i know that's the right thing but there is always a small devil on my shoulder that says it's better to own 80% of 10M than 100% of 1.5M . there is room for growth we got a plan but who knows if we will be able to execute it well.

100% depends on what kind of business you have and what kind of business you want.

If you're a services business without a BoD your world would be turned upside down, which probably isn't worth it if you're happy with what you're doing.

If you're an enterprise software business that already has advisors and a board but only plays in the regional market, you could definitely have a chance to shoot for the moon but your days are quickly going to be filled with things like hiring senior managers, ramping up staff, and revenue projections including hitting/beating those projections. Every month. Is that a reasonable tradeoff for you? Maybe, maybe not.

Fact is, a lot of people are going to get far richer by owning all or most of a $2M/yr business than those who try to own 15% of a $100M/yr business. But some people only want to build those second kind.

Sorry guys, I've been really busy and haven't been on 2p2 in a while. If you ever need me to pop in this thread just ping me @ ezra at chicagoventures

So for Kauffman, it's not a joke and it's a good program. Yes, I agree that any industry based on good old boys club is in bad shape, but at the same time, this is a tough industry to work in. Here's why: the partners in this industry are massively time constrained. There is little time for training. Part of the reason why it's so hard to break in is that the partners only want to hire people who are trained and well connected. That creates a bit of a catch-22.

So there are a few ways to solve that. One is you can be highly ambitious and just go out cold and build a network (that's what I did). Another option is to work in a startup and start making lots of connections. The problem is that even with connections there's still a lot of learning in this industry. There is very little structure or direction. Even for entrepreneurial people who are willing to try and figure it out, the onboard time is 6-12 months before you're even competent? It's tough.

Kauffman is a place where you can grow and develop a network of non-judgmental peers. The problem with this industry is that if I send a potential investment to a contact and ask "what do you think," if that person responds negatively, my leads have just been de-prioritized in his eyes. Because of the overwhelming # of companies we see, we need to be really careful in prioritizing leads from only the most qualified sources. That makes it tough to gain feedback. It makes it tough to open oneself up to being vulnerable.

Kauffman is not paying for friends. Obviously developing your own real friends and mentors is something everyone should do. But Kauffman is a highly curated/pre-screened group (acceptance rate is +/- 4%) of non-judgmental people, who will be a sounding board unconditionally. We all have the same goal: to grow & learn. It's tough to find that out in the while. There are professional networking groups in tons of industries - this is one that makes sense.

Happy to answer further questions. But unless you're in this industry, you can't fathom how hard it is to move up & become better because how fast moving it is and how much inbound stuff there is to manage.

E

Most companies are not a VC backable. That doesn't mean they're not good companies. I'll put it this way, if you're doing 1.5M this year, we'd want to see you at ~6M in 2015, and ~20ish in 2014, with 2x growth from there. If you couldn't see a path to hitting $250M in 7ish years it wouldn't be the right fit.

Most companies simply aren't going after a big enough market. That's not a dig at the company. CardRunners is a great company, but the market isn't large enough to sustain $100M a year in revenue. Most small businesses are this way. VCs demand significant growth which increases your volatility and risk of going to zero. In addition, VCs get their money out first if something goes wrong.

Would depend on the biz.

E

This sums up what I was thinking pretty well.

http://feeds.inc.com/~r/home/updates...rA/story01.htm


Thoughts ez?

Obviously there's some truth here, but it's a bit simplistic.

We do see a lot more private money making direct investments into early stage companies. I don't pass judgement, it's a free market. I think a lot of people can make or lose money in early stage startups.

I would say though that none of the 37 CEOs we've invested in hate us or think we're overbearing or anything. When we make new investments and CEOs ask to speak to some of our prior investments for reference checks, we don't curate a list. We say look at the website, pick 3-4 companies and we'll intro you. We get very high marks from entrepreneurs.

Does that mean I deserve to be paid $5M a year? I don't know. I don't get paid that much. Look I get that I'm not a partner at Sequoia, but even in 5ish years, I don't think I'll be making much more than my best poker days.

It's important to remember that if I'm a family office with $800 AUM, and I make a $750k investment into SeedCo, and the founder really needs help with a pivot or go-to-market or intros to CMOs at 5 big corporations, then I'm thinking to myself, would I rather use my connections & favors & time for $750k SeedCo or for $40M growth stage company that wants the same intros.

But everything is balance. Family offices often pay higher valuations because the difference between a $5M and $10M valuation is less significant to their bottom line.

I think good VCs realize the industry is changing and aren't scared of it but rather embrace it. I think articles like this are a bit condescending and derisive but I get why they get written.

been a year so figured id bump it. holla.

sweet bumb! General update on your current position? Any investments you can discuss? General progress in career path? Has you team expanded?

Where, geographically, is most of your deal flow coming at this point? Are you still mostly Chicago/Midwest or have you started to branch out to WC?

How has the rise in round valuations affected your investing, specifically follow-on?

How freaked out are entrepreneurs that you want to see Series B metrics when they try to raise an 8-figure A round?

Bump.

Somehow missed this thread first time around. Really appreciate the time taken for such thorough insight. Congrats on your growth and good luck moving forward!

cool thread and nice read

Whoops, bumped, then got slammed. Tough life :-/

I think the most surprising thing to me about the VC life is the complications of defining a career in this business. Partnerships are fairly insular, and while most partnerships try to be transparent with the junior partners, there is always a disconnect. I don't blame anyone - it's just the unfortunate reality. There are also firm politics at every fund. Again, no one is to blame, it's simply reality and part of proving you're good at the biz is to show you can play the game well. Of course, I do believe the process would be better served with no politics, but I would say that 98% of funds will inevitably have some level of politics (for reasons I don't want to go into too deeply).

My career path is good. We did recently hire a new associate & theoretically I'm moving up the ranks nicely. I've also worked really hard at building a personal brand in the space - I've been blogging heavily and active on Twitter and it's working.

One of the things I've realized is that while there's a lot of collaboration amongst VCs, no VC wants to refer an entrepreneur to a useless, not so sharp VC (of which there are plenty). So proving that you're really thoughtful, have good follow through, express a strong level of empathy towards entrepreneurs, etc, is vital for building credibility with the VC network. I think a lot of my thought leadership has served that purpose so it's nice to see it all coming together.

Of our investments to date, about a third are non-Midwest and yes that deal flow is increasing as we build our network and as word of mouth amongst entrepreneurs builds that we're actually value additive, pretty sharp, not annoying, and have a good culture/team. It's certainly a challenge for us to discern how focused we should be on the Midwest versus other areas. We simple rule we've implemented is to not lead West coast financing rounds...I think that's sensible as with rare exception we shouldn't be winning lead status in west coast companies and if we are, that suggests something about the company.

I don't think we're scared to follow-on when there's a big step up in valuation especially when we believe in the investor syndicate and the vision of the team. This is the quintessential Peter Thiel rule that a massive step-up in valuation often signals the most undervalued the company will ever be (because it's growing so fiercely that literally no one in the world knows how to price it correctly).

We don't lead 8 figure rounds, so I can't answer that element of the question. I don't know how to define Series B metrics versus Series A. All I can say is that we look at burn, team, marketing spend, CAC, LTV and make an estimation if $10M or $20M is the right amount to grow 3-5x y/y while keeping unit economics sustainable. One of our companies is about to close one of these rounds, and I worked intimately with them on the raise, and I can certifiably say that $20M is entirely reasonably

E

Thanks Scott

Thanks

Cool. Having only done this from the other side of the table I can say that most of what I've seen/heard from folks is that A metrics tend to be a lot more around growth and engagement while B metrics suddenly require you to know how to actually run a business.

I think that trips a lot of people up because they're thinking to themselves "look at this user/revenue/whatever chart!!" and then the questions are suddenly around cohort performance/retention, payback periods, etc.

This is probably my favorite "easy concept to understand once you can finally wrap your head around it" at the moment.

-Biggest surprise so far? Good and bad.
-How has your investment philosophy evolved since you first started the thread?
-Are you sitting on boards yet? How is that experience like?
-When you speak to potential investment's management team how are you really getting them to talk to you and get the answers you are looking for? I suspect being a successful poker player would give you an edge in this area.
-And a fun one: what do you think about the HBO show Silicon Valley?

Hey Ezra,

Do VCs find any value in introducing useful products to their contacts?

Context: I'm working on a product that the entire technical hiring team of Facebook and Uber use. I was wondering if VCs would be a good way to spread the word about our product, or if we should do good old fashioned cold emails / calls directly to the companies we're interested in.

Ha yea man, this is the dream! We are constantly asking our investments what products they and their teams are using to find new software platforms before the rest of the market gets wind. This is how Braintree, for example, was discovered by Accel.

VCs would absolutely be a good way to spread word of your product - get some warm VC intros and the good ones will make intros to their companies for you to try and show how value additive they are.

Hell, email me right now ezra at chicagoventures. We haven't invested in any Uber sized companies but I'd be curious to learn what you're working on & can see if the technical hiring teams at Groupon/Grubhub etc would be interested in it.

E

Groupon uses us already but I'm for sure going to email you. Thanks.

Is it true that giving up over 20% of the company in the first round is a red flag to VCs in subsequent rounds?