Five Lessons Learned Getting to a Second Fund
Got to announce the good news about my second effort today…
There are some things I learned about running a first fund over and above finding great companies that I think are important for new managers to keep in mind:
1) Venture capital will be humbling.
You’re going to wind up failing a lot. You’re probably not going to have the “coolest” fund or always be first to the trend with the most hype around it. The founders that are going to make your career aren’t the ones that everyone knows already, inviting to all the best parties. They’re the ones working on the companies that were a struggle to get people to invest in — so much so that you’ll question your own judgement a lot when you’re the first yes.
2) Focus on getting known for being helpful and hardworking — by actually being helpful and hardworking. It’s easy to get swept up into the cult-like status around venture capitalists as kingmakers or thought leaders. The truth is you won’t really know how good you are for years and years — so don’t be so quick to think you know what you’re doing, no matter what the media tells you. This will be my seventh year of leading investments and it’s been fifteen years since I first joined the asset class — and I still feel like my learning has just begun. Don’t worry too much about the new new fund everyone wants to write about more than they want to cover what you’re doing.
3) Have a consistent focus. Since I started working at First Round Capital back in 2009, very few early stage investors seem to be doing the same kinds of deals at the same stage today as they did back then. There are firms that started after that date that have gone on to raise three, four, or even five funds that are ten or twenty times the size of their original offering — even though we’re just figuring out now how good those investors are at what they started out doing.
It takes so long to hone your craft in venture capital that, for me, I could never be successful changing up what I do all the time. The deals I do today at Brooklyn Bridge Ventures are largely the same kinds of deals I was looking at seven years ago and they’ll be the same seven years from now.
4) The investments you make in relationships last longer than most of the companies you’ll invest in. Last year, I got to back a founder that I first met ten years ago when I was an analyst at Union Square Ventures. I have investors in my fund that have known me that long — and others who took the time to watch my first effort over three years before investing in the second. I also made an investment in a founder that I previously backed once before — my first repeat founder.
I’ve spent a lot of time over the past four years thinking about how I treat other people — how I can make people feel respected, comfortable, and listened to. I’ll never get it right 100% of the time, but I realize now, more than I ever have, how these relationships add up to a network over a career. I take no greater pride than when a founder I passed on recommends me to another founder because they feel like, even though they didn’t get a check, they had a good experience with me.
5) You need a plan rooted in reality.
I highly recommend that any new investor builds out a cash flow model around their strategy. Are the assumptions realistic or do you need to find eight IPOs in a sector likely to only have four of them? What’s your average going in price? Will you ever be able to put all this money to work? When do you expect these companies to fail and how many checks will you need to write before that happens?
That’s the difference between angels and VCs. Success doesn’t just come from having a good network and getting in cool deals — it’s about building a portfolio strategy and having something that works at scale and over time.
One other note: This isn’t, and never will be, about the money. There are a lot easier and quicker ways to make money than by running a seed and pre-seed fund. I do fine and pay my bills but greater scale, more management fees, and a bigger operation would undoubtedly put more money into my pockets in the short term. It wouldn’t, however, enable me to make better investment decisions or provide me more time to spend with founders. That’s my only goal — to responsibly invest my Limited Partners’ capital as part of a consistent strategy by being helpful to high potential founders.
Everything else is just noise.