Haystack’s Semil Shah: “I still believe venture investing is an apprenticeship business”

Tech investor and writer Semil Shah was just named to the Forbes Midas Brink List, Forbes’ shortlist of up and coming VCs. Semil runs Haystack, a fund that has invested in over 70 companies, including Instacart, DoorDash, Hired, Hashicorp, Giphy, Envoy, OpenDoor, eShares, Airmap, Clara Labs, and Managed By Q. He is also a Venture Partner at GGV Capital.

In this interview, we get Semil’s take on:

• Why he’s focused on investing in specific people and not specific sectors
• How AngelList makes him a more effective investor
• How the emergence of hybrid funds, funding platforms, and deal-by-deal investing is changing the VC ecosystem

Julie Ruvolo: Why did you start Haystack?

Semil Shah: I started Haystack in Q1 of 2013. Two of my closest friends — Nakul Mandan, who is now at Lightspeed, and Gautam Gupta, the CEO of Naturebox (previously at General Catalyst) — pulled me aside, slapped me across the face, and told me that I needed to start a fund if I wanted to have a real career in venture. I didn’t know what I didn’t know then, and had I known how much paperwork is involved and all the other time-consuming mechanics of doing this, I may not have.

I known how much paperwork is involved and all the other time-consuming mechanics of doing this, I may not have started a fund.

My initial thesis was to look for marketplaces, products that bridged online-to-offline, and the like. Over the years, I’ve come to realize it’s less about sectors and, for me, more about finding specific types of people. So today, my focus is to search for and find those people, wherever I can find them.

One example of many is Marshall Culpepper from Kubos. Marshall lives in Texas now, but in a previous life, he was a major, long-term open-source contributor in the Bay Area, an early employee at companies like Jboss and Appcelerator, and a tour of duty with Mozilla. Then he was a very early employee at Spire, a leading satellite technology company. With Kubos, Marshall and his team built an open-source software platform for flight control of micro-satellites. Kubos is a clear extension and continuation of what Marshall has done to date, and is also in a large growth market of micro-satellites and related technologies.

You’ve made close to 100 investments through Haystack, many through your AngelList syndicate. What deals do you bring onto AngelList, and why?

To date, I’ve shared opportunities for the AngelList community to co-invest with me when I’m investing, like Chariot, which was acquired by Ford in 2016; I’ve also taken some follow-on allocations to the platform, like Filament, since my own fund is very small and not set up for these kind of follow-on opportunities.

Is this full time for you?

Yes, absolutely, I focus on investing. I’m also a Venture Partner at GGV, where I go on Mondays. And, I’m a dad of three little kids. That’s it. In the past, I juggled lots of different things as I found my way through the Valley, but since the summer of 2015, those activities have become narrowly focused on investing in Haystack, spending Mondays with GGV, and changing diapers!

Any thoughts on being an emerging fund manager?

Perhaps a contrarian opinion — I still believe venture investing is an apprenticeship business. The old tradition of growing up in a firm and then taking over the reins may be gone, but I still believe that parts of the business need to be taught and passed down to those coming up. You can’t just read about it online or in a book.

I rely on a vast network of current VCs with many years of experience to learn from and get guidance from. I wouldn’t have started or survived without their help.

Others will disagree and say that venture needs to shed itself of the old patterns, and there is certainly truth to that, but at least for me, I rely on a vast network of current VCs with many years of experience to learn from and get guidance from. I wouldn’t have started or survived without their help.

Any thoughts on raising capital as an emerging fund manager?

If I were an LP (and I am not), I wouldn’t get caught up in the chatter about what could make a great investor — I would just try to find unique people who have unique access to opportunities that others may not. Those unique people could have an operational background, or an investment background, or a technical/academic background. Who knows? Instead, I would look for demonstrated evidence of angel investing, I would talk to the founders they’ve worked with, and I would interview them and reference them thoroughly.

You mentioned that if you’d known all the work that goes into starting a fund, you might not have done it. Has AngelList helped you at all in this respect or been an enabling factor for you to scale your investment activity?

Without a doubt, AngelList is partly responsible for me to have an investment career and track record. Not only is the software, platform, and network valuable, the team at AngelList works tirelessly and relentlessly behind the scenes to help both founders and investors on the platform. Even just on specific deals, the work someone like Parker Thompson or Simon Pickert have done, just to name two of many, is never-ending — and that culture permeates through the organization and the software, and makes me more effective at what I do.

You’re an investor through Haystack and GGV Capital, but you previously consulted for a number of VC firms, including General Catalyst, Kleiner Perkins, and Trinity Ventures. What’s your take on how VC is evolving from within Silicon Valley — What are the key shifts do you see in the actual VC ecosystem?

There are so many! I’ll share one: I believe the future of many of the great traditional venture funds out there will see a transformation into “hybrid funds.” Many of the most successful funds have scaled to very large AUM. Specifically, instead of just investing in early-stage companies, they may also manage and deploy fund-of-fund vehicles, or buy-out capabilities or even public “crossover” vehicles to broaden their exposure.

These hybrid structures could enable funds to manage more money, earn more fees, and have more tentacles into the ecosystem with which to find and fund the next Airbnb. I don’t mean to suggest all will do this exactly or succeed if they try to, but I believe it’s the path we’re headed down.

How about the proliferation of angel/seed investment — Is it becoming harder to make money as a seed investor? Is there a point where there are too many early-stage investors?

I don’t think it’s a surprise — yes, there are tons of small funds and lots of options for entrepreneurs to raise initial or seed capital, especially in the Bay Area. In most places, there could certainly be more investors and money early, but most of it is concentrated here in the Bay Area, which we know is insanely expensive; office space and labor are not cheap, and it’s very competitive.

It’s a fair question to ask: “How does the Bay Area in 2017 help or hurt an early-stage startup’s runway?”

It’s a fair question to ask: “How does the Bay Area in 2017 help or hurt an early-stage startup’s runway?” One byproduct of this is startups are spilling over geographically outside the Bay Area, which is fantastic for many reasons. Another byproduct is that early-stage companies that want to stay here may end up raising larger seed rounds (say, $3M+) very early in order to keep up with local inflation and maintain a solid runway.

What impact are new platforms like Y Combinator or AngelList having in the ecosystem?

In my opinion, there have been three new platforms that have changed the game of venture in the last decade or so: First Round Capital’s platform; Y Combinator; and AngelList. I wrote about YC and AngelList’s moves in detail back in 2015.

There have been three new platforms that have changed the game of venture in the last decade or so: First Round Capital’s platform; Y Combinator; and AngelList.

With crowdfunding and accelerators, and in an era of relatively cheap money, Shark Tank, and The Social Network, early-stage investing has become so chaotic, most of the established funds have moved up-market as a result. They’ve also attempted to try to morph into platforms to offer more services to their portfolio and attempt to scale operations that used to be done in a more craft-like, 1:1 way. At the end of the day, I would argue these all create a net-positive state for founders, with the caveat that it also created a great fragmentation of talent.

AngelList has catalyzed a shift from investing in funds or fund managers, to investing on a deal-by-deal basis in SPVs. What do GPs or LPs you’ve spoken with think about this?

I am neutral on this. In some cases, SPVs feel like the right choice, where everyone has choice; in others, it feels like pooled risk keeps everyone honest and aligned. I think it just depends on whether the GPs and the LPs in each situation understand the benefits and drawbacks, so they can keep an active dialog open around them.

Any thoughts on the globalization of VC?

I have a nuanced point of view here. There will undoubtedly be tremendous opportunity for innovation and new markets outside the U.S. as more and more of the world comes online (via mobile phone) and gains access to better software and cloud-based services.

Whether traditional venture capital will scale to meet those opportunities is another question. To date, VC has largely (not entirely) been a special animal in the Bay Area because the density of technology innovation in this geography has afforded the VC model an extra exit path — acquisition. I believe most (not all) acquisitions are driven by proximity. That could change. But outside the Valley, companies will have to find new ways to help their earliest investors get liquid, as many will not be able go public.

So, innovation will be universal, but VC may not meet the challenge. Of course, this doesn’t apply to large markets like China, which are incredible and have the chance to be dominant worldwide. Perhaps a new model emerges, and that would be exciting to see!

Any new models or developments you see on the horizon?

So many! I’ll cite one — as the number of funds continues to increase, and as many of those funds scale, I believe it will be harder for founders to find qualified, credible board members to be active, long-term investors in their companies.

I believe active management and governance help guide a company to reach its potential. Just like there are not many great pitchers in Major League Baseball, I believe founders will find it harder to fill these seats with people who not only have the right incentives, but who are qualified to sit in that seat for a long period of time. We may be in the early innings of that today, and perhaps it is one reason why companies were royally funded but took their eye off the exit path.

Originally published at blog.angel.co on April 21, 2017.