20VC Why YC Is The Exact Opposite of Proprietary Deal Flow, Why Having No Follow On Dramatically Aligns Incentives & Why Founders Do Not Have To Be Passionate About Their Idea From The Start with Michael Ma, Founding Partner @ Liquid 2 Ventures

In this episode of "20 minutes vc," host Harry Stebbings interviews Michael Ma, founding partner at Liquid 2 Ventures, a notable seed fund in San Francisco with a diverse team including NFL Hall of Famer Joe Montana. Ma discusses his immigrant parents' sacrifices, his unexpected foray into tech post-economic crisis, and his journey from founding Talkbin and selling it to Google to investing with Liquid 2. The conversation delves into micro VC market dynamics, the importance of founder grit, and the challenge of providing pre and post-investment value. Ma highlights Liquid 2's unique approach to decision-making with a "silver bullet" policy, their preference for advisory roles over board seats in early stages, and their success in follow-on funding. He also shares his views on the evolution of Y Combinator, deep tech investing, and the need for less hero worship in the startup ecosystem.

• Harry Stebbings is the host of the 20 minutes vc podcast.
• Harry invites listeners to join him on Snapchat for personal engagement.
• The podcast features a range of guests from different areas of venture capital.

This is the 20 minutes vc with your host Harry Stebbings at H stepbings with two B's on Snapchat, and I'd love for you to join me there, where if you add me to date, you might even see a holiday snap or two.

Harry Stebbings introduces his podcast and invites listeners to connect with him on Snapchat, suggesting a more personal interaction with his audience.

• Michael Ma is a founding partner at Liquid 2 Ventures.
• Liquid 2 Ventures is a young and exciting seed fund in San Francisco.
• The fund has notable investments and a unique founding partner, Joe Montana.
• Michael Ma previously co-founded Talkbin, which was sold to Google.

And today's guest sits in the latter camp. So I'm thrilled to welcome Michael Ma, founding partner at Liquid two Ventures, to the hot seat today. Liquid two is one of San Francisco's younger and most exciting seed funds.

Harry Stebbings introduces Michael Ma and emphasizes the significance of Liquid 2 Ventures as an up-and-coming seed fund in the venture capital landscape.

• Michael Ma credits his parents' sacrifices for his educational opportunities.
• His parents immigrated to the U.S. with limited resources but prioritized education.
• Michael attended Yale and Harvard Business School, while his sister attended Duke and Harvard Law.

So I always like to start a little bit earlier than most people when I talk about my career because I just owe my parents so much.

Michael Ma highlights the importance of his family background and the sacrifices made by his parents, which laid the foundation for his success in the tech industry.

• The 2009 financial crisis prevented Michael from securing a job in finance.
• The crisis led him to the startup world, where he co-founded Talkbin.
• Talkbin became the fastest exit YC had ever had at that time.

The great thing is that I actually owe it to the financial Cris 2009. So as economics at Yale couldn't get a job in finance.

Michael Ma discusses how the financial crisis inadvertently steered his career towards entrepreneurship and ultimately led to a successful exit with Talkbin.

• There is a perception of too much cash chasing too few deals in the micro VC market.
• The number of micro VC funds is increasing at a faster rate than the number of available companies.
• Michael acknowledges the competition and advises limited partners (LPs) on allocation in micro VC.

I agree in general, like Silicon Valley bank keeps sending out this list of micro vcs and I just keep seeing it growing more and more.

Michael Ma agrees with the sentiment that there is an oversaturation of micro VC funds in the market, which could lead to increased competition for investment opportunities.

• Specialization is seen as a way to stand out among micro VC funds.
• Michael Ma respects specialized funds but is a proponent of generalist funds.
• He challenges the notion of specialization, citing successful generalist funds like Benchmark and lowercase.

I do think it's one way that microvcs are used to solve that. I have immense respect for. There's a whole bunch, Seth Bannon's 50 years, it's presence capital who just done a great job of that.

Michael Ma acknowledges specialization as a strategy for micro VC funds to differentiate themselves, but he also points out that historically successful funds have been generalists.

• Liquid 2 Ventures is a generalist fund.
• Ma questions the true nature of specialist funds and their investment decisions.
• He advocates for transparency in being a generalist fund rather than claiming a false specialization.

But I usually push back against people, especially lps, when they ask about, it's like, look, what are the best funds of all time? Benchmark, lowercase? They're all generalist funds.

Michael Ma expresses skepticism towards the concept of specialist funds and emphasizes the success of generalist funds, suggesting that many specialist funds may still invest outside their claimed area of focus.## Raising Liquid Two vs. Micro VC Today

• Raising Liquid Two was considered unique due to the diverse team composition.
• The team's diversity in skills and backgrounds was a key differentiator in fundraising.
• Having a mix of individuals such as a physicist, a Harvard MBA, a company founder, and a Super Bowl champion allowed for a variety of value propositions.

"So we have a PhD in physicist who worked at CERN, started one of the first databases of service companies... and a Super Bowl champion, all in one fund."

This quote highlights the unique composition of the Liquid Two team, which combines expertise from various fields, contributing to its distinctiveness in the market.

• Liquid Two employs a majority vote system with an additional "silver bullet" mechanism for decision making.
• The "silver bullet" allows any partner to push through a deal once a year without consensus.
• This system is designed to reduce the need for internal selling of deals and encourage open discussion.

"So it's a majority vote, plus everybody gets a silver bullet."

The quote explains the decision-making framework at Liquid Two, where the majority rules but individual partners have the power to make a unilateral decision if they strongly believe in a deal.

• Initially, Liquid Two did not prioritize follow-on funding due to competition concerns.
• The industry standard for micro VCs is often a 50/50 split between initial and follow-on funding, with some successful funds opting for a 3:1 ratio favoring follow-on.
• Liquid Two's current strategy involves majority voting and generally avoiding seed extensions, with a focus on participating during Series A rounds.

"We didn't think we could win these deals... So we didn't have a compelling strategy."

This quote reflects the initial uncertainty Liquid Two had about their ability to compete for follow-on funding, leading to a lack of strategic focus in this area.

• The general advice is to avoid seed extensions, as they often do not lead to further progress.
• There are exceptions to this rule, but they are rare.
• This viewpoint aligns with the broader VC community's skepticism about the value of seed extensions.

"I think you should stay away from it. From the VC standpoint, they just tend to go nowhere."

Michael Ma agrees with the common VC perspective that seed extensions typically do not lead to successful outcomes for the companies.

• Having Joe Montana on the team significantly aided fundraising efforts for Liquid Two.
• Montana's celebrity status and network connections directly led to securing investments from influential individuals.

"Joe sometimes would come back as like, oh yeah, I was sitting next, it was a very well known us billionaire and Joe was like, I was sitting next to him at event he agreed to invest in the fund."

The quote illustrates the advantage of having a well-connected individual like Joe Montana on the team, who can leverage personal relationships to attract investors.

• The involvement of high-profile LPs can be sustainable if the fund performs well and returns are impressive.
• The credibility of team members, such as Joe Montana, can initially attract LPs, with performance solidifying their continued involvement.

"But I think once the numbers come in, if anything, I think LPs are going to be even more impressed with what we've accomplished."

Michael Ma expresses confidence that the performance of the fund will encourage LPs to continue investing, beyond their personal respect for team members.

• Liquid Two enjoys its micro VC status, which allows for close involvement with founders.
• There is a discussion about slightly increasing the fund size due to founder trust and the desire to provide more follow-on finance.
• The focus remains on seed investing, and any increase in capital would support this strategy rather than fundamentally changing it.

"I think we're very good at seed and we want to stick with that. The more capital just has to be with supporting founders more, not fundamentally changing strategy."

This quote underscores the intention to maintain the core strategy of seed investing while considering a moderate increase in fund size to better support portfolio companies.

• Liquid Two aims to manage expectations by not overpromising pre-investment value.
• The goal is to exceed rather than just meet LP expectations.
• The fund strives to balance value provided before and after investment, with a focus on post-investment support due to limited resources.

"I think in a perfect world you wouldn't have to oversell... It's optimal. That doesn't always happen, in which case we think we do about the same both ads."

Michael Ma acknowledges the challenge of providing value both before and after investment, emphasizing the importance of not overselling capabilities to potential portfolio companies.## Board Seats and Advisory Roles

• Liquid 2 Ventures (Speaker C's firm) does not take board seats at the seed stage.
• They consider themselves advisors, especially in follow-on fundraising.
• Entrepreneurs often approach them first due to their aligned incentives.
• Expectation exists that at Series A, larger funds may take board seats.
• Liquid 2 is open to taking board seats if a founder specifically requests it.
• Founders should not feel pressured to have Liquid 2 on their board.

We don't take board seats on seed. I like to think of us as advisors in a lot of ways.

This quote explains Liquid 2 Ventures' approach to board seats at the seed stage, emphasizing their advisory role rather than a governance one.

We're very incentivized along with entrepreneurial. We've had entrepreneurs who have taken from really good seed funds who have a lot of capital deployed to follow on.

This quote highlights the firm's alignment with entrepreneurs' incentives, particularly in the context of follow-on fundraising.

We haven't taken board seats ever, but we're not opposed to it.

Speaker C clarifies that while their firm has not taken board seats before, they are not against the idea if a founder deems it necessary.

• Founders can be friends as well as portfolio companies.
• Pre-existing friendships with founders can be beneficial during valuation.
• It's important to maintain professional treatment of all founders, regardless of personal relationships.
• Personal relationships should not influence investment decisions.

Yes, I think it's helpful. I would say the short of it, it's actually really helpful during the process of valuing company.

Speaker C acknowledges that having a personal relationship with a founder can be helpful, especially during company valuation.

You always got to take yourself away from the personal relationship.

This quote stresses the importance of separating personal relationships from professional investment decisions.

• YC is the antithesis of proprietary deal flow, as it is a public demo day.
• Despite the scaling of YC, the quality of companies has not significantly reduced.
• The number of good deals per batch remains consistent, regardless of batch size.
• YC's international expansion has introduced deals that may not fit all VC theses.

Everybody talks about proprietary deal flow like having something unique. And YC is a public demo day where everybody in the Valley is invited.

Speaker C contrasts YC's open approach to the traditional concept of proprietary deal flow in venture capital.

I don't think the percentage of quality companies have gone down.

This quote addresses the concern about the quality of YC companies, asserting that the quality has not diminished despite the increase in batch size.

• Good companies will eventually provide a payout, even if it takes longer.
• Deep tech companies may require longer exit environments due to their development cycles.
• Flexibility and patience are key in venture capital, especially with longer time horizons.
• The best firms adapt to changes in venture over time.

Personally, I think if you back great companies, you will get your payout at the very end of the day and it might take a little bit longer and that's okay.

Speaker C expresses confidence in the long-term payout of investing in great companies, acknowledging the longer timelines in deep tech.

• Leveraging the expertise of knowledgeable partners is crucial.
• Having a strong network to consult with is beneficial.
• Recognizing patterns in successful founders is a valuable skill.
• Micro VC firms may lack internal resources but can compensate with strong external networks.

I think it's super helpful that Mike Miller is one of the general partners.

Speaker C highlights the importance of having partners with deep technical expertise, like Mike Miller, when evaluating deep tech companies.

Can you reach out to a stronger network and ask them for help?

This quote emphasizes the value of a strong network to compensate for the lack of internal resources in small VC firms.

• Founders are unique, and there is no single trait that guarantees success.
• A common trait among successful founders is having a "chip on their shoulder."
• Founders often exhibit a variety of characteristics, making it difficult to pinpoint one defining quality.

I do agree with that. I would also say because founders themselves are such outliers, it's impossibly like, oh, that's the one trait you need.

Speaker C agrees that having a "chip on their shoulder" can be a common trait among founders, but also acknowledges the diversity of founder characteristics.## Founder Traits and Grit

• Founders often exhibit a strong will or grit, which can manifest in various ways such as passion for an idea or a sense of responsibility to solve a problem no one else will tackle.
• This grit is seen as a necessary quality for success in entrepreneurship.
• Founders are generally very intelligent, meeting a certain threshold of smartness.

I think Paul Graham calls it grit. It shows off in a lot of different ways. Maybe they're super passionate about an idea, and that's the worst thing. Maybe they do have a chip on their shoulder. Sometimes they think, hey, nobody else is going to do this if I don't do it. So I have to do it. And they just end up just really into a space. That grit, that will to do whatever it takes to be successful, I think is a very common trait. And I would all say founders are very smart. They don't have to be geniuses, but I think they all hit the threshold. He talked to me like, this person is a smart person.

The quote explains that the concept of grit, as described by Paul Graham, is a multifaceted trait found in founders, encompassing passion, determination, and intelligence.

• A founder should be so intelligent that they make others feel uncomfortable with their intellect.
• This level of intelligence is often intimidating but also inspiring to those who work with founders.

No, absolutely. Peter Phantom told me that you have to have a founder that's so smart that he makes you feel uncomfortable.

The quote emphasizes the high level of intelligence expected from founders, to the point where it can cause discomfort due to their exceptional cognitive abilities.

• "Count of Monte Cristo" is cited as a favorite book due to its comprehensive storytelling, encompassing personal development, revenge, and romance.

My favorite book is Count of Monte Cristo. It's just an epic story. I mean, there's personal development, there's revenge. Romance. I just think it's a great story.

This quote highlights the speaker's admiration for "Count of Monte Cristo" as a well-rounded narrative with various engaging elements.

• To break into venture capital, one should start by performing the job's tasks, such as meeting with founders and writing market maps.
• Winning over founders is crucial, as their recommendations can significantly influence venture capitalists' responsiveness and decisions.

One, do the job first. I mean, it's actually possible for you to basically act like an analyst associate at a fund without getting a job. You can meet with founders, you can write market maps, you can basically do the job. You can send over these deals to vcs and you'd be surprised how far that goes. The other one, I'd say is win over founders.

The quote provides practical advice for those looking to enter venture capital by suggesting proactive engagement in the industry and building relationships with founders.

• It's commonly believed that founders must be passionate from the start, but they can actually develop passion for their venture over time.
• This growth into passion contradicts the typical narrative presented by founders in interviews and pitches.

I don't think you need to be passionate about an idea in the beginning, which is sort of controversial in my opinion. But you actually do see founders grow into something and they never talk about it, because in every interview and everything like that, nobody's going to be like, I'm not passionate about this. But sometimes they start off not passionate and they actually grow into an idea.

The quote challenges the conventional wisdom that initial passion is a prerequisite for founders, suggesting instead that passion can evolve as the founder becomes more immersed in their venture.

• Term Sheet is preferred over Axios for staying informed, even after the departure of a key contributor, Dan.

I really like term sheet still.

The quote reveals the speaker's preference for Term Sheet as a valuable resource for industry information.

• The speaker would like to see a reduction in hero worship of startups, founders, and VCs to prevent inflated expectations and crashes.
• Founders should be viewed as humans, akin to local business owners, rather than being idolized excessively.

Be less hero worship around both startups and founders and vcs. And I think you'd see less crashes there.

The quote expresses a desire to change the perception of startups and their leaders to a more realistic and humanized view to avoid the negative consequences of hero worship.

• The speaker invested in Vivid Vision, a company using VR to address eye issues, because of the founder's deep understanding of the space, personal experience, and the company's potential for high impact and profitability.

Vivid vision, a great company trying to use VR to solve eye issues. One thing that really spoke to me is James, the founder there, really knew the space had suffered this personally and it was something that would help people and had great margins.

The quote explains the rationale behind a recent investment decision, highlighting the importance of the founder's expertise and the company's mission and market potential.

• Appreciation is expressed for the guest's time and insights shared on the podcast.
• The host promotes following on social media for behind-the-scenes content and endorses WePay and Pipedrive as valuable tools for payment processing and sales pipeline management, respectively.

And a huge hand to Michael for giving up his time again to be on the show today. Such a pleasure to have him on and hear the exciting journey ahead for liquid two.

This quote thanks the guest for participating in the podcast and hints at the promising future of his venture, Liquid Two.

Visit forward Slash Harry oh yes, I have my own URL for a video case study on how Equid grew its revenue while better serving customers with forward Slash Harry.

The quote is a promotional message for WePay, highlighting a case study and offering a special support deal.

Pipedrive is the sales CRM and pipeline management software to use.

The quote endorses Pipedrive as an effective tool for sales professionals and dealmakers, noting its customizable features and no upfront payment requirement.