18 to my mid 20s than ever learned or learned a lot of the important things, I guess I should say, from being an entrepreneur." "So in 1991, I joined what was then a very young and small firm called Summit Partners and learned the industry from some of truly the best."

These quotes detail John Callaghan's early entrepreneurial ventures and his transition into venture capital, highlighting the foundational experiences that shaped his perspective in the VC industry.

True Ventures' Philosophy and Founder Alignment

  • True Ventures was named to signify alignment with entrepreneurs.
  • The firm aims to support and empower creative founders and their teams who are seen as underserved in the industry.
  • True Ventures believes in the importance of the entrepreneurial mindset for early-stage investors.
  • The firm's investment allocation process and operations are designed to support founders from day one.
  • True Ventures' core principle is to align fully with the founder and their teams.

"We started true, and we actually named the firm true because we thought that entrepreneurs deserved a better, more aligned partner in their cap table and better, more aligned partner on their board." "We think the entrepreneurial mindset, and also, as Tony would say, the sort of founder mindset is essential to your role as an early stage investor." "So it's powerful."

These quotes explain the ethos behind True Ventures and how they strive to be fully aligned with the founders they invest in, emphasizing the importance of the entrepreneurial mindset in their investment philosophy.

Empowering Risk and Embracing Failure

  • John Callaghan believes that a founder's time is more valuable than any amount of capital.
  • True Ventures encourages founders to try big things and not fear failure.
  • Empowering risk and embracing failure is seen as essential for innovation and progress in society.
  • The firm supports founders in their bold endeavors and ensures they feel secure in taking risks.

"So the way we think about it, again, if you think that the creative founder is our society's most precious resource, which I do, and we as a firm believe that, then their time, the founder's time, is worth way more than all of the capital we have at true." "We want to try big things. We want to be out in the frontier, and we want to empower those founders to try big things and not worry about failing."

These quotes capture the essence of True Ventures' approach to risk and failure, positioning founders as the most precious resource in society and encouraging them to pursue ambitious and innovative projects without the fear of failure.## Investment Philosophy and Approach

  • True Ventures operates with a mindset that emphasizes learning and market discovery over immediate correctness in initial investments.
  • The firm's initial investment is typically between $1 million and $3 million, which is less than 1% of their $300 million fund.
  • Entrepreneurs are encouraged to use the initial investment to aggressively explore market potential rather than conserving funds.
  • True Ventures has a significant capital reserve to support companies over the long term, with an additional $297 million available.
  • The firm aims to empower creative individuals to build and launch products and understand customer feedback to assess market size and potential.
  • Venture capital is seen as the sector of the capital markets where risk should be maximized to seek out unconstrained upside opportunities.

"So our initial check is less than 1% of the fund. And every time we write a check to a seed founder, we, of course, are fully bought in."

This quote emphasizes True Ventures' commitment to their investments and their philosophy of empowering entrepreneurs to explore and learn rather than focusing on immediate returns.

Loss Aversion in Venture Capital

  • Loss aversion is identified as a significant bias and constraint in the venture capital industry.
  • The firm recognizes that early-stage entrepreneurs value their time highly and are focused on whether their idea is worth years of their life.
  • True Ventures encourages a mindset of learning and discovery in the initial investment phase, not insisting on being right from the outset.
  • Maximizing risk is considered the primary role of venture capital, which is communicated to both Limited Partners (LPs) and founders.

"The biggest bias is loss aversion. So it's very common. And for any investor to write a check and then begin worrying about losing it."

This quote highlights the prevalent issue of loss aversion in venture capital and how it can negatively impact the entrepreneurial process.

LP Community's Reaction to Risk Maximization

  • The LP community sometimes reacts provocatively when presented with True Ventures' strategy of maximizing risk.
  • True Ventures explains their strategy in detail to LPs, highlighting their asset allocation, fund size, and the experienced entrepreneurial team.
  • The firm's track record of being early in large markets with successful companies like Makerbot, Fitbit, WordPress, and Peloton is used to validate their approach.

"I think it's not meant to be provocative, but sometimes it does provoke reaction."

This quote indicates that while the firm's approach to maximizing risk is not intended to be controversial, it can sometimes elicit strong responses from the LP community.

Reserve Capital Allocation and Investment Strategy

  • True Ventures acknowledges that venture capital involves a high rate of loss and emphasizes the importance of becoming comfortable with losing.
  • The firm's strategy involves dreaming and envisioning potential during the initial investment, followed by data-driven decisions for subsequent investments.
  • Expectations for initial investments are clear: build and launch a product, recruit a team, and establish a durable culture.
  • Open communication and setting clear expectations are key to True Ventures' investment strategy, differing from the industry norm of secrecy regarding further investment intentions.
  • The structure of True Ventures' funds is designed to allocate reserve capital in various situations, from early successes to additional funding rounds.

"The dirty little secret of venture capital is half the time we lose, more than half the time."

This quote candidly acknowledges the high risk of failure in venture capital, which is an integral part of True Ventures' investment philosophy and approach to managing expectations and reserve capital allocation.## Venture Capital Investment Strategies

  • Venture capital firms can deploy significant capital into early, unexpected successes.
  • Large funds allow for follow-on investments, sometimes reaching $15-$20 million into a company.
  • There are select funds designed for additional reserve capital for companies that need it.
  • Investing additional capital in early-stage companies with low burn rates is relatively easy.
  • The industry problem of "good money after bad" is often due to biases like endowment bias and loss aversion bias.
  • Traditional venture capital firms often have individual attribution which can lead to these biases.
  • In some venture capital models, compensation is not tied to individual deals, reducing biases.

We can jump forward and deploy significant amounts of capital into early, unexpected success.

This quote emphasizes the ability of venture capital firms to invest heavily in companies showing early promise.

The funds are large enough to support 15, $20 million into a company.

This quote indicates the scale of investment that the funds are capable of making in a single company.

For us to invest incrementally, to see more cards for the founders and their team, that's actually pretty easy to do.

This quote suggests that it is straightforward for the firm to make incremental investments in early-stage companies to support their growth.

Our incentives are not designed on an individual basis. We have no attribution for one.

This quote points out that the firm's incentive structure is not based on individual performance, which is different from many other venture capital firms.

Venture Capital Firm Culture and Behavior

  • The firm's culture avoids traditional behaviors like ownership of relationships and individual deal attribution.
  • Founders have access to the entire team rather than a single point person.
  • The compensation structure is designed to support founders and the team as a whole.
  • The firm's initial investment decision process avoids forcing partners to aggressively defend their positions.
  • A collaborative approach is believed to help handle the full spectrum of outcomes, from success to failure.
  • The firm aims to support founders through their entire journey, including critical "kill the company" moments.
  • Venture capitalists should not be nervous or loss averse but should be fully supportive in any situation.

No one's worried about their own track record. No one's worried about that. It's all about how we support our founders across the entire team.

This quote reflects the firm's team-oriented culture where individual track records are not the focus, but rather the collective support for founders.

We succeed when our founders succeed, no matter who's on the watch kind of thing.

This quote emphasizes the firm's success is directly tied to the success of the founders they invest in, regardless of which partner is responsible.

You've got to have a fully in any situation. Exactly right. How are you helping?

This quote highlights the need for venture capitalists to be fully engaged and helpful in any situation that arises with their portfolio companies.

Evolution of Board Meeting Practices

  • Traditional board meetings often do not serve early-stage startups well.
  • Board meetings should focus more on strategy and leadership, rather than just reporting.
  • Early-stage boards should empower, protect, and remove obstacles for the CEO and team.
  • The role of reporting is smaller for early-stage companies as investors should already be close to the company's objectives.
  • Board meetings should be a safe space for founders to share concerns and issues.
  • The structure and responsibilities of board meetings evolve as the company grows.
  • Board meetings should be engaging, focusing on critical issues rather than reading from slides or documents.

I am wildly passionate about board meetings, about startup board meetings, constructing startup board meetings to better serve the CEO founder CEO, but also better serve the management team and better serve the strategy of the company.

This quote shows the speaker's passion for optimizing board meetings to support the startup's leadership and strategy effectively.

Board meetings in later companies are designed to report the progress of the management team to effectively the shareholders.

This quote explains the traditional purpose of board meetings in more established companies, which may not be suitable for early-stage startups.

We're here to pick the one thing that's important to you and that you're worried about and talk it through.

This quote suggests that board meetings should focus on the most pressing issues for the founder, creating a supportive and problem-solving environment.

Those people on your board, they're part of your team, put them to work, engage them in the real issue of the company.

This quote advocates for utilizing the board as an active part of the startup's team, challenging them to contribute to solving the company's most significant challenges.## Role of the Board in Early Stage Companies

  • Harry Stebbings emphasizes the importance of the board in early-stage companies.
  • Boards should be supportive and avoid causing harm or distraction.
  • Granting stock options and reviewing minutes are considered trivial tasks for a board.
  • The board's role is to provide a high-level perspective while being aligned with the founder's goals.

"So these are the kinds of things that your board should be great at. Granting stock options, reviewing minutes. Trivial. Like 100% trivial, let's face it."

This quote underscores the speaker's view that the board should focus on more significant issues than routine administrative tasks, which are seen as trivial.

"Boards can hurt a lot."

This quote indicates that boards have the potential to negatively impact a company, especially if they are not supportive or if they cause distractions.

Impact of Boards on Companies

  • John Callaghan believes that distraction is the most common way boards hurt early-stage companies.
  • Boards should support and empower founders rather than distract them with issues not immediately relevant to the company's current focus.
  • Board members should offer practical support aligned with the founder's objectives.

"I think it's distraction in the early stage."

This quote identifies distraction as a primary negative impact that boards can have on early-stage companies.

"The founder can go back and say, that's the last thing I want to think about is how AI impacts my business."

This quote illustrates how a board's high-level concerns can be a distraction if they are not aligned with the immediate priorities of the founder and the company.

Personal Preferences and Insights

  • John Callaghan shares his favorite book, "Moby Dick," and draws parallels between the book's themes and the venture capital industry.
  • He suggests that venture capitalists should be willing to take risks and embrace ambiguity.
  • Callaghan believes that the most overhyped and underhyped space is AI, while robotics, particularly industrial robotics, is not receiving enough attention.

"For sure, for what we do, you just can't beat Moby Dick."

This quote reveals John Callaghan's admiration for "Moby Dick" and its metaphorical significance to the venture capital industry.

"Our business is about being comfortable with massive amounts of ambiguity and risk."

This quote reflects Callaghan's philosophy on the venture capital industry and the importance of embracing risk and uncertainty.

Venture Capital Perspectives

  • Callaghan advises his younger self to take more risks and have more conviction.
  • He emphasizes the importance of investing in great people and markets.
  • Brava, an investment in a home technology company led by John Pleasance, is highlighted as an example of investing behind great talent.

"Be more bold."

This quote is a piece of advice Callaghan would give to his younger self, emphasizing the need for boldness in venture capital.

"Investing behind great people in great markets."

This quote encapsulates Callaghan's investment strategy, which focuses on the people and the market potential.

Resources and Recommendations

  • John Callaghan recommends the newsletters "Next Draft" and Jason Hirschhorn's "REDEF" as must-reads.
  • Harry Stebbings promotes Pendo, a product experience platform, and Treehouse, an online coding school.

"Voracious readers of everything they do."

This quote indicates John Callaghan's high regard for the content provided by "Next Draft" and Jason Hirschhorn.

"Learn how to build websites and apps."

This quote from Harry Stebbings is about Treehouse, encouraging people to learn coding and app development through their platform.

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