20VC Why Partners Are There To Save Each Other From Themselves, Why Effective Reserve Allocation Is The Hardest Question In Venture & What Makes The Truly Special Board Members with Jeff Fagnan, Founding Partner @ Accomplice

In a dynamic conversation on "The 20 Minute VC," host Harry Stebbings chats with Jeff Fagnan, founding partner at Accomplice, about the evolution of venture capital and Accomplice's unique approach to early-stage funding. Fagnan shares insights from his journey, emphasizing the importance of individual conviction in investments and the challenges of scaling a VC firm while maintaining a hands-on, entrepreneur-centric approach. He recounts missed opportunities, such as Dropbox, which shaped Accomplice's proactive investment strategy and commitment to supporting special founders. Fagnan also discusses the significance of building long-term relationships in the industry and how these connections can lead to successful partnerships and investments over time.

• Harry Stebbings introduces the 20 Minute VC podcast episode.
• Harry mentions his Instagram account for guest and question suggestions.
• He expresses excitement for the episode with Jeff Fagnan, founding partner at Accomplice.
• Accomplice is highlighted as a leading early-stage fund with a notable portfolio.
• Jeff Fagnan is recognized for his involvement from inception with most of his portfolio companies.
• Harry gives thanks to Fred Desta for introducing him to Jeff.

"Welcome back to another week on the 20 minutes vc with me, Harry Stebings it'd be great to see you on Instagram at htebings 1996 with two b's where you can both suggest guests and questions for future episodes."

This quote introduces the podcast and the host, Harry Stebbings, while also inviting listeners to engage with him on Instagram for future content suggestions.

• Accomplice is one of the East Coast's leading early-stage funds.
• The fund has been involved in building platforms like Spearhead, Maiden Lane, and Boston syndicates.
• Jeff Fagnan is a founding investor and sometimes co-founder of companies in his portfolio.
• He has sold one of his companies, Veracode, to CA Technologies.
• Jeff sits on the board of several companies, including AngelList and Pillpack.

"So I'm very excited to welcome Jeff Fagnan, founding partner at Accomplice, one of the East Coast's leading early stage funds with the portfolio including the likes of Angel List, Pillpack, recently acquired by Amazon, Freshbooks, Hopper, Secret Escapes, and many more incredible companies."

The quote introduces Jeff Fagnan and his venture fund, Accomplice, highlighting its significant investments and initiatives in the startup ecosystem.

• Harry Stebbings endorses The League, a dating app with high standards.
• He promotes Zoom for its video and web conferencing services.
• Culture Amp is recommended for its employee feedback collection and management platform.
• Harry notes the importance of company culture and employee engagement.

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This quote endorses Zoom as a comprehensive video and web conferencing service that Harry personally recommends.

• Jeff did not initially aspire to be a venture capitalist; he wanted to be an entrepreneur.
• He worked at Booz Allen and Hamilton and was involved in setting up Orbitz and an e-commerce project for General Motors.
• Jeff's former partner at Booz Allen invited him to join Softbank as an associate.
• Despite his reluctance, he joined Softbank in March 2000 and has been in venture capital since.

"I did not want to be a venture capitalist. I wanted to be an entrepreneur."

This quote captures Jeff's initial career aspirations and his unexpected path into venture capital.

• Jeff experienced the dot-com bubble shortly after joining venture capital.
• He attended three IPO parties in his first month but has not seen such activity since.
• The bubble's collapse and its impact on companies influenced Jeff's investment strategy.
• He values intellectual honesty and sustainable business practices.

"It fundamentally shaped my thinking."

Jeff reflects on how the dot-com bubble influenced his approach to venture capital and investment decisions.

• Jeff acknowledges differences between the current market and the dot-com bubble era.
• He is cautious about the behavior in the crypto market, which reminds him of past excesses.
• Despite setbacks, Jeff believes in the long-term viability of blockchain and distributed ledger technologies.
• He views the hype and reality cycles as healthy for the technology industry.

"I do think we're in a different shift, and I think that, look, there was a compute paradigm happening then. I think there's a couple of compute paradigms happening now."

Jeff suggests that the technological landscape has fundamentally changed since the dot-com bubble, with new compute paradigms emerging.

• Jeff's first VC experience was with seed capital Partners, a seed fund from Softbank.
• He learned the importance of creating deal flow and differentiating in the market.
• After leaving seed capital Partners, Jeff joined Atlas Venture, which later evolved into Accomplice.
• The transition from Atlas to Accomplice involved changing partnership dynamics and focusing on early-stage technology.

"So, Harry, I don't think you could shape that transition if you didn't look at my first venture capital experience, which was seed capital Partners, which was a seed fund that came out of Softbank."

Jeff emphasizes the significance of his initial experiences in venture capital, which laid the foundation for his future work with Atlas Venture and Accomplice.## Venture Capital Career Transition

• Jeff Fagnan was encouraged to pursue a venture capital career due to his potential in the field.
• He joined Atlas, which was a complex, billion-dollar, transatlantic fund.
• Atlas had offices across the globe and included both life science and tech investments.
• The partnership structure at Atlas was hierarchical and complex.

"A lot of people said, hey, Jeff, we think you could be interesting from a venture capital career perspective." "Atlas was an interesting animal. It was a billion-dollar fund. It was transatlantic." "The compensation and the decision making framework looked like a government chart of the matrix."

These quotes indicate the scale of Atlas and the opportunity it presented for Jeff, as well as the complexity of its internal structure. Jeff's potential in venture capital was recognized by peers, leading to his involvement with Atlas.

• Jeff's first deal at Atlas was with a cybersecurity company called Bit9, which later became Carbon Black.
• Bit9 was founded by two academics with a unique security paradigm modeled after the human immune system.
• The investment process at Atlas involved multiple partners from various global offices, and it appeared that not all were fully engaged or informed.

"My first deal at Atlas was a company called bit nine... It was a siege stage investment in two academics." "They had to present their ideas, which at the point, I think they had just put into a PowerPoint presentation maybe a day before."

These quotes describe Jeff's initial investment experience at Atlas, emphasizing the early stage of the company Bit9 and the unconventional approach to cybersecurity that the founders proposed.

• Atlas was perceived as strategically adrift and lacking a clear brand or investment focus.
• The firm had a reputation for engaging in average-quality deals.
• Jeff and a few partners sought to reform Atlas, requiring significant changes in strategy and leadership.

"We were strategically adrift. We didn't have a brand that you could actually say in one sentence." "A few zealots... just really said, hey, how do we start to change this?"

These quotes highlight the lack of strategic focus at Atlas and the desire among some partners, including Jeff, to initiate a transformation to improve the firm's direction and performance.

• Jeff's experience with Seed Capital Partners influenced his perspective on the need for change at Atlas.
• Despite struggling fundraises, LPs showed conviction in the firm's potential for transformation.
• The firm's survival was contingent on adapting to changes in the venture industry.

"If I had walked into Atlas without the seed capital experience, I probably would have been like, oh, let's go along." "We had to do something or we were not going to stay in business."

Jeff reflects on how prior experiences shaped his readiness to challenge the status quo at Atlas and the necessity for the firm to evolve to remain viable.

• Jeff's investment approach at Atlas and later at Accomplice was influenced by missed opportunities, such as not investing in Dropbox.
• Atlas implemented a policy allowing partners to write checks based on individual conviction.
• The firm shifted focus to early-stage investments, supporting first-time entrepreneurs and special individuals.

"Most likely this means I'm going to have to start drinking, because it was actually modeled after a couple huge misses from an Atlas perspective." "Any partner on their own conviction could write up to a million dollar check on meeting an entrepreneur."

These quotes reveal the motivation behind the strategic shift at Atlas and Accomplice, which was partly driven by past investment oversights. The new policy empowered partners to act on their conviction without consensus.

• Jeff believes in giving team members freedom to act on their convictions.
• A balance between trust in individual judgment and collective intervention is maintained to prevent excessive risk-taking.
• The culture at Accomplice encourages assertiveness, but repeated failures can lead to consequences.

"Partners are there to save each other from themselves." "If somebody is going to pound their fist on the table, they will get something done."

The quotes underscore the philosophy of empowering team members while also being prepared to intervene when necessary to ensure balanced decision-making.

• Reserve allocation is one of the most challenging aspects of venture capital.
• Accomplice's approach involves companies earning their next round of funding based on performance data.
• Initial seed investments are viewed as opportunities to gather data without automatic reserve allocation.

"How you do effective reserve titration and investment." "Every company needing to truly earn its next check and earn those reserves."

These quotes discuss the reserve allocation strategy at Accomplice, where the emphasis is on performance-based funding rather than automatic follow-on investments.## Lifecycle Investment Strategy

• Accomplice adopts a patient approach to investing, waiting for data and understanding of the working relationship before committing reserves.
• The fund aims to invest and raise $200 million every two and a half years, targeting a minimum fivefold return on each investment.
• They prioritize investments with more growth potential over those with higher valuations, avoiding forced ranking in the portfolio.
• The focus is on milestones and proving or disproving hypotheses with the invested capital rather than comparing companies at early stages.

"ut what it's like to work with this entrepreneur and then let's wait until we see the data, until we understand that working relationship and we're really making that a lifecycle investment."

This quote emphasizes the importance of understanding the entrepreneur and the business before making a significant investment decision, highlighting a lifecycle investment approach.

"So at that level, every check that we think about, we want to see at least a five x."

The quote outlines the fund's investment objective of seeking at least a fivefold return on each investment, indicating their performance benchmarks.

"I think forced ranking at an early stage portfolio is really dangerous."

This quote reflects the belief that early-stage companies should not be ranked against each other, as it can lead to poor investment decisions and misperceptions.

• Accomplice starts investments between $1 million and $2.5 million, referred to as "spears," representing high conviction bets.
• They track data to decide on follow-on investments, sometimes opting out when valuations become too high.
• The firm has shifted from being price-disciplined to being proactive with data and capital concentration, focusing on sub $50 million valuations for seed-led investments.
• The strategy includes preemptive funding rounds, concentrating capital without waiting for formal funding rounds if the deal is right.

"And then we're tracking data. And absolutely, we will see somebody come in and invest in one of our companies where we have a spear and they might put a valuation on it that is high, and we may decide that we're not going to follow on or try to compete at that valuation range."

This quote describes the firm's approach to follow-on investments, where they may opt out of additional funding if valuations exceed their comfort zone.

"Forget about whether around's happening or not. Let's just go see if there is a deal and a structure for the entrepreneur that makes sense and for us, that makes sense."

The quote reveals a shift in strategy towards proactive investments based on data and mutual benefit, rather than waiting for formal funding rounds.

• Accomplice expanded to the West Coast to improve deal execution and support for portfolio companies, maintaining a unified team approach despite geographical spread.
• The decision to expand was driven by the need for a local presence to better capitalize on opportunities and support companies in the region.
• The firm values camaraderie and peer-to-peer interactions, ensuring these dynamics are preserved even with the geographic expansion.

"We didn't go out to set up a west coast office or a west coast strategy."

This quote explains that the West Coast expansion was not about creating a separate strategy, but rather about enhancing the firm's overall capabilities.

"We really thought about it as one team, one unified strategy, doing investments everywhere but with people on the ground in San Francisco."

The quote highlights the firm's commitment to a unified strategy and team, regardless of location, ensuring consistent investment practices.

• Accomplice attracts talent by demonstrating a mission-driven philosophy, an entrepreneurial approach, and a service-oriented brand reputation among entrepreneurs.
• The firm's culture is characterized by energy, creativity, and a willingness to embrace unconventional methods, appealing to like-minded individuals.
• Personal stories, such as the recruitment of Sam Clements, illustrate the firm's unique approach to attracting talent and building its team.

"And he's like, you're entrepreneurial, and you're thinking, you're trying different things. He's like, you're company. Like, you guys aren't just sitting around looking at spreadsheets."

This quote captures the entrepreneurial spirit and dynamic culture of Accomplice, which is a key factor in attracting top talent.

"Our brand is built by the entrepreneurs where we're serving them."

The quote underscores the firm's commitment to serving entrepreneurs, which is central to its brand identity and success in attracting competitive deals.

• Jeff Fagnan shares personal preferences and insights, such as his favorite book, which reflects on self-exploration and facing one's demons.
• Fagnan's biggest challenges include finding the right professional balance and maintaining accessibility to entrepreneurs.

"My favorite book is Marie Sendak, where the wild things are. And I like it because it's all about embracing who you are."

This quote reveals Fagnan's appreciation for self-awareness and authenticity, values that likely influence his professional approach.

"How to achieve the right balance at this part of my professional life."

The quote indicates that Fagnan is focused on achieving a sustainable work-life balance while remaining committed to his professional responsibilities.## Balancing Proactivity and Reactivity

• Jeff Fagnan discusses the challenge of balancing proactive and reactive work.
• Being proactive involves chasing down investment theses, while being reactive is dealing with incoming emails and requests.
• Jeff expresses a desire to return to proactive thinking and work.

"I used to have very proactive thinking around kind of different investment thesis... And I find myself being too reactive versus proactive today because reactive is you've got this email inbox, you've got people coming in, everything like that."

This quote highlights Jeff's struggle with the shift from proactive to reactive work due to the demands of his inbox and incoming communications, which diverts attention from pursuing strategic investment opportunities.

• Venture capital may not be inherently scalable, presenting a challenge to Jeff and his team.
• Accomplice focuses on building companies from the ground up, starting with small investments and increasing them as companies succeed.
• Jeff is exploring ways to scale, including hiring, building an organization, and establishing a West Coast office.
• He teaches 'jump school' to distill 18 years of investment experience into teachable lessons and case studies.

"It's not clear that venture capital is a real scalable approach... we're trying to do things more of a player coach. I actually am teaching something every Monday internally here called jump school..."

Jeff reflects on the non-scalable nature of venture capital and how he's addressing it through internal education and mentorship, sharing his extensive experience with others at Accomplice.

• Jeff Fagnan values empathy, altitude (judgment), and responsiveness in board members.
• He believes that seed stage companies should not have boards to avoid misdirection.
• He cites Court Cunningham as an exemplary board member due to his analytical skills, entrepreneurial background, and availability.

"Empathy, but altitude and then responsiveness... The best board member I've ever worked with is court Cunningham from inside squared."

Jeff outlines the traits of an ideal board member and provides a specific example of Court Cunningham, who exemplifies these qualities through his deep analytical approach and empathetic understanding of startups.

• Jeff appreciates Fred Desta's fear of failure, work ethic, and unique deal flow.
• Fred's ability to identify promising investments and have conviction is valued.
• However, Fred's tendency to operate independently can reinforce Jeff's own lone wolf behavior, highlighting a need for balance between individual conviction and team collaboration.

"Fred has a fear of failure, just like myself... And Fred then had really interesting stock picking ability... I think the con was fred can operate as a lone wolf..."

Jeff discusses the advantages and disadvantages of working with Fred Desta, noting Fred's strong work ethic and investment instincts but also the challenge of excessive independence in a partnership that requires collaboration.

• Jeff's most recent investment, Perch Homes, was with Court Cunningham, whom he has known for over ten years.
• He emphasizes the importance of long-term relationships and trust in the venture capital industry.
• The time lag in business requires patience and the understanding that today's efforts contribute to future success.

"My most recent investment is a company called Perch Homes... I've known court for over ten years... You have to do so much in building of relationships... that actually result in an investment."

Jeff's quote underscores the significance of enduring relationships in making investment decisions and the long-term nature of venture capital, where investments are often the culmination of a decade or more of relationship-building.

• Patience is key in the venture capital industry, as highlighted by Jeff's conversation with Patrick Morley from Carbon Black.
• The journey of venture capital is described as an "epic, arduous voyage" that requires a lot of trust in people.

"These are epic, arduous voyages where you have a lot of trust in people."

Jeff concludes by emphasizing the lengthy and challenging nature of the venture capital journey, which is built on trust and requires patience and resilience.