A Game of Venture Loans

The premiere of the final season of Game of Thrones is tonight. I am sure it will not surprise you to learn that I am a massive fan. I have read the books and watched and rewatched the series. One of the major overarching themes of the show is the zero-sum competition all characters experience in Westeros.

In the game of thrones, you either win or you die.

At a much more benign level, we see this zero-sum phenomenon play out in our world too. One of the reasons I have never been particularly enamored with the public markets is that there is someone “on the other end” of every trade. What this means, is that if you are purchasing a stock, the person who is selling you that stock almost always expects it to go down. If the stock goes up, you win and they lose.

I love venture in part because it is not a zero-sum game. There isn’t anyone sitting on the other end of our “trade.” When done well, there is enough incentive alignment to ensure that no party is succeeding at the cost of anyone else. Investors in funds win when VCs win when entrepreneurs win (say that fast five times). Perfectly in balance, as all things should be <<insert Thanos meme here>> (speaking of Thanos, it’s kinda wild that GoT, Avengers, and Star Wars are all concluding in 2019. I am firmly aboard each respective hype train, but it will be a bit bummer when all is said and done).

The one area that this does not necessarily hold true is getting into a hot round. The dynamics are such that in venture, entrepreneurs are always trying to thread the needle between raising too little (short cash runway) and raising too much (dilution). This means that for a given company, at a given valuation, there is going to be a cap to the amount of money the entrepreneur is going to want to raise. For most entrepreneurs, the worry is getting enough dollars in the door to close out the round, but for the hottest deals with experienced entrepreneurs or in a sexy space, rounds can fill up quickly. This can lead to significant competition between investors trying to get into the round. While not as competitive as Stark vs Lannister, things can heat up pretty quickly.

I should note that I have only ever witnessed this competition second-hand. My experience so far has mostly been centered around investing in the Midwest where the focus is much more on getting enough money around the table than trying to elbow to the front of the line. The simple fact is that there are not nearly the same numbers of investors here as there are in a bay area or a New York. That is changing as more and more people start paying attention to the exciting things being built in cities like Columbus, Pittsburgh, Kansas City and more.

I am thrilled for this increased attention and I think that it will be hugely beneficial to the region as a whole.

My one hope is that midwestern investors can maintain the same collaborative nature that they have cultivated thus far.

Because zero-sum competition is not a ton of fun.

Just ask the Starks.

How to Invest Like the Best of the Midwest for the Rest

I had the privileged of seeing Andy Jenks, Partner at Drive Capital speak last week at Ohio State’s Venture and Startup Summit. Drive are the big dogs in town with over half a billion dollars in capital and investments into some of the top companies in the Midwest. I really enjoyed Andy’s speech and thought there were some insightful nuggets in there that were worth sharing.

The Midwest startup ecosystem is flourishing right before our eyes…

Now this is something Andy and I agree upon! The Midwest has all the ingredients to be a successful startup ecosystem. High quality universities, low-cost of living, and a strong corporate base combine to form a potent cocktail for growing new enterprises. The Midwest is also slowly, but surely starting to get some startup momentum. Successful startups inject new capital into an ecosystem and unleash the next generation of entrepreneurs in that area. In 2013, ExactTarget was acquired by SalesForce for $2.5 billion. In 2017, CoverMyMeds was acquired by McKesson for over a $1 billion. In 2018, Duo was acquired by Cisco for over $2 billion. Acquisitions like these will seed the next wave of great startups in the region.

… but investors on the coast still have a bias against the region despite their claims to the contrary.

This was disappointing to hear, but maybe not completely surprising. Despite increased media attention and success story after success story, Jenks claimed that coastal investors are still not willing to give Midwestern startups a fair shake. The cynical part of me would call this blatant geographic bias. The more optimistic part would point to the fact that venture investing is a relationship business and being located closer to the startups you are investing into means you can better support the entrepreneurs you are partnered with. The truth probably lies somewhere in the middle. The fact is that if a startup wants to raise serious institutional money from the coasts, they need to have better metrics and more traction than a similar startup in the bay area or New York would need to raise the same amount.

Getting the most out of your board

I love this one. Andy mentioned that he tells all of the founders of boards he serves on to “give him homework.” I think this is a great mentality from a board member, but even more so I think this should be a mindset that all founders should adopt. You don’t have to spend much time in the space to see that unhealthy founder-board relationships are pretty pervasive throughout the startup landscape. Too often founders look at their boards in an antagonistic light. This is a recipe for disaster as founders begin to withhold information from the board and then by the time these issues surface, it is too late for the board to help. The best boards have a symbiotic relationship with a company’s founding team. The board’s purpose is to support and advise the founder, not hound them or tell them how they can do their job better. I love the accountability that assigning each board member a task to complete before the next meeting brings. I think this is a great way to keep your board aligned and engaged, while generating value for the company from the most knowledgeable, experienced, and well-connected people at the table.

Focus on the market first

One of the most interesting parts of the presentation was Andy’s discussion about how Drive develops their investment theses. Drive takes a very market-driven approach to investing. They spend a lot of time building what they call “market maps”. These market maps chart out all the different aspects of a particular market and help Drive determine how they want to attack a particular market and what sort of companies they would be interested in investing in. There is a debate in venture about what matters more, the market or the team. What Drive would tell you is that markets need to be big enough to support the sort of outsized return they need to generate on their successful exits. Proponents of the market first approach will also point to the fact that a good team in a bad market will not be successful, but a bad team in a good market may still be successful despite themselves. My response would be that the absolute best teams have the ability to build markets that never existed before. My personal view aligns much more closely to that of Peter Thiel’s strategy, find a niche that you can attack, build a defensible position, and then build the market from there. To be honest, I think that much of the debate depends on what stage you are investing in. For larger, later-stage shops like Drive, it makes 100% sense to focus on market sizes because when you are deploying hundreds of millions of dollars at a time, every company you invest into needs to have a market large enough to support a billion (or even multi-billion) dollar enterprise. When you are investing in the the earliest stage companies, I believe it makes more sense to invest in the best possible teams. The best teams will be able to pivot when others won’t and may even be able to build a multi-billion dollar market where one never existed before.

There are things we need to still do better on

One of my favorite parts of Andy’s speech was that it was relatively pragmatic in nature. A lot of the presentations around the Midwest startup ecosystem can take on a very ra-ra tone, which makes sense. The great companies being built here continue to be overlooked and it is important to bring attention to them and the growth of the region as a whole. However, as promising as the Midwest’s trajectory is, not everything is perfect. Jenks highlighted a few ways that we need to improve if we really want to take the next step towards being a bonafide startup ecosystem. He urged investors and entrepreneurs alike to aim higher, raise more, and attack bigger markets. I like this. I will be the first to tell you that venture funding is not for everyone, but if it is right for your company, you are joining a game of fastballs and home runs, not grounders to left field (is it weird how many baseball metaphors I use when I am not even a big fan of the sport? I need to start working in more soccer references. Something to think on…). I want to invest in companies working on big ideas. Capital B BIG ideas. I want to invest in companies working on solving world hunger, traffic, cancer, the melting ice caps, and water shortages. And I think that the Midwest is the ideal place to build these sort of companies.

We need only to dream a bit bigger.

The Start of Something New

I am excited to announce that today is my first day working as an analyst at Rev1 Ventures in Columbus, Ohio! I could not be more excited about this next step in my career. Ever since my first exposure to the venture capital ecosystem as an intern at 3x5 Partners in Oregon, I have been fascinated with startups and the ambitious entrepreneurs that build them. Making my way into venture capital has been a goal of mine for years now and I am so grateful to the Rev1 team for this fantastic opportunity. This feels like a huge accomplishment, but I know that this is really just where the hard work begins! Very excited to roll up my sleeves and get started!

WHY Rev1? 

Rev1 is exactly the sort of firm I have been looking for. Rev1 invests in seed stage companies. As I went through my job search process I was very purposeful in targeting seed investors as opposed to later stage venture capital or growth equity firms. One of the things I learned during my time at Carlyle was that the later stage you are as an investor, the more your returns are concentrated in two areas: acquisition and exit. When you are buying billion dollar companies, there is only so much value you are able to add to the operations of a company. Large, developed companies tend to be able to run themselves pretty well without too much outside interference. The real returns in later stage private investments are all based around finding the right deals and executing on them. This is a lot harder than it sounds, but it really does work to drive returns for investors. This is all well and good, but I wanted to gain expertise in an area where there is a much bigger focus on partnering with companies to help them grow, not buying them and letting them run themselves until they are ripe to be sold. With Rev1's venture studio model, they are true partners in the entrepreneurial process. They work with entrepreneurs all the way from two guys with an idea in a garage, up to fully formed and fast growing companies. I am thrilled for the opportunity to work alongside entrepreneurs at the earliest stages of company formation. I believe that this role will provide me with an unparalleled opportunity to learn about what it takes to build and lead a successful business. 

WHY Ohio?

Chris Olsen, the founder of fellow Columbus-based VC firm, Drive Capital, calls the Midwest "the opportunity of our lifetime." The Midwest has all the ingredients necessary to support a vibrant entrepreneurial ecosystem as well as some key competitive advantages versus other geographies. Collectively, the Midwest would be the 5th largest economy in the world. It is home to incredible Universities and research institutions such as Ohio State University, University of Michigan, Notre Dame, University of Chicago, and many more. These institutions provide an incredible wealth of both technical talent and research/Intellectual Property to build companies around. Resources and talent are further provided by the 152 Fortune 500 companies that call the Midwest a home. The ethos of the Midwest is also ideal for building an entrepreneurial ecosystem. There is a palatable underdog status of the region compared to coastal tech centers. This has helped create a much more collaborative environment than one would see somewhere like San Francisco. From what little exposure I have had, there definitely seems to be a view that "a rising tide lifts all boats" and there is a focus on collaboration over competition, as everyone seeks to build up the region together. The Midwest has another "secret sauce" that helps set it apart versus other startup ecosystems: the cost. The cost of living in the Midwest can often be less than half that of living in coastal metropolitan areas. This allows companies to attract and retain top-level talent at a fraction of the cost of what would be required in somewhere like San Francisco or New York. I can personally vouch for this difference in cost myself. As part of our recent move to Columbus, my wife and I were able to double the square footage in our new apartment for approximately half the cost of our previous apartment just outside of DC.

Thanks to everyone that has provided me with wisdom and support throughout this process! Breaking into venture capital is not easy (I am sure there will be another blog post on this topic in the future!), and it is not an exageration to say that I could not have done it alone! 

I am so looking forward to my time with Rev1 and continuing to bring you my insights, thoughts, and views on startups and the world of venture capital. 

Until next time!