Tag: Seed Investing

Team vs. Market at Seed Stage

The best seed VCs bet on the team everytime.

While doing some random browsing, I came across Linear’s $4.2M seed fundraising coverage on TechCrunch in Nov’19. This paragraph from the post stood out to me:

“Linear is a late entrant in a world filled with collaboration apps, and specifically workflow and collaboration apps targeting the developer community. These include not just Slack and GitHub, but Atlassian’s Trello and Jira, as well as Asana, Basecamp, and many more.”

Imagine looking at the dev collaboration space as a seed VC in 2019. It would be a tremendous leap of faith to believe that there could be space for a new entrant in a market with multiple scaled incumbents and indie products.

How were Sequoia and Index able to pull the trigger then on the Linear deal? My guess is because they followed the core philosophy of top-tier seed investing, which I have myself seen play out multiple times in my career – “that seed bets are all about the team, and that overthinking the market & competition at this stage adds fatal blurriness to what should be a sharp team-centric seed lens.”

I have studied the anti-portfolios of many legendary VC firms spanning decades, as well as connected the dots with key misses of VC firms I have personally worked with or closely observed in my career. A dominant theme across the anti-portfolio set is getting distracted by overstudy­ing the ‘market’ and as a result, overlooking what was a star founding team.

A nuance to this “team vs market” point that I have tried to incorporate is that as long as the market is directionally correct and, more importantly, the team has a strong fit with it, I pretty much give it a checkmark at my end and quickly move on to spending most time evaluating the founders.

PS: btw, I have a similar observation on seed entry valuations as well. Will cover it in another post!

More investors than operators in Silicon Valley?

Recently, Brian Armstrong (Co-founder and CEO of Coinbase) did a tweetstorm on how there are way too many investors, vs builders/ operators, in Silicon Valley. And how founders in their prime-age are opting to become full-time investors, rather than starting-up again, even after a relatively small exit.

Brian makes some good points about a trend, though short-term in my view, that even I am seeing in the Valley. Here are my thoughts on why this is happening and how it will eventually get corrected (I did my own tweetstorm with these views).

I think this is a side-effect of the last decade of over-liquidity across markets. Companies got over-funded, assets got over-paid for, specific skillsets (mostly engineers) have gotten astronomical salaries relative to their skills & experience. Also, there is no inherent entry-barrier to becoming an angel/ seed investor, provided you have “some” liquidity, especially as cost of starting businesses has come down a lot and early rounds have gotten increasingly syndicated/ fragmented across multiple small investors.

Given excess liquidity, a person who ordinarily would have been an individual angel, is now getting a shot at raising a small fund. While institutions would still keep a high bar, there are enough friends/ colleagues/ relatives willing to commit funds to ride the tech gravy train.

So am not surprised that many are jumping on the professional investing bandwagon, instead of starting-up/ operating companies. What many wouldn’t realize is:

  1. This asset class has a 10 year feedback loop. You might end up concluding after a decade, that you aren’t really that good as an investor.
  2. While raising a “small” first fund from personal well-wishers is relatively easy, scaling up to 2nd fund and beyond, esp. getting institutions to buy-in, is much harder.
  3. Once you raise other people’s money, you are locked-in for many, many years. Not easy to switch career tracks.
  4. Unlike a startup, it’s really hard to “pivot” or “reset” a fund. If your thesis/ strategy turns out to be faulty, or your Partner team chemistry doesn’t work out for some reason, you are still going to be stuck with these mistakes for a relatively long period of time.
  5. In professional investing, showing commitment & consistency over a long period of time is critical. Yet, this is really hard to do, especially when you have decades of your career ahead of you.

In the end, market forces will weed out short-term players and restore balance. This could start once the current boom cycle turns around and liquidity becomes tight.

My personal philosophy — the world is shaped by “Builders”, not “Investors”. Why would you want to be a full-time cheerleader, when you can play the actual game?