6 Lessons Learned 6 Years Into Co-Founding a VC Fund

This July marked the 6 year anniversary of Work-Bench. Co-founding a venture fund has been both the most professionally rewarding endeavor I could ask for while also being equal parts batshit crazy. Interspersed with endless gratitude for reaching the 6 year mark of this journey, I’ve also been reflecting on lessons learned launching and scaling Work-Bench with my incredible co-founder Jessica Lin.

In honor of 6 years of Work-Bench, here are 6 lessons learned from co-founding and scaling a VC fund:

1. Differentiation is Critical.

At Work-Bench, differentiation is our lifeblood. We focus exclusively on enterprise software investments, and from our Fund 2 we lead Seed II rounds and co-lead Series A’s. Our team is unique for the enterprise VC world given that we hail from corporate IT roles, and our model is unique in that we leverage NYC’s high concentration of Fortune 500 companies to understand top pain points, drive our investment theses, and be hands-on in supporting our startups in their early enterprise sales efforts.

Especially as an emerging manager, having this clear focus and differentiated value add has enabled us to punch above our weight class. In a continuously evolving venture landscape featuring “yet another seed fund” on one end of the spectrum and Tier 1 VCs raising bigger and bigger war chests on the other, differentiation has given us a shot at standing out and has been the backbone of our scaling efforts these past 6 years.

In our early days, what set us apart was often perceived as a weakness: “People from corporate IT can’t be enterprise VCs & “You can’t possibly run an enterprise VC fund in NYC.” The ultimate irony here is that this hyper focus and differentiation in enterprise software is now our greatest strength.

Our biggest learning here: embrace what sets you apart and be 10000% you, even when it feels hard to otherwise. I’m proud that we had this thesis going in and that we’ve been resolute in sticking to our model.

2. That Said — Money Talks.

Most new fund managers don’t start out the gate with $100M+ funds. In fact, according to a study by Samir Kaji from First Republic Bank, the average first time VC fund raised in 2018 was ~$33M. Given this stat, most emerging managers begin focused on pre-seed or seed opportunities, and their models run into a bit of a brick wall when trying to get meaningful allocations in Series A rounds and beyond (whether through their own reserves or even to invest through an SPV as a way to give LPs a co-investment opportunity).

When a startup raises their Series A, most funds who can lead the round require 20% ownership. So whether that’s a $12M or $15M Series A that we’ve seen frequently over the past couple years, given the large incoming check and some of the assumed responsibilities they’ll take on (i.e. become an active board member, reserve meaningful funds in case of difficult times ahead), this allocation requirement can frequently be at odds with the existing seed investors who want to double down with their pro rata rights of these potential fund winners.

Especially with the average startup raising $5.6M prior to raising its Series A, there is a tension between insiders who have supported the company to this point and want to invest more in their portfolio company achieving this milestone, and the new investor who typically will remain steadfast about this 20% threshold.

The tl;dr here is that money talks and the Series A lead will typically have enough clout to set the terms, put their ownership requirements first, and then have the insiders figure out the rest themselves. For funds like ours who are on the smaller side, we have had to learn how to get ahead of this dynamic as I explain in my next point.

3. Ownership Matters — Be Ready To Go Elbows Out.

For funds of any size, ownership matters. This is especially true for emerging managers who are trying to build a track record and need to be able to sink their teeth into winners in order to have a chance at returning multiples of their funds.

In practice, this has meant that we’ve had to pass on deals that we are excited about but where we can’t get the necessary ownership to fit our model. The inverse is true too, that just because you can get enough ownership doesn’t mean that you should invest. The reality is that as VCs, depending on your fund size and model, there are many types of “ball” you can play. In our case, it’s a hyper disciplined ball. It also means hard conversations and sometimes wondering if certain deals “should” have been that one-time exception. Of course this is a slippery slope and why our robust corporate network is so critical to our diligence process.

Given the power law of venture returns, it’s not only important to get meaningful initial ownership in companies with massive potential outcomes, but you also need to meaningfully deploy your capital into follow-on rounds of your winners.

For us at Work-Bench, we’ll typically enter at the Seed 2 round and help position the company for its Series A through significant assistance on the customer front and with hiring. Helping one of our portfolio raise their Series A is just the beginning of our relationship though. Given our focus as a fund on enterprise GTM support, as companies raise their Series A, they are often better suited to benefit from tailored introductions to our corporate network given their product and organizational maturity to onboard more, and larger, customers. This conflict to maintain pro rata that I discussed in point #2 above is highly at odds with our model.

The best advice here comes from the Beastie Boys. You Gotta Fight, For Your Right, To P….ro Rata ;)

As a newer manager on the scene you need to start out friendly and highly collaborative. As you grow though, you need to add some sharp elbows to the collaboration and be prepared to have hard conversations with founders, fellow existing investors, and the new lead VC. When you have a new lead for a round, especially a Tier 1 VC, everyone comes out of the woodwork wanting their allocation and the fun ensues.

The way we maintain our pro rata (and even at times, invest more) is by staying close to our founders and being one of the most helpful investors on the cap table. In addition to help with customers and hiring, we also play an active role in helping them identify and cultivate relationships with their eventual Series A lead. When a round comes together we can have the conversation about allocations with the founder and incoming investor. This is never an easy conversation though, and it’s something we think about a lot as our model continues to evolve.

4. Culture is your secret weapon.

VCs often talk about creating great culture at startups. Oddly though, VCs barely talk about building culture at their own funds.

Given the continued rise of new funds being raised, fostering a collaborative VC fund culture is more important than ever. This is something that we put a lot of thought into at Work-Bench.

A simple pro-tip that we’ve done (and recommend for everyone at startups and VC funds alike) is that onboarding to our team involves reviewing everyone’s user manuals and then adding your own responses. Credit to our friend David Politis at BetterCloud for sharing this best practice.

In terms of daily operations, most firms have a split between the investors and platform teams. We’ve always scratched our heads at this front and back office type delineation. At Work-Bench, community and corporate engagement are core to our model in all phases of an investment’s life — from deal sourcing to diligence to how we add value post-investment across customer intros, hires, and even sharing relevant playbooks in a functional area like demand-gen or working through SOCII certification.

Therefore, what we do at Work-Bench is have everyone own a primary swim lane and the associated community and corporate engagement support within that particular sector. On our team, I cover AI/Machine Learning, Jess covers Future of Work, Vipin the cloud-native world, and Kelley cybersecurity. Our newest analyst Priyanka is supporting us across several investment areas and beginning to research new investment areas too. Within our coverage areas, we each own everything from the associated corporate network and facilitation of peer roundtables, to organizing customer dinners and meetups for our portfolio company execs.

To be specific, our 200+ community events a year has led to sourcing over 60% of our Fund II portfolio companies. We also get tremendous leverage in helping our portfolio companies attract talent through our various meetups, dinners, and more.

By having that continuity up and down the “venture value stack” our value add runs deeper, is more consistent, and tends to be much higher leverage from an effort perspective. With no sense of “dumping a company” onto a services side of the house, the interactions remain fresh and companies can stay top of mind. This has an added benefit of helping promote better collaboration among the team to assist the broader portfolio, regardless of who is point on a company. By everyone exercising these community and corporate engagement muscles more frequently, when one of us has a specific ask for a company, we’re all able to do deep dives for meaningful talent or customer wins.

The other key element here is the tight bonds of friendship that have been forged on our team. Beyond being co-workers I consider my teammates very close friends. We’re in the trenches together trying to rethink enterprise VC, and this keeps us far more connected than the average VC on a weekly basis.

We spend a fair amount of time together outside of the office, whether seeing concerts (Bowery Ballroom and Brooklyn Steel are our most frequented venues), spinning (we’re addicted to Flywheel), hosting team dinners and BBQs, watching Fast & Furious movies on premiere nights, binge watching Always Sunny episodes, competing at bowling, and lots more.

Beyond this I’ve tried to add a few special touches which I think reinforce our culture and really separate us from other venture funds:

1. Annual Yearbook — Our team is constantly laughing with (and often, at) each other. During the year we have tons of special memories from large community events, speaking engagements, late night karaoke sessions, and everything in between that comprises a day in the life of Work-Bench. To capture all of these memorable moments on our journey, I take on the audacious project of creating a team yearbook each December. This is by no means an easy project, between saving photos throughout the year, distilling them down to ~175 keepers, and then placing them 1 by 1 into a highly curated yearbook. Some pages are themed, with others calling out the zany stuff that our team does. The expressions on our team’s faces as they flip through the pages of photos and captions I write in make it so worth every single time.
2. Super Days and Karaoke — One of our flagship community events to bring together our “suits and hoodies” community is the NY Enterprise Tech Meetup which we host monthly. What we try to do is turn the days of an NYETM event into a “Super Day” and load them up with an Executive Briefing or two with forward thinking corporate executives from our Fortune 500 network. We celebrate these productive jam-packed days with our favorite team activity, karaoke. What’s fun is that we sometimes even get some of our suits and hoodies friends to join us. We’ve learned that you really get to know them over a good karaoke set ;)
3. Thanksgiving Gratitude — I send a note every Thanksgiving with reflections on the year and individualized kudos to each teammate. This is different than a year-end performance review which of course we do too, and this note lets teammates know that their constant hustle is recognized and extremely appreciated. It also ties in highlights from the past year with some thoughts on where we’re going in the following year.

The last piece of the equation is diversity of thought and representation. My co-founder Jess and I (JL x JL) complement one others’ skills naturally. Being 50% male/female at the GP level, and 50% male/female across our team of 6 is not an accident, and it’s something we continue to invest in heavily as we continue to grow.

We also don’t have the “2–3 years and out” guiding principle that many bigger funds have. We have been grateful to both Vipin and Kelley, our two Principals, who started with us as Associates and have been critical members of our journey to date. We invest our time and efforts heavily in their growth as investors and we are thrilled to support and cheer on their continued leadership here at Work-Bench

5. Integrity and humility will position you for the long haul.

It honestly shocks me that this is a learning, but there are unfortunately a ton of a-holes out there in this business, so it’s worth calling out.

If you’re going to turn your emerging VC fund into a franchise that you can grow over your career, you need to play the long game. And key to this is integrity and humility.

It’s not about being overly nice or too soft. It’s about being fair and doing what you’ll say you’ll do. It sounds simple but we’ve seen every type VC behavior and it can be sickening. Just a few examples we’ve seen include:

• VCs who diligence startups to get access to their data rooms to share with existing investments who are competitors
• VCs who waste customer references very early in a diligence process without empathy that it costs a startup relationship capital. (Side note for any founder reading this — gate your customer references until late in a diligence process! Make a VC demonstrate that they’re serious before making these introductions)
• VCs who ‘verbally commit’ to founders and then walk away from a deal

Don’t be those people. This is an industry built on reputation and founders talk.

On a related point, some of our highest fliers have unfortunately turned south. Some of our companies that almost died multiple times have risen from the ashes like a phoenix. We pride ourselves on sticking with founders through the good and the bad, and in doing everything in our power to tilt the odds of success in their favor. Some days it takes a tough stomach to cope with company ups and downs, but this is what we signed up for! This steadfast commitment to our companies has led to some of our best founder references as we’ve continued growing Work-Bench.

6. LP construction matters.

People talk about portfolio construction as a VC but not enough people appreciate the mix you need in your LP base to build an institutional fund for the long haul.

We’re so fortunate to have an incredible group of LPs — including a mix of Fund of Funds, family offices, corporations, and angels — who have been enormously supportive in our journey so far. Between folks who bet early on our unique model for enterprise VC, to making intros to other LPs (navigating this world when you’re new to it is hard!), to sharing advice and best practices on things like portfolio construction, LP reporting, fundraising timing, and more, we’re so grateful for these terrific partners of ours.

As an emerging manager, you need an LP who will commit to you for a fund and be there for your next fund assuming you do what you promised you would. Especially if you seek to grow your AUM in future funds, having this stable base (that can potentially grow with you) gives you something to work off of as you bring LPs into the mix.

Hopefully these LPs can also be a sounding board for advice (as they may likely have seen many other funds), and give you feedback that you may need to hear. Also, they can and should be some of your best references as you go into future funds.

The same way that LPs do references on you before investing, you should ask an LP for some managers they’ve backed so that you can reference them. And of course, ask your trusted network of fellow investors for backchannel feedback and things they hear reputationally about different firms too.

An Ending Thought — Gratitude

My ending thought is that I’m so lucky to be here and recognize that every single day. I have the best team you could ask for (and spend such a large portion of the day laughing way too loudly) and an incredibly supportive wife (who is an incredible sounding board and true partner for this journey), so I try to pay it forward by sharing advice with other new managers and helping enterprise startup founders in NYC, even if they’re not investments of ours.

Are you a fellow VC who is a few years into launching your own fund? Did I miss anything worth sharing with other managers? I’d love to hear from you, so please tweet to @fendien with any feedback.

Thanks to my co-founder Jessica Lin for her substantive edits on this post to make my stream of consciousness hopefully way more digestable ;)

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