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On Funding — Shots on Goal

Being great as a startup technology investor of course requires a lot of things to come together:

1. You need to have strong insights into where technology markets are heading and where value in the future will be created and sustained
2. You need be perfect with your market timing. Being too early is the same as being wrong. Being too late and you back an “also ran”
3. You also need to be right about the team. If you know the right market and enter at this exact right time you can still miss WhatsApp, Instagram, Facebook, Stripe, etc.

I’ve definitely been wrong on market value. I’ve sometimes been right about the market value but too early. And I’ve been spot on with both but backed the 2nd, 3rd or 4th best player in a market.

In short: Access to great deals, ability to be invited to invest in these deals, ability to see where value in a market will be created and the luck to back the right team with the right market at the right time all matter.

When you first start your career as an investor (or when you first start writing angel checks) your main obsession is “getting into great deals.” You’re thinking about one bullet at a time. When you’ve been playing the game a bit longer or when you have responsibilities at the fund level you start thinking more about “portfolio construction.”

At Upfront we often talk about these as “shots on goal” (a fitting soccer analogy given the EURO 2020 tournament is on right now). What we discuss internally and what I discuss with my LPs is outlined as follows:

• We back 36–38 Series Seed / Series A companies per fund (we have a separate Growth Fund)
• Our median first check is $3.5 million, and we can write as little as $250k or as much as $15 million in our first check (we can follow on with $50 million + in follow-on rounds)
• We build a portfolio that is diversified given the focus areas of our partners. We try to balance deals across (amongst other things): cyber-security, FinTech, computer vision, marketplaces, video games & gaming infrastructure, marketing automation, applied biology & healthcare systems, sustainability and eCommerce. We do other things, too. But these have been the major themes of our partners
• We try to have a few “wild, ambitious plans” in every portfolio and a few more businesses that are a new model emerging in an existing sector (video-based online shopping, for example).

We tell our LPs the truth, which is that when we write the first check we think each one is going to be an amazing company but 10–15 years later it has been much hard to have predicted which would be the major fund drivers.

Consider:

• When GOAT started it was a restaurant reservation booking app called GrubWithUs … it’s now worth $3.7 billion
• When Ring started, even the folks at Shark Tank wouldn’t fund it. It sold to Amazon for > $1 billion.
• We’ve had two companies where we had to bridge finance them several times before they eventually IPO’d
• We had a portfolio company turn-down a $350 million acquisition because they wanted at least $400 million. They sold 2 years later for $16 million
• In the financial crisis of 2008 we had a company that had jointly hired lawyers to consider a bankruptcy and also pursued (and achieved!) the sale of the company for $1 billion. It was ~30 days from bankruptcy.

Almost every successful company is a mixture of very hard work by the founders mixed with a pinch of luck, good fortune and perseverance.

So if you truly want to be great at investing you need all the right skills and access AND a diversified portfolio. You need shots on goal as not every one will go in the back of the net.

The right number of deals will depend on your strategy. If you’re a seed fund that takes 5–10% ownership and doesn’t take board seats you might have 50, 100 or even 200 investments. If you’re a later-stage fund that comes in when there’s less upside but a lower “loss ratio” you might have only 8–12 investments in a fund.

If you’re an angel investor you should figure out how much money you can afford to lose and then figure out how to pace your money over a set period of time (say 2–3 years) and come up with how many companies you think is diversified for you and then back into how many $ to write / company. Hint: don’t do only 2–3 deals!! Many angels I know have signed over more than their comfort level in just 12 months and then feel stuck. It can be years before you start seeing returns.

At Upfront Ventures, we defined our “shots on goal” strategy based on 25 years of experience (we were founded in 1996):

• We take board seats and consider ourselves company-builders > stock pickers. So we have to limit the number of deals we do
• This drives us to have a more concentrated portfolio, which is why we seek larger ownership where we invest. It means we’re more aligned with the outcomes and successes of the more limited number of deals we do
• Across many funds we have enough data to show that 6 or 7 deals will drive 80+% of the returns and a priori we never know which of the 36–38 will perform best.
• The outcome of this is that each partner does about 2 new deals per year or 5.5 per fund. We know this going into a new fund.

So each fund we’re really looking for 1–2 deals that return $300 million+ on just one deal. That’s return, not exit price of the company. Since our funds are around $300 million each this returns 2–4x the fund if we do it right. Another 3–5 could return in aggregate $300–500 million. The remaining 31 deals will likely return less than 20% of all returns. Early-stage venture capital is about extreme winners. To find the right 2 deals you certainly need a lot of shots on goal.

We have been fortunate enough to have a few of these mega outcomes in every fund we’ve ever done.

In a follow-up post I’ll talk about how we define how many dollars to put into deals and how we know when it’s time to switch from one fund to the next. In venture this is called “reserve planning.”

** Photo credit: Chaos Soccer Gear on Unsplash

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On Funding — Shots on Goal was originally published in Both Sides of the Table on Medium, where people are continuing the conversation by highlighting and responding to this story.

A few weeks ago, I had the pleasure of talking to Samir Kaji on the Venture Unlocked podcast about a wide range of topics that we as venture capitalists think about everyday, including:

• How to build a generational firm — retaining partner talent and finding the complimentary networks and skillsets firms need to succeed over time
• The state of venture today and how COVID crammed 10 years of technological change into one accelerated year
• The human psychology of decision making and one book I think every VC should read
• How to get LPs to become true believers and why I think data rooms are where deals go to die

Mark Suster of Upfront Ventures

And much more. You can listen to the entire conversation above or via this link, but I also wanted to highlight one topic we discussed that I feel strongly about, which is how I think enterprise sales and venture fundraising are basically the same muscle. Let me explain.

Three Rules of Fundraising “Sales”

One of the common mistakes I see startups as well as VCs make is spending too much time on top of funnel prospecting. Why? Because it’s comparatively easier to have a first meeting, meet each other, share stories, etc. than it is to start narrowing down and doing the work to close the deal, or risking hearing a no. But here’s the thing — it’s not just startups who do it. We all do it on this side of the table too. LPs, VCs, everyone. We love first meetings! It’s the mid and bottom funnel that’s hard.

In fact, I wrote a previous blog post on “Why Successful People Focus on the Bottom End of the Funnel.”

I counsel first-time VCs (as well as founders) to have mid-funnel strategies to get from first LP meeting to close and to put a disproportionate amount of time into this area (I say more about this on the podcast starting at timecode 27:41). Like any enterprise sale, you want to think from the perspective of the buyer and what they need to feel confident about the decision to buy a stake or ownership in your fund.

Here are the three rules I think about in any sale, whether it’s enterprise sales or when trying to move LPs to a decision, there are three keys you need to be able to answer:

• Why buy anything?
• Why buy me?
• Why buy now?

Why Buy Anything?

When raising a first fund (or a fifth or even a tenth), it’s all about establishing your core target market and finding out who is in the market for what you are selling? Whilst there are a wide range of LPs and you could have first meetings for months (and many VCs do), there is probably a much smaller number of LPs who want to invest in a fund your size, with your focus, and whose minimum or maximum check size lines up with what you’re seeking.

So I encourage first-time fundraisers to qualify, qualify, qualify. Do the legwork to find the people who want to buy specifically what you’re selling. Research everyone who has raised a comparably-sized fund and find out who backed them — that’s your target market. Every other conversation will be wasted time, and just like an enterprise startup, wasted time is an existential threat.

Why Buy Me?

OK, so you’ve found your target LPs who invest in funds at your stage. Now it’s time to convince them why they need to invest in your fund, when they could invest in other funds with more proven returns or partners. And again, just like in enterprise sales, this is all about differentiation — what makes you different and complimentary to all the other funds in their portfolio? What’s your unique selling proposition?

For Upfront, it’s about Los Angeles. We invest 40% of our dollars in Southern California firms — and even though by definition that means the majority of our dollars are invested outside the area, that still makes us meaningfully different from the ten other Sand Hill Road funds this LP might be speaking with. We’re definitely not a “regional investor” but we do have some comparative advantage in a good portion of our deals.

It’s critical to stand for a firm differentiator and here’s why: it shines a clear spotlight on whether you are or are not a good bet for this LP. If you do everything that every other firm does, in the same ways, why should they buy you? And yes — a firm differentiator means that not everyone will buy into your thesis but that’s okay. You don’t need everyone, you just need a few core believers and having a hard “why buy me” pitch makes it easier to find and convert those leads.

“Why buy me” is also a good time to leverage references and external people who can vouch for you, who can champion who you are and why you’re a good bet. Everyone loves to know that someone else has bought first, and LPs are no different.

Why Buy Now?

This can be the hardest of the three rules to sell whether you’re in enterprise sales (“why buy this now when I can wait until you have more traction, more logos, more product features?”) or whether you’re raising a fund (“why invest now when I can see how your first fund turns out and come in for the next one?”)

This is all about creating scarcity and being willing to walk away, but doing it with a smile on your face. For Upfront, we raise consistently sized funds and have been fortunate to have LPs with us fund after fund, whether in our core A fund or our growth funds that support some of our most promising investments. That means there’s not a lot of room to bring in new investors down the line, and hopefully that’s true of first-time funds as well — they do so well that the second fund is oversubscribed. Any customer, whether an LP or a big enterprise buyer, needs to know that there’s a chance they could miss out.

You can hear more about these three rules and more in my conversation with Samir — it was a fun one to do and I hope you’ll enjoy it as much as I did.

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What Mistakes Do VCs Make When Fundraising? was originally published in Both Sides of the Table on Medium, where people are continuing the conversation by highlighting and responding to this story.

Customer acquisition is the lifeblood of many startups from e-commerce to gaming to marketplace companies, among others. Most of these startups spend the lion’s share of their marketing budget in today’s social media channels: Facebook, Twitter, Reddit, Snap, TikTok and so on because — no surprise — that’s where the customers are.

Digital advertising spend is projected to grow 25% this year to $191 billion, and Google (69%), Facebook (59%), Snapchat (116%) and Twitter (87%) all just reported rapid growth in their year over year advertising revenues. For these companies, it looks like a rosy picture.

But if you ask anyone in the ecosystem of customer acquisition — founders, marketers, investors — and you’ll hear the same thing: customer acquisition (CAC) is getting harder and more expensive. Some of this can be attributed to the exponential growth in e-commerce and direct-to-consumer businesses as a result of the pandemic and global lockdowns — eCommerce for example grew 39% just last year – so there’s simply more demand. And some of this can be attributed to the increased pressure on the available platforms not only to facilitate acquisition at scale but to do so in an increasingly “walled garden,” privacy-restricted world.

Despite the huge and sustained growth in digital advertising (or maybe because of it), there are virtually no tools where a marketer or growth leader can understand their performance and spend across channels, nor where they can share best practices and insights with their peers so the platforms are at an information advantage.

That’s where Trust comes in — it was built to arm those spending money in channels in order not to be at a disadvantage.

==> You can join the Trust waitlist here.

Trust, which today has announced a $9 million financing (Upfront is an investor), is a platform designed to help make the most of marketing investment by providing both analytics and a community of likeminded executives to share what’s working, and what’s not, across platforms. Think of it as Bloomberg for marketers, in a way that gives smaller companies and teams as much firepower as larger organizations to help them optimize spend across channels and identify new, high-performing opportunities. This is accomplished through aggregated, anonymized competitive benchmarking, market-level performance data across the major social and ad platforms, and curated news and conversation from industry leaders.

To start, Trust is also launching with the Trust virtual card, which essentially funnels credits and preferred billing to any business, allowing them to increase their marketing buying power by up to 20x and receive 45-day payment terms for all their marketing investments.

Why Did I Invest in Trust?

As a VC, one of the key things I’m looking for in any new investor is “product-founder fit” e.g. does this founder have an insight or advantage that makes them uniquely suited to successfully build this product and business? There are plenty of talented, smart founders out there but you’d be surprised how many don’t have that “unfair advantage” when it comes to their product and audience.

Trust is led by CEO and co-founder James Borow, who led Snap’s global programmatic ads platform and grew the self-service ads revenue from 0 to $1B+ over three years. In that role, James and his co-founders (many also from the Snap team) saw first-hand how hard it was for companies to understand where and how to best invest in marketing, and how opaque the platforms make it for advertisers. They lived this challenge every day alongside their customers at Snap, and Trust was founded out of a direct desire to reshape marketing and ad-spend dynamics for the people who are on the ground building businesses. To me, that’s the textbook example of “product-founder fit” and one of the reasons I believe this business will succeed.

Since day one I’ve believed in James as a founder who deeply understands and empathizes with his customer pain point, not just from the user side but also from the platform side. A lot of people have tried to solve multi-channel analytics and optimization, but I believe James and team have the unique set of skills and experience to finally crack the code.

As an investor in early-stage companies, many of whom are living the customer acquisition challenge every day, I’m excited to see how Trust can reshape the playing field for startups and larger organizations alike. Founders, marketers and growth leaders — join the Trust waitlist here.

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Introducing Trust, and the Importance of Product-Founder Fit was originally published in Both Sides of the Table on Medium, where people are continuing the conversation by highlighting and responding to this story.