Splitting The Deal

Syndicating an early stage investment is a time honored practice in the venture capital business. It was extremely common in the VC business in the early 80s when I started.

I assume syndicating was a common practice in the early days of the institutional VC business because fund sizes were small, risk was high, and splitting the deal among multiple firms was a good way to manage those things.

Over the years syndication has become less common among large venture capital firms as fund sizes have grown and portfolio diversification can happen in a single fund to manage the early stage risk.

In the angel market (and to a lesser extent seed market), syndication is alive and well and remains very common.

But in the institutional VC market, it is pretty common to see one firm lead and take all of the Series A, another firm to lead and take all of the non-pro-rata amounts of the Series B, and the same in the Series C and Series D. Syndicates are still built but they are built round by round versus in the round itself.

I was thinking about this today and it occurred to me that the three best VC investments I have made in the last ten years, which are also the three best VC investments I have made in my career, were all syndicated in the first VC round, which was a Series A in all three cases.

In each one, I negotiated for a $4-5mm round that bought between 20-25% of the business, and I then offered between 33% and 50% of the amount I had negotiated for to another firm.

In each case, USV could have taken the entire round. We had sufficient capital to do that. But in each case, I wanted some company in the investment and, honestly, I wanted to lay off some risk too.

In each of these three situations, the $1.5-2mm that we “laid off” to others was or is worth hundreds of millions or more and yet I don’t regret the decision in the least.

These syndicate investors each stepped up at critical times and did things for the companies that I could not do and they earned every penny of the returns they got.

So, I am a firm believer in splitting the deal, even when the economics (another word for ownership) suggest that there is no room for others.

My personal track record tells me that splitting the deal works. It helps you step up to something that has a lot of risk but also a lot of upside and it brings other people who can add value into the situation early on.

At a time when we are seeing venture funds get bigger and bigger, I am convinced that the hallmarks of old school early stage investing; small fund sizes, small rounds, and syndicates remain best practices and we continue to do that at USV.

Video Of The Week: The Upfront Summit Crypto Video

The annual Upfront Summit took place in LA this past week. I attended day two and enjoyed it very much.

Prior to the summit, the Upfront team interviewed a bunch of investors in the crypto sector and put together this video.

I think it captures the current investor sentiment very well.

USV Is Hiring Two Analysts

It’s that time again. USV is hiring two analysts, each for a two year rotation.

The hiring process is similar to what we have done in the past, but the role is a bit different. We are adopting more of an apprenticeship model:

For this analyst cycle, we are changing things up a bit by transforming the program into more of an apprenticeship. What does that mean? You will work mostly with two partners at the firm, one of whom will be primarily responsible for your training. We are looking for two people. The first analyst will be working primarily with Andy, the second primarily with Albert.

The USV analyst role has been a nice launchpad for the folks who have done it:

Past analysts have gone on to join other venture firms and even start their own (AndrewCharlieJoel), work at USV portfolio companies (JonathanEric), help launch new products (ChristinaBrian) and start their own companies (ZanderJennifer).

If you are interested in spending a couple years at USV, here is our process:

Our process starts with having candidates answer two questions by recording videos, as well as submitting two short written pieces. These will be due by end of day Thursday, February 15.

From the initial submissions we select a smaller group for telephone interviews and then a set of finalists for in-person meetings. We expect the process to be finished by the end of March and candidates should be available to start work in April or May.

Here are the questions:

Video 1: Why are you interested in the analyst role? [30 seconds]

Video 2: What is an example of an initiative you took outside of school or work? [60 seconds]

Written 1: An email asking for a meeting with the founder of a startup you admire.

Written 2: An argument for why one of the following is either overvalued or undervalued [Twitter, Snap, Bitcoin, Ethereum] [750 words max]

If this seems right up your alley, you can start your application here.

An Addition To The AVC Comment Policy

Yesterday I went to see what the community was talking about and found this at the top of the comment threads:

I thought to myself “oh shit, the token scammers have arrived” and immediately deleted those comments and left a reply saying that I am going to update the comment policy.

So I did that this morning.

There will be no token promotions in the AVC comments, period.

I am fine with discussing the merits of various blockchain/crypto technologies and tokens, but outright promotion is not cool and I won’t allow it.

I hope this is clear and everyone understands why it is necessary.

USV Manager Bootcamp

Our USV Portfolio Network Team built a new offering last year called the USV Manager Bootcamp.

The idea is to offer management training classes to our portfolio companies that are too small to be able to offer those classes themselves.

Last week was the sixth bootcamp and the self reported results are pretty impressive:

As I tweeted out last week, this is something other VC firms can do as well. It’s a perfect example of something that works for a portfolio of companies.

If you want to learn more about how this works, our Portfolio Network Team wrote a blog post about it last week.

A Low-Volume, High-Conviction, High-Support Investor

My friend Mark Mullen and his partner Jim Andelman are announcing a new VC firm in Southern California today. They call themselves Bonfire Ventures.

I love how they describe themselves as “a low-volume, high-conviction, high-support investor.” That is who you want at your side when you are starting a business. There are a number of those types of firms out there, USV is one, Bonfire is another, and there are plenty more. But there are also plenty of the other variety; high volume, low conviction, can’t get them on the phone when you need them investors. So finding a high conviction investor to lead your seed or Srs A round is ideal and we have one more VC firm like that now.

Bonfire is based in Southern California, one of the hottest venture capital regions right now, and is focused on “B2B” companies, a sector that Mark and Jim have focused on for the last decade.

I’d like to congratulate Mark and Jim on getting Bonfire off the ground and welcome them to the high conviction club. It’s a good group of VCs and we can always use a few more.

The Co-Founder Relationship

If you were making a list of things that could go wrong on an seed, angel, or Series A investment, you would have to put the co-founder relationship right up there at the top of the list. Not every startup has co-founders. Some just have one founder. In some ways, that is a bit easier to “underwrite.” At least it is clear who is in charge and why things are happening or not happening.

With co-founders, it is always a bit unclear where the issues are coming from. Founders don’t generally like to disclose their issues to their investors and Board. If it gets really bad, the stuff comes out. But often it stays under the covers where you, as an investor, can’t do much about it, other than wonder what is really going on.

Frequently one of the founders is the “business person” and the other is the “technical person.” That works pretty well as each person has a domain where they are “the boss” and that means they aren’t in each other’s hair so much. But there are many places where that framework breaks down. Examples of areas that create co-founder stress are compensation, raising money/dilution, product strategy, resource allocation, marketing, and PR, among many others.

The co-founder dysfunction impacts everyone in and around the company, but mostly the team underneath the founders. It is like being in a family where mom and dad aren’t getting along. There is stress and strain, messed up decision making, and everyone is walking on eggshells.

So what can be done about this issue?

Here are some suggestions:

1/ The Board and investor group should talk directly and honestly with the founders about the challenges of staying aligned and those conversations should start before an investment is even made. By putting the issue on the table, making it something people are allowed to talk about openly, there is a much greater chance the issue can be managed effectively.

2/ The team underneath the founders should feel like they have the right, and the responsibility, to talk to the Board and investor group when founder dysfunction gets really bad. In general the idea of the team going around the leaders to the Board is a big “no no” in startup land, but there are a few places where that needs to happen, like outing illegal or dishonest actions, or harassment. Likewise, if the co-founder relationship is so bad that the company is being seriously harmed, the team should feel a responsibility to come to the Board with that information.

3/ There are some great “founder conflict” coaches out there. This is a bit like marriage counseling. The co-founders meet with a coach together regularly to diffuse and manage their conflict. I have seen this work very well. Most CEO Coaches will do founder conflict coaching, and if they don’t do it, they can recommend someone who will.

4/ Founder divorce is something that happens pretty regularly. If two, or three, people can’t figure out how to work well together, then one, or possibly more, will have to leave. Sometimes founders can figure this out on their own, but often the Board and members of the team will get involved as well. I have not seen the data on this, but I would imagine a minority of founder teams make it all the way to the finish line without one or more leaving along the way, often for reasons of unmanageable conflict.

Founder conflict is pervasive in startup land but is not discussed very often. That should change. It is normal. It happens. You aren’t the only one who is experiencing it. It is OK to talk about it, put it on the table, and deal with it.

DISCLAIMER – This post is absolutely not about any company, any founder or founders, or anything specific at all. It is just about something that we frequently see and is worth talking about. If you think I am writing about you, your company, or your founder, you are wrong. But I am happy to talk about it nonetheless.

Audio Of The Week: A16Z’s Alex Rampell

I found this wide ranging interview quite interesting.

Alex has been an entrepreneur and is now an investor.

He is operating at the intersection of traditional fintech and crypto, which is a place USV also often occupies.