A couple of weeks back I did an interview with Abadesi Osunsade from Product Hunt. We discussed a number of themes close to my heart, including the future of venture, Forward Partners culture and the power of mindfulness practice.
Embed here, and more detail of what we discussed below. (Originally published on Product Hunt last week.)
In this episode they talk about…
The future of venture capital and the concept of “applied venture”
“Why stop at having a few people on payroll to help your portfolio companies succeed? Why not find a way to have as many as possible? That allows you to help your portfolio companies with many more things, offer better service, and that should see the companies go on to achieve greater results.”
Nic gives us a history of the waves of venture capital since the early 2000s and explains how firms have evolved over time to better serve founders. He talks about the new trend in the industry — what they call “applied venture.” He explains what it is and how it is having an impact on founders and companies.
The culture at Forward Partners
“When we think about our culture, on the one hand we’re trying to reflect what we have currently so that it feels authentic and on the other, we’re trying to stretch ourselves to what we want to be tomorrow.”
Nic says that at Forward Partners they look up to characters who inspire and inform their work. He explains why they chose Indiana Jones, Yoda, and Leonardo Da Vinci as the three individuals who capture what they want to be at Forward.
Nic’s introduction to mindfulness
“It was totally the wrong time of year to go to India. I arrived at the New Dehli airport and there was a sign up in the airport with the temperature, 44 degrees centigrade at 1 o’clock in the morning.”
Nic explains how he became an advocate for mindfulness after having a hesitant start and shares the funny story of going to India during the hottest months to meditate at an ashram.
The benefits of mindfulness for founders
“There was a biotech company that ran an 8-week mindfulness course for their employees. After eight weeks they did MRI scans and the happiness centres in the people who had been on the mindfulness course were noticeably more active.”
After Nic became a mindfulness convert, he didn’t stop at how it could help him in his work, he looked also to how it could have a positive impact on the founders he works with as well. He explains some of the benefits to the practice and talks about some of the programs they have been putting on for founders to help them get in the habit.
What he’s most excited about in the tech ecosystem
“Really what’s most exciting for me is the way that the startup ecosystem is growing and growing. The world is changing faster and faster and we have bigger and bigger problems to solve and it’s entrepreneurs who are going to be solving those problems for us on a global level.“
He talks about some of the tech trends happening now that he loathes and loves, and explains what they look for when they’re evaluating a potential investment for the impact it would have on the world.
Nic also shares some of his favorite products and explains why he was initially an Apple skeptic but has since become a fan.
When I started in venture capital in the late 1990s VCs were regularly lambasted for taking long summer holidays and spending too much time on the golf course. I remember one enterprising journalist judging VCs on the basis of how much their handicaps had gone down. Low handicaps weren’t good!
During this time, cash was scarce and VCs were firmly in control. Most investors thought of their job as picking good companies and making sure governance was strong. Decades later, things couldn’t be more different. After about twenty years of different forms of value-added services in VC, it feels like we are approaching a new plateau, to which everyone aspires and few have achieved.
In this post, I want to look at this new plateau, describe how we got here and offer three reasons why this trend has been gathering steam.
From around 2000, and perhaps coinciding with the need to work harder to win deals as opportunities dried up after the internet bubble burst, individual partners at VC firms began adding ‘helping CEOs win’ to their job descriptions.
The most visible symptom of this trend was VCs writing blogs to show just how value add they were. Fred Wilson, Brad Feld and Mark Suster stand out as the three best examples of individuals who built their careers this way, and Benchmark stands out as the fund which best embodies this approach.
Then from the mid 2000s, value add began moving beyond the partner to the firm as VCs began employing people who’s full time job was helping their portfolio.
They called them ‘Platform Teams’ and the value they add varies between funds. The most common strategies are to provide networking services and content to portfolio leaders so they can be more effective in their jobs.
The output takes the form of events where portfolio execs can meet each other, online communities where they can share knowledge and blog posts and talks from experts to disseminate best practice.
The other most common focus areas for platform teams are to employ talent and PR/marketing experts who give advice to portfolio companies on strategy in these areas and have relationships and discounts with pre-vetted agencies who can deliver the work.
It was perhaps First Round Capital that pioneered the platform VC model, but at this point nearly all the major VCs have platform teams of varying sizes, including KPCB, Accel and Sequoia.
The most recent development that’s emerging is an extension of the Platform VC model that we call Applied Venture. There are two key differences between Platform and Applied VC.
Firstly the value add teams at Applied VCs are much larger allowing them to help portfolio companies with execution as well as advice. The services they provide extend to pretty much everything their portfolio needs that it doesn’t make sense for them to have on payroll, and includes talent, growth, design, data science, and development.
This is what brings us to the second big difference: the cost of Applied Venture is too large to finance from a standard VC management fee.
Different funds finance the cost of these teams with a differing weighting of asking portfolio companies to pay for services, larger than normal management fees, and reduced compensation for partners.
Other than Forward Partners, notable examples of the Applied VC model include Andreessen Horowitz, Google Ventures, OpenView and Project A in Berlin. Our value add team is 10 people rising to 15 (servicing a £60m fund), Project A has 130 people on their value add team, Andreessen Horowitz has around 100, Google Ventures has 25-30, and OpenView has 10.
Sidenote: There are a number of great funds that have strategies that are very close to Applied Venture and arguably should have been included in the list above. First Round Capital and Atomico spring to mind. I excluded them because they still focus more on advising portfolio companies rather than supporting with execution and I wanted to be a purist, but the line between Platform VC and Applied Venture is certainly fuzzy and you could argue it either way.
What’s driving this change?
The next interesting question is why the strategy of VC funds is evolving in this way. I believe there are three reasons:
Capital is a commodity, a truism that the VC industry was largely able to ignore in the early days due to lack of capital in the market and scarcity of information for entrepreneurs. Over the last twenty years both of these features of the startup financing world have changed dramatically flipping the balance of power from investor to entrepreneur.
As a result VCs who didn’t want to only compete on price began looking for ways to differentiate their money from the money of other investors and started deploying the strategies listed above.
Entrepreneurship is becoming more science and less art
As the number of startups has exploded over the last 30-40 years best practices have been developed that can be shared from one early stage company to the next. This trend accelerated through the emergence of VC and operator blogging in the early 2000s.
The emergence of these best practices created an opportunity for VCs to become a channel for these best practices, simultaneously improving their service to entrepreneurs and accelerating value creation at their portfolio companies.
The watershed moment in entrepreneurship becoming more science than art as probably Eric Ries’s publication of The Lean Startup in 2011 (although some would argue for Steve Blank’s Four Steps to the Epiphany in 2005).
In addition to Platform and Applied Venture strategies, the trend towards hiring ex-operators into partner roles at VC firms can be seen in this light.
Value add strategies make partners at VC firms more personally effective
Partners at Applied Venture firms can focus their time and energy where it has the most impact, and they can turn to their value add teams to support the portfolio in all other areas.
When it comes to supporting portfolio companies, for most partners that will be advising on strategy and fundraising, helping keep other directors focused on the right things, and supporting founders at a personal level.
The value add teams should be better placed to advice on areas of more detailed execution, including things like employee recognition frameworks, merits of one marketing channel over another, and the best choice of analytics package.
Partners who don’t have the support of a value add team but still want to add value have to allocate a portion of their precious hours to having sensible high level opinions on these sorts of things and building networks of people who can provide support at the more detailed level.
At Forward Partners we believe that these three reasons are becoming stronger over time. Competition is increasing as more capital flows into the market and transparency improves. Best practices continue to develop apace. All the while the best VCs continue to look for ways to leverage their talents.
That can only mean that VCs will continue to find ways to add more value to their capital and that more and more fund managers will adopt the Applied Venture model.
And what’s holding it back?
There are two reasons why the trend towards Applied Venture isn’t playing out more quickly.
When we ask other VCs whether they would like to employ (more) people to help their portfolio the most common response is that they would love to but their management fee won’t stretch that far.
Moreover, most LPs are wary of larger than average management fees, fearing that the extra money won’t be deployed in a way that improves returns, and in particular that the Partners at the funds will simply use the money to increase their drawings.
The GP-LP structure used by most funds is a brake on innovation here too. Because LPs don’t typically have any ownership of the GP they don’t benefit directly when GPs build value into their management companies. This lack of alignment makes conversations about fund managers investing to build value add capabilities harder than they could be.
It’s hard and requires a different mindset
The second reason is that Applied Venture is difficult to execute on from an operational perspective. As well as being great investors, Applied VCs need to run a high value services business. Moreover, if the VC is high quality, the portfolio companies will be high quality and hence very demanding of the value add team.
Executing well on this opportunity requires building a deep understanding of the support entrepreneurs need, developing a suite of services that match those needs and then hiring and maintaining a team that can deliver those services. The people in that team will have very different needs to investment professionals.
The Applied VCs listed above have tackled these challenges and developed solutions that are making a big difference to the success of our portfolio companies and are starting to show that our approach will generate superior returns for our investors.
Although it is early days, we’re starting to see some positive data for our own portfolio. Our companies are 4x more likely to reach Series A, with a 55% higher valuation, 26% faster and with founder equity 2.3x more valuable than their peers.
The success we’re seeing coupled with the experience at other VC firms and the logic outlined above has convinced us that Applied VC is the logical next step for the venture industry.
Between 2006 and 2016, I wrote something on this blog almost every working day. It was a huge effort but I loved it. People often asked me how I found the time, but when you see value in something, you almost always simply make the time. That value for me has been not only in distilling and consolidating my thoughts – but also reaching and engaging with a much broader audience than I would be able to otherwise.
But by 2016 things had changed a lot, which meant blogging slowly but surely taking a back seat. We were now three years in at Forward Partners and it was increasingly obvious that the team here should be writing rather than me. As of last summer, I stopped blogging all together.
Well we’re on the cusp of yet another big change here at Forward Partners, one which has given me the energy and will to get back into it, and so today I’m relaunching the Equity Kicker – with a fresh design update for good measure (a big thanks to Lewis for his help here!).
That big change? Well, I’ve been working on the long term future for Forward Partners and continuing to build on our ambitions to revolutionise the world of venture capital. Continuing to share more of how we see the ‘Applied Venture’ model becoming commonplace is one thing, but another part of that is how servicing founders will evolve more broadly. I’ve personally been exploring how a mindfulness-meditation based service for founders will not only contribute to their personal wellbeing but in turn improve performance.
So this blog will ongoing be dedicated to these two passions – the future of venture capital and how mindfulness/meditation can support the founder journey. As usual, for all things Forward Partners you can check out our own blog, or for insights, tips and tools for company building from our team, The Path Forward continues to go strong.
If you’ve read this far, I say thank you and a big welcome back! It feels a bit retro to still be blogging on my own domain but I’m reluctant to lose my archive of posts. So please pass the word on to any friends you have who are interested in mindfulness and/or the future of venture capital, and I hope to see you back here soon!
In it he argues that lean thinking has been overdone and that startup CEOs should be more aggressive raising capital and investing in building value in their companies. His reasoning is that being number one in a market is the only thing that counts, and that it therefore makes sense to go all out to achieve that goal. Running lean means going slower, increasing the chances that another company takes that coveted number one spot.
I have a ton of respect for Ben. He was produced large volumes of beautifully written guidance for startups that I have enjoyed reading and quote frequently. I’ve also agreed with pretty much all of it.
Even this time I think he is partially right. But his advice needs a major qualification, because whilst it is right for some companies to go all out to secure the number one slot, there are plenty of others for whom raising a ton of cash and investing heavily is the wrong answer. For some it’s because they haven’t reached that point yet, and for others it will never be the right answer.
Let me start by defining the group of companies for whom a ‘Fat start-up’ strategy is the right strategy. I think they have the following characteristics:
They operate in a very large market
They know how investing heavily will drive growth – i.e. have some form of product market fit
They have a path to profitability or confidence they can raise future funds
It is likely all the companies that a large fund like Andreessen Horowitz wants to invest in have all three of these characteristics, making Ben’s advice appropriate for his universe.
However, for earlier stage funds like Forward Partners the picture is a little different.
Some of our portfolio companies have these three characteristics, and most of those are raising as much as they can to maximise their chances of being number one in their market. We love and support that firstly because it’s what the founders want and we are behind them, but also because we are shareholders and know that in nearly all markets the number one company is much more valuable than the number two.
But a lot of our portfolio don’t have all three of those characteristics, and for them it makes sense to run lean, at least for a while. Most of those companies fall into one of these two categories:
They don’t yet know for sure how big their truly addressable market is. We invest in lots of companies that are playing early in emerging new markets. We believe the markets have a good chance of being large, but at the outset we don’t know for sure. For those companies it is important to make sure they don’t over-fund for their truly addressable market size. If a company’s market ends up being small relative to the amount of capital they have raised then the outcome won’t be good. The exit will likely be similar to or smaller than the amount of capital they raised, meaning investors will be unhappy because they lost money or only just made their investment back, whilst management and founders will only make what they can negotiate out of a side deal.In his post Ben talks about a startup purgatory where under-investment leads to coming second in the market and low returns after years of effort. This is the other type of startup purgatory, where over-investment leads to low returns despite winning the market, again after years of effort. There are few things more annoying than working hard, building a successful business, exiting for a decent, but not huge, amount, and having all the stakeholders be disappointed with the outcome.
Companies in this group should start raising relatively small amounts and then scale up as it becomes clear the opportunity size merits it. Putting that in fat startup vs lean startup terms, these businesses should start lean and only move to fat once they are sure they are in a big market.
They are in a big market but haven’t found product market fit yet. Most of our investments are pre-product market fit. Many are pre-product entirely – no product, no code, no team, just a great founder and an amazing idea. For these pre-product market fit companies raising a lot of money early is occasionally the right thing to do – mostly when the competition is, or is likely to be, fierce – but for most of them it makes sense to keep things lean until the unit economics are established and it’s clear how more cash will drive growth and enable the next round. Raising a lot of money before this point – which you can consider a working definition of product market fit – is dangerous because of the increased expectations that come with a big round.Getting investors to back you in a big round generally requires showing them a big plan, i.e. one that has rapid revenue growth to make them excited and rapid expense growth to justify the fundraise. Most founders who raise a round like this follow the expense side of the plan, but if they are pre-product market fit they don’t know if the revenues will follow. If those revenues don’t come then the company quickly falls into a precarious position, with a big burn, a big valuation to live up to and little progress to show to potential investors in the next round.
Companies in this group should generally stay lean until they have found product market fit.
I’m as excited about being part of massive companies as everyone else in this industry, but it’s important to recognise that there are lots of great companies that don’t reach $1bn in value, but do make a meaningful contribution to society and deliver great outcomes for their founders and early investors. The overarching point of this post is to note that these sub $1bn companies need to be funded appropriately. Generally speaking, and to simplify, that means staying lean unless or until it’s clear the outcome can be very big, or, in more detail, start lean and become progressively less lean only as the scale of the opportunity becomes clear.
We all know that things get difficult when someone wants something too much. You might have had a needy boyfriend or girlfriend whose constant need for reaffirmation and over-reaction to perceived signs of problems undermined your relationship. Or you might have experience of a co-worker who wanted promotion so much they got obsessed on one thing and lost sight of the big picture.
The same thing happens to founders. A lot.
It’s easy to see why. Starting a company is a big risk and founders invest a lot of themselves into their companies – a lot of time, a lot of emotion and a lot of money (whether by way of direct investment of opportunity cost of a higher salary that could be earned elsewhere). Then they hire people and raise money by promising success.
By this point failure feels unimaginable, an embarrassing waste of time and money, a horrible process of laying people off and a litany of broken promises to people they care about. And then the negative voices can start, I’ve wasted my career, I’m a failure, nobody will ever want me, I won’t be able to keep up the payments on my house etc. etc.
I have had some of these feelings at Forward Partners.
Here are the three most common ways I see needing it too much hurt founders:
They are less authentic when they pitch. Every startup is an experiment and is best understood as a learning journey, yet when they pitch founders are asked to project into the future with confidence. It’s important that they feel conviction – investors are most definitely looking for that – but it’s also important that they show an understanding that their assumptions might be wrong. Founders who need it too much have a hard time countenancing that idea, making them look brittle and unconvincing.
They don’t push potential customers and partners to a ‘yes’ or a ‘no’, preferring to let time pass and have more meetings rather than take the chance of getting a ‘no’ that might be too hard to hear. The result is spending a lot of time and effort with companies that don’t come through, time that could have been spent building new pipeline, thus increasing the chances of the business succeeding.
They are chronically slow to ship product, always wanting to add another feature or add a bit more polish rather than release it to the world who might not like it. As Eric Ries taught us, if some customers don’t love the essence of your product you are doomed anyway and unless you are a most uncommon genius at least some, if not most, of the additional work you do pre launch will turn out to be a waste of time. So much better to release early. There’s a balance of course, and the game has become harder since Ries published The Lean Startup in 2011. Nowadays there’s an existing online alternative for just about every new product, so it’s no longer sufficient to ship a bare bones MVP, if you want people to even think about switching you also have to achieve a minimum level of usability across the whole product. But that doesn’t change the need to ship at the earliest feasible moment.
The first line of defence is self-awareness. If you catch yourself doing anything I’ve described above, or more generally, departing from your normal standards of objectivity then stop and ask yourself if you’re needing it too much. Then, maybe the tougher part is to try and change how you feel. Remember that, as important as it might seem at the time, no one conversation is going to make or break your company. There are always more customers and investors to talk to, so you can afford to relax a little. And if you get good at relaxing you will do better anyway.
The second thing is to take time to think through your Plan B. If you have an acceptable fall-back then it will be that much easier to relax and you should avoid the really negative thought spirals. Our big bet when we started Forward Partners was that we could get better results by investing heavily in an operational team to support our partner companies. Providing a platform that would make it easier for founders to succeed would let us win the best deals and help them reach even higher heights. That’s panning out, but our Plan B was a calculation that if all the extra investment turned out to be a waste of money then the fund would still make OK profits so long as the investments performed as well as companies I had backed in the past.
Finally, find someone to talk to. Best is a coach, if you can afford one. They will help you see when your need for success is getting in the way of clear thinking.