20VC Why Portfolio Construction Is Inefficient, Why The Only Thing That Matters In Venture Is Pricing & The Future of Venture; Bundled or Unbundled with Zach Coelius

In this episode of "20 Minutes VC," host Harry Stebbings interviews Zach Coelius, managing partner at Coelius Capital, an eclectic investor with a preference for early-stage startups. Coelius shares his journey from CEO of Triggit, an ad tech company acquired in 2015, to becoming an influential investor with a portfolio including mParticle, Cruise Automation, and Branch Metrics. He emphasizes the importance of product-market fit, the inefficiencies of consensus-driven VC decision-making, and the value of being an insider with legal inside information. Coelius criticizes the venture industry's traditional approach to portfolio construction and highlights the benefits of flexibility in check size and stage. He also notes the potential pitfalls when VC funds disrupt pro rata rights and underscores the importance of price sensitivity in investments. The conversation touches on the challenges of entrepreneurship, the role of hustle in building significant businesses, and the dynamic nature of the support founders need.

• Zach Coelius is a managing partner at Coelius Capital.
• Known for his eclectic investment portfolio.
• Has invested in companies like mParticle, Cruise Automation, Branch Metrics, Skysafe, ProsperWorks, and others.
• Advised companies including Liveramp, HelloSign, Art 19, Loom AI, and Startgrid.
• Former CEO of Trigit, an online ad tech company, which raised over $18 million and was acquired in 2015.
• Senior advisor to McKinsey & Company.

"To date, Zack's made investments in the likes of mparticle, Cruise Automation, branch metrics, Skysafe, Prosperworks and more. In addition, Zack is or has been an advisor to Liveramp, hello, Sign, Art 19, Loom AI, and Startgrid, just to name a few."

The quote highlights the extensive investment portfolio and advisory roles Zach Coelius holds, showcasing his experience and influence in the tech industry.

• Transitioned from being an entrepreneur to an investor after selling his company in 2015.
• Began advising and helping companies like Branch Metrics with fundraising.
• Utilized AngelList's syndicate product to raise a $200k allocation for Branch Metrics, marking his entry into investing.
• Made successful investments in companies like OneSignal and Cruise Automation.
• Attributes some of his investment success to luck and being at the right time and place.

"And so that year, while I sort of tried to regather myself and figure out what and who I am, I spent a lot of time looking at other companies and so got lucky to invest."

The quote reflects Zach's humble perspective on his transition from entrepreneurship to investing, emphasizing the role of luck and timing in his early investment success.

• Ad tech is a challenging industry that provides a strong learning environment for entrepreneurs.
• Importance of differentiation and the ability to articulate the unique value proposition succinctly.
• Ad tech experience reinforced the need for clear product-market fit and differentiation in startups.
• Seeks these qualities in companies he chooses to invest in.

"I would say pretty much every lesson I've learned as an entrepreneur was reinforced and reinforced and reinforced in adtech, for instance, differentiation is key."

This quote underscores the lesson of the necessity for clear differentiation in startups, a principle derived from Zach's ad tech experience that he applies to his investment strategy.

• Zach Coelius never considered himself an angel investor since he has always managed other people's money.
• He has become more cautious with investments over time due to the responsibility of managing a significant amount of assets under management (AUM).
• Reflects on the potential difference in investment approach if using personal funds versus others'.

"I never was angel. I never invested my own money. And so I don't know."

The quote shows Zach's distinction between his own investment approach and that of a traditional angel investor, highlighting his focus on managing external capital rather than personal funds.

• Credits AngelList with significantly aiding his investment career.
• Loyalty to the platform and the community of backers who participate in deals with him.
• Backers provide feedback, prevent mistakes, offer deal flow, and assist with due diligence.
• Describes the support from AngelList backers as a "superpower" for an investor.

"Yeah, so angelist basically made my career and I have just a tremendous amount of loyalty not only to the platform, but probably more importantly to the individuals, what angels calls the backers that are on the platform."

This quote expresses gratitude for how AngelList and its community of backers have been instrumental in Zach's success as an investor, providing a network of support and resources.## Diverse Investor Profiles

• Zach Coelius describes the varied backgrounds of the individuals who invest in his deals, which include a private equity firm owner with companies generating $5 billion a year, senior executives from major Silicon Valley companies, and others who are not traditional insiders but bring significant value.
• Investors in Zach's deals derive joy from participating in the startup ecosystem, sometimes valuing the experience more than the financial returns.
• There is a strong sense of partnership among these investors who are actively engaging in the startup world.

"There's a guy in there who runs private equity firm whose owned companies generate $5 billion a year and he sits there and plucks $10,000 checks into my deals just because I think he enjoys the weird space that we play in."

This quote illustrates the diversity and enthusiasm of investors in the startup space, highlighting that even highly successful individuals find value in making relatively small investments in the sector for reasons beyond just financial gain.

• Harry Stebbings raises the concept of the unbundling of venture into three core offerings: capital, advice, and structuring/guidance on corporate structures, as suggested by Naval Ravikant.
• Zach Coelius acknowledges Naval's intelligence and tendency to be correct about extreme ideas but believes the situation is more complex than a simple unbundling of venture capital.
• Coelius sees a simultaneous trend of both bundling and unbundling in the industry, with platforms like Andreessen Horowitz building highly bundled services, while AngelList democratizes access to the asset class for those traditionally outside of VC firms.
• He notes the venture capital industry is generally static and conservative due to the nature of limited partner (LP) relationships, but appreciates the changes brought about by platforms like AngelList.

"I think there is a place for bundled venture. In fact, if you look at what Andreessen is doing and you look at what a number of the other big platforms are doing, they're taking venture to a whole even higher level of bundling."

This quote suggests that while some aspects of venture capital may be unbundling, there is still significant value and growth in bundled venture services, where firms offer a comprehensive suite of resources to startups.

• Zach Coelius expresses skepticism about the traditional approach to portfolio construction, viewing it as a source of inefficiency.
• He believes that deal flow and access are the most critical components of success in venture capital, rather than a predetermined portfolio structure.
• Coelius argues that flexibility is key, and investment decisions should be based on the merits of individual opportunities rather than fitting a preconceived portfolio model.
• He has invested in companies at various stages and amounts, focusing on the potential of each investment rather than its impact on portfolio balance.

"Forget about portfolio construction. Forget about basically the perfect whiteboard world. Just say, what is a great company? Do I have access? And if I do, how much ownership can I get in a way that basically fits my capital, that I have access to deploy?"

This quote emphasizes Zach Coelius's belief that rigid portfolio construction models are less effective than a flexible approach that evaluates each investment opportunity on its own merits.

• Coelius discusses his investment strategy, which includes starting with smaller checks and potentially increasing investment as he gains insight and confidence in a company.
• He criticizes the common venture capital practice of not leveraging insider positions to invest further in subsequent funding rounds.
• Coelius points out that venture capital firms often prefer to show healthy markups to LPs rather than maximize their insider advantages, which can lead to inefficiencies.
• He shares his personal experience with progressively larger investments in a company called Branch, demonstrating how insider information can lead to efficient capital deployment.

"Why is it that we get an inside position and then we let somebody else lead the round and take all the opportunity to deploy capital in subsequent rounds? Why do we do that?"

This quote challenges the traditional venture capital approach of not fully capitalizing on insider positions for further investment, suggesting that there are inefficiencies in how venture capital firms manage their follow-on investments.

• Zach Coelius describes his decision-making process for follow-on investments as treating each decision as isolated and not influenced by sunk costs.
• He assesses each investment opportunity based on opportunity cost, deal flow, market positioning, and the inside information he has about the company's performance.
• Coelius emphasizes the importance of distinguishing between an objective investment opportunity and personal bias when making investment decisions.

"I look at that as an, I'm opening the door to get access to becoming an insider. So if you think about, like, let's say, mparticle walks in the door, and we both love mparticle. It's a great company. Mike Katz is an amazing entrepreneur, and you and I are both basically going to make an investment decision today."

This quote illustrates Coelius's strategy of using initial investments as a means to gain insider status, which then informs more substantial investment decisions based on detailed knowledge of the company's trajectory.## Investment Decision Making

• Zach Coelius discusses his approach to investing in companies, emphasizing the importance of gaining inside information over time.
• He believes that the decision to invest should become increasingly obvious with more involvement and information.
• If the clarity to invest is not there, Zach tends to write smaller checks or not participate in subsequent funding rounds.
• His position as a minority investor in funding rounds gives him the flexibility to adjust his investment sizes.

"The longer I'm with a company, the more inside information I get. It should be more and more obvious that I should be writing that check."

This quote explains Zach's strategy of leveraging the inside information he gains over time with a company to make informed investment decisions. The more involved he is, the clearer the decision should become.

• Zach Coelius highlights the critical role of pricing in investment decisions.
• He argues that regardless of a company's success, overpaying for investments can negate the wins.
• Pricing determines the potential for returns; he contrasts investing in one company at a high pre-money valuation versus multiple companies at lower valuations.

"Pricing is everything. At the end of the day, the only thing that matters in this business is price."

Zach underscores that in venture capital, the investment price point is a fundamental determinant of the success or failure of an investment.

• Zach anticipates a loss ratio similar to traditional venture capital, which is around a third of the portfolio.
• Although his current portfolio has not experienced any losses, he is aware that losses are inevitable and operates under that assumption.

"I assume my loss ratio will be similar to traditional venture. So a third, give or take."

This quote reveals Zach's realistic expectation about investment losses, acknowledging the risk inherent in venture capital.

• Zach prefers to get involved with companies early in their lifecycle.
• He enjoys participating in the startup formation process and finds it easier than being an entrepreneur.
• Zach identifies a crucial point for investment when a company finds product-market fit and shifts from a broad vision to a specific product offering.
• His own experience with rapid revenue growth illustrates the potential at this stage.

"That point of sort of like, when you go from sort of like space articulation to product articulation is a really sweet spot for me and I really look for that."

Zach's strategy focuses on identifying the moment a company transitions from an abstract idea to a concrete product that resonates with customers, which he sees as an optimal time for investment.

• Zach expresses skepticism about the possibility of building a large business with a work-life balance.
• He sees entrepreneurship as a challenging journey that requires pushing beyond one's limits.
• According to Zach, those who do not commit fully to their business are unlikely to achieve extraordinary success.

"If you don't believe in hustling, I don't believe you're going to build a massive business."

Zach's quote reflects his belief that a strong work ethic and dedication are necessary for building a highly successful business.

• Zach is not concerned about the re-entry of tier-one firms into early-stage investing, as they have always been present in some form.
• He believes that the value these firms bring depends on their willingness to contribute to building great companies.
• Zach differentiates himself from traditional VCs through his flexibility and entrepreneurial approach to investing.

"If they want to be tourists and throw checks in and think that that's going to get them to where they want to get to, great. Hopefully they don't mess up things up too much, but if they do the work, they're going to be great."

Zach points out that the effectiveness of tier-one firms in early-stage investing hinges on their commitment to actively supporting startups, not just providing capital.## VC Market Structure and Decision-Making

• The venture capital (VC) market is driven by outsized returns from non-consensus, atypical companies.
• Most VC firms operate with a consensus-driven partnership structure, which contradicts the nature of the market.
• Individual decision-makers are often more effective in deploying capital in various asset classes.
• Zach Coelius operates as a solo general partner (GP) to make faster, non-consensus decisions.

"The VC market generally is a market that is driven by sort of outsized returns on weird. Companies that are out of norm, non consensus companies make most of the money, and yet we have a consensus driven partnership structure for the vast majority of the ecosystem."

This quote highlights the contradiction between the VC market's need for non-consensus decision-making and the widespread consensus-driven structures of VC firms. It implies that a solo GP can navigate this landscape more effectively.

• Many funds have rigid return profiles and construction, dictating the stage and check size they operate with.
• This rigidity can limit opportunities for investment.
• Zach Coelius adopts a multi-stage approach to exploit market inefficiencies and remain flexible in his investments.

"Certainly really interesting allocation decisions over stage. So a lot of funds are designed to be funds such that they have a certain return profile and a certain construction that delineates what stage and check size they write."

The quote explains that Zach Coelius intentionally positions his investment strategy to be flexible and multi-stage, setting him apart from many traditional funds that have fixed investment criteria.

• Entrepreneurs have varying needs, and there is no commonality regarding the type of support they require.
• Some may need introductions to customers, while others may seek expertise in areas they are less familiar with.
• Zach Coelius aims to be a valuable resource for entrepreneurs, offering tailored support based on their unique needs.

"Every one of them wants something different. I'm there to basically be hopefully one of the first calls and try to be useful."

Zach Coelius emphasizes his role as a supportive figure for entrepreneurs, acknowledging that each entrepreneur's needs are distinct and that he strives to be a helpful and responsive resource for them.

• Reflecting on missed investment opportunities can provide valuable lessons.
• Recognizing companies with challenging early barriers but significant potential is crucial.
• The experience of missing out on investing in successful companies like Airbnb and Uber has informed Zach Coelius's current investment approach.

"The biggest miss was just not being in this market, not figuring out a way early on to get access to capital so that I could be potentially in one or multiple of those companies."

This quote reveals Zach Coelius's reflection on his past non-involvement in the investment market and his regret over missed opportunities, which has influenced his current investment philosophy.

• Start with an AngelList syndicate to get into startup investing.
• Zach Coelius encourages taking action and offers his assistance to those interested in entering the field.

"Start angel list with a syndicate today. Call me up, I'll help you do it."

The quote is an actionable piece of advice for those looking to begin startup investing, with Zach Coelius offering direct support to help newcomers start.

• Funds that dismiss prior investment agreements, such as pro rata rights, are viewed negatively.
• Unprofessional behavior by funds can lead to being excluded from future deals by affected investors.

"One thing, I've seen a number of funds who basically have come in and wiped out my pro rata or my follow on, and those funds will never see another deal from me if I can help it."

Zach Coelius expresses his strong stance against funds that disregard previous investment agreements, indicating that such behavior will lead to consequences in terms of deal flow.

• Growth rate, margins, and team quality are critical factors in investment decisions.
• Being open to investing in unfamiliar sectors can be rewarding if other indicators are strong.
• Zach Coelius's investment in Mud water, a mushroom tea company, exemplifies his criteria.

"But the growth rate is 100% month over month. Amazing margins. This amazing team I've worked with."

This quote highlights the key factors that led Zach Coelius to invest in Mud water, emphasizing the company's rapid growth, profitability, and strong team as decisive factors.

• Zach Coelius expresses gratitude for content creators like Harry Stebbings, appreciating their contribution to his world.

"Content creators like you make my world a better place. So I appreciate it a lot."

The quote reflects Zach Coelius's recognition of the value that content creators bring to their audience and his personal appreciation for their work.