VC Fundamentals Part 3: Company Building
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Hello, Acquired Limited Partners, and welcome to another installment of our VC Fundamentals series.

this thing has taken on a life of its own. I think, David, you and I have both gotten the feedback that some people have even described the LP show as the Fundamentals series or the VC Fundamentals series. So clearly, we're having a lot of strong feedback on this. And know that it doesn't mean that we're not doing any of the other stuff too. We're sort of formally classifying a lot of the other shows as sort of startup fundamentals, things like pricing and hiring and all that. But I'm excited to do another one of these because...

folks have really expressed that it's interesting to get sort of the look behind the curtain. And frankly, I think as we'll talk about even people who've been in the job for a while, it's nice to hear how other people think about it. Yeah, totally. I mean, we kind of debated even doing this in the beginning because we were like, well, there are lots of blog posts out there about how to be a VC and whatnot. But it's like,

you know, it's not quite the same as I think what we're talking about here, which is like, okay, how does this stuff really happen? Like, what are people really thinking behind the scenes? Not some polished blog post, but like, what are the nuts and bolts? And, you know, it's funny. I was hanging out with a good friend this morning. Who's a GP at a, at a super big, well-established firm. He said that, you know, they're thinking about changing up something about their structure, thinking about some stuff internally and,

Pouring it all into crypto? Pouring it all into crypto, yeah. No, like a run-of-the-mill type of thing. But he's like, we've just never done this before. We don't know how to do it. So we reached out as a firm to another couple firms that have this structure and do it to start to understand from them. And I was like, yeah, this is what we're doing here on the LP Show. Because even if you've been in the industry for a while, so much of this knowledge is siloed and locked away in organizations. And we're hopefully going to unlock it.

Yep, absolutely. This one in particular is on company building. And I think this is sort of the exciting one. Speaking from the investor side,

There are loads and loads of people who talk about picking, sort of the how you make investment decisions as if it's sort of like a stock picking exercise to invest in early stage startups. And as we know, it's very different in a lot of ways. But this is sort of the fun part as the investor because early stage venture investing, at least from the sort of lead investor side, is an active investor game. You have tons of

responsibilities on the governance side. You have tons of opportunities to create value for the company. It is not always the case that the investors do create value, but the way that these investments are structured is investors can be very involved in the company, unlike, say, a public company where you're a sort of passive investor that has nothing to do with actively creating value inside the entity. And so this being an asset class that has

active involvement by capital in company building means there's lots of different ways that people could go about helping that company create value. And so I think what we're going to do here today is break down what those things are, debate the merits of them, decide when do we think those things are and are not helpful, and offer some examples of things we've seen work in the past.

David, is that about cover it? That sounds great to me. I mean, you know, it's funny. You said this is the fun part. I totally agree. This is the fun part. But, you know, there are plenty of investors out there that think this is not the fun part. There's lots of ways to do this. So quick definition by company building. Ben, you basically already described it, but we're talking about everything that happens outside.

after you make the investment. So we've already covered sourcing. We've already covered initial investment decisions. This is, okay, you wrote the check, the deal closed. Now what? You went through the one-way door and made that decision. Now you live with that decision and try and make the most of it for a long time. Yeah. So, okay. So kind of to start it off, we thought we would talk about

What are you really trying to do here with company building? And the first one, Ben, you've already mentioned is obvious. You're in theory trying to increase the value of add value to your investments. VC is adding value. This is like a trope. This is what they- What can I do to be helpful? Trying to be helpful. Less obviously though, although still pretty obvious-

The second kind of purpose for doing this is to increase your likelihood of sourcing, finding, winning your next investments. And that can really come in one of two ways through your company building work.

directly it can come from people that you meet within your portfolio companies, people farther down in the org, whether you work with them directly or you get exposed to their work through your involvement with the company. Great. You know, if they're really talented, they might go start a company. And so that's another really important reason to take this seriously and think about doing company building. There's also indirect to just your reputation. Like if you develop a reputation as somebody who's

really good at this, who entrepreneurs love working with, feel like you're adding a lot to their company and what they're building, well, then word's going to get around and that's going to make it easier for you to, you know, source and find your next deal. So obviously increasing value, but also I think important to keep in mind, there is this other aspect of it too.

Yeah. So the single turn game that you're optimizing is you made this investment and so you want to make it as valuable as possible. And the iterated game that you're playing is your own, you know, 50 year reputation here and trying to increase the value of future investments. Yeah. And I guess the last thing we should say on this too, you know, the, what are you trying to do? Why are you doing this? There's a class of VCs and investors, certainly by no means all, and I don't even think a majority, but

I definitely fall in this class. I think you do too, Ben. I'm like, I just like doing this. This is the fun stuff. I would do this even if I wasn't an investor in the company. I do sometimes. Yeah, I think, David, that's mostly what you're doing with your time now. Yeah, exactly. For this class of investors, whether it's why they got into the game or how they got into the game, David, you probably represent more of the why of the reason that you wanted to

stop being an investment banker and get into VC is to be able to work on companies sort of in the nitty gritty level. Meanwhile, for me, sort of like

became an investor because this is the sort of stuff that I was doing more in the writing software and shipping and being a PM and starting companies and, you know, eventually through the startup studio, ending up deploying capital as well through PSL Ventures. I think you and I represent sort of the why and the how of really enjoying this part of being a VC. I think Bill Gurley used to talk about in interviews and stuff. Well, yeah.

He probably still does now because he's not being paid for it. But he used to say, yeah, I would do this job even if I didn't get paid for it. And now he's not getting paid for it and he's still doing the job. So, you know, I relate doing the same thing. Okay. So just like we did with sourcing...

we went through all the, you know, activities you do and things you can do around company building. We're going to put them into some different buckets first. Then we'll talk about what the actual activities are, how they work, how you do them, how they impact the companies, et cetera. First, we're going to do these categories.

And one thing before sort of diving into the categories here, just a point that I want to make is that there's so many caveats here to avoid being a trope. And so we're going to make all of them partly as a defense mechanisms, but also just to like say how we feel about these things. So an investor is never going to be as deep in what the company actually does as the entrepreneur.

It's not even like throwing shade at an investor to say that. It's really just like the fact of an entrepreneur is starting a company because it's their life's work and their obsession, and an investor is diversified across a broad set of them. So sort of by natural forces, the VC will always have a wider purview across companies and pattern match across different situations that are common between different companies at the sort of stage that they operate.

That's from the purview perspective. They'll also have a set of deep horizontal relationships that they can replicate from previous companies. So this could be things like PR or other platform portfolio services, or things like customer relationships with Fortune 500 buyers in the case of enterprise software. So the important thing here that's worth sort of identifying is to figure out what activities are best for a company to do in-house by those who are actually deepest on the subject matter based on their unique depth

versus what is high leverage to get out of an investor who has that thin slice perspective across companies and industries. Oh, yeah. And we're going to get into this. Like, are you getting it from your investor person? Are you getting it from a portfolio services team at the firm? We're going to get into it. Okay. So the first bucket is...

when you are getting value as a company or you as an investor are giving value to, to the company directly. So like it's you one person, or maybe the investment team at the firm that's working on this portfolio company. Some firms are structured like that, but more often one person. And this is, you know, stuff like you are joining the board of the company and

or depending on stage and your check size, maybe you're being a board observer, or if you're not on the board at all, you're the investment lead. We'll talk more about board work, board memberships, board meetings later, but that's going to be a lot of the context of your direct interactions with the company. Also other sort of more informal relationship that you have with the CEO, with founders, with other people deeper down in the organization. And I would say the kind of like

The in some ways purest but best, most easily graspable example for most people of a firm that primarily operates in this bucket is Benchmark. So like they don't have any portfolio services. It's just them. It's just the GPs. Like they talk about this all the time. The craft of investing is what they do. HGP is making an investment.

He or she is serving on the board. It's their relationship with the founders that is the primary activity of what they do. Yep. And we've talked about this. I kind of like bringing in the chronology here. We've talked about this in other parts of the VC Fundamentals series, but this is sort of the historical way that it always was. If you think about the origin of venture capital, it's a pool of

three to four or three to six, frankly, men at that point in time, but people coming together, you know, this is the 60s to basically invest their own money and some of other people's money, but there's zero, like that's what you get is you get capital in the relationship with that one person and the

VC wasn't a professionalized asset class. Firms didn't have career progressions and people across all these different sort of skill sets that we have now. But it's interesting to sort of understand origins are that's all you sort of used to get. And now that's classic venture capital. Yes, there's there's much more specialization of labor now.

Yeah. So now to jump to the complete opposite end of the spectrum, I would categorize this bucket as active slash portfolio services. This is, you know, the canonical example here of is Andreessen Horowitz. And when they came on the scene in 2009, they were amazing.

you know, firms had done a little bit of this before, but they were the first that were like, Nope, what we are, we are a big firm, lots of people here, some of which are on the investing team, some of which are GPs, but most of the people here are not on the investing team. They are on the talent and recruiting team. They are on biz dev teams. They're on market development, which is helping find, you know, customers and biz dev partners. They're doing PR. Sometimes they've been doing data science or design or engineering and,

for our portfolio companies. And this was like a radical shift at the time. I called it specialization of labor, but that's really what it is. I sort of said it jokingly in the past, but if you think about sort of that economic theory of if you're deploying capital into people, and when I'm saying deploying capital now, I mean paying with management fees people at the firm who are specialists in what they do, then

then the sum of all of that can be greater than if you just had sort of generalists doing all of that and being pretty good at all of it instead of excellent at just one thing. And so before, funds were smaller. And so there wasn't enough management fee to hire 150 people or whatever Andreessen is.

But when you have enough sort of fees to go around and you actually can hire the best PR person or, you know, the best executive recruiter, the sort of economic theory behind that is that you can get much more leverage on those sort of fee dollars to grow the value of your investments. It's a fool's errand and unrealistic to think that somebody who's a

an investing general partner at a firm is also going to be world-class at, you know, PR or recruiting or whatever. Like they're going to have their areas, they spike in and there is, they don't. And so the, the thesis behind building a firm like this is like, Oh, we can just bring in the world-class people, have them in house, offer those directly as a services to our portfolio companies versus the companies hiring third party agencies to do this stuff. Um,

Great. Makes sense. People have all sorts of opinions about the efficacy of these services, which we probably won't get into as much now. But I think the point I want to make that, Ben, you probably, I assume, would agree, there is a vast difference in how this works and is structured in a studio model like PSL versus a pure venture firm model.

The reason I think to just articulate my view of that is at how a venture capital platform like the one we were going to probably keep referring to Andreessen Horowitz because they're the most exaggerated example on the spectrum of having a massive platform. But pretty much every firm except Benchmark these days has some degree of this that they've adopted. Exactly. Exactly.

And the difference between that and a studio is really that like the studio resources are really around sort of pre-founding, pre-launch, getting the company off the ground, whereas the sort of portfolio services or platform are really about once the company is already formed and capital has gone in, parachuting these people in to do work alongside the company as it scales.

And sometimes that can be incredibly high leverage. Like I think a good example is I've heard great things about OpenView. They're sort of Series B focused, B2B SaaS. Like they have a whole go-to-market team. And I think you actually pay for it. Someone from OpenView can correct me if I'm wrong on that. But

They're much like emergence because they're so focused on B2B SaaS companies, go-to-market, growth, sales. It's super high leverage to have these people who are sort of specialists parachute in and work with your company. But in a lot of cases, it's harder to squint and see how somebody at the firm who isn't a part of the company is actually going to help as much.

And so... Well, especially I think once you get into like engineering or design or data selling, then that's... You really got to squint in those cases. Totally depends how it's structured. Yeah, I think on those, there exist examples where like there's a firm I know that will basically lend an engineer for an entire year. And like they will be embedded in the company. And the closer they look to like actually joining the company and being an employee in those types of situations, usually the better they work out in my experience. Yeah.

But just to finish the thought on juxtaposing against a studio, in the studio, no one's ever really parachuting in because there was kind of nothing there before the studio folks started working on it with the founder. And so that tension isn't really there. Obviously, I'm excited about the studio model because I...

help start PSL. Start in a studio. Yeah. The whole notion of like, oh, so-and-so expert from that venture firm coming in and telling us what to do or making suggestions and then leaving. Like you don't have that sort of tension friction that you would in sort of a later stage platform team. Right. I mean, you're the first ones building it.

So what's interesting here is for the past 10 years or so in the Andreessen era of venture capital, that's kind of been the model of this, like, you know, what I'm calling active or, you know, portfolio services approach. It's interesting. There's another spin on this approach that is in some ways super old school, but is now coming back around in a modern focus.

And that's the, or in a modern context, and that's the, I'll call it the network approach. In the old days, this is what Kleiner Perkins was all about. Like they had this, you know, in the glory days of Kleiner Perkins. The Koretsu. The Koretsu, yeah. You know, with Kleiner and Perkins and then in the John Doerr glory days, you know, this was, if Kleiner invested in your company,

They were super actively encouraging all of their companies to work together, give each other deals, you know, sell services to each other, do partnerships together, acquire each other, all of these things. You know, Koretsu is obviously the Japanese conglomerate approach, but.

which Kleiner itself wasn't providing any headcount people services here. They were saying, no, like you guys, like we invest, we have a portfolio of literally the best startups out there. You guys should be helping each other.

Interestingly, I feel like this has kind of come back into vogue in a weird way. It's more like community mindset advice now. But from everything I've heard, I think First Round does a really good job of this. They have so many companies. First Round, of course, has done great. But the canonical example here is YC. The network of being within YC, I think 5%.

thousand companies? No, it can't be five. Is it five? They have several thousand companies that have gone through YC. A hundred a batch, a hundred-ish a batch, 120 or something like that, two a year, 250 a year at this point. Well, they had those supersized, the steroid years where they had like 200 plus in each batch. They've dialed it down a bit. Anyway, you know, they have all sorts of

communities, whether it's discussion forums, Q&A. Actually, Michael Siebel was just on Patrick's show on Invest Like the Best, and he talked a lot about this. And it's really interesting. It kind of is. It's this modern community-focused spin, obviously at a much bigger scale for both first round and YC, obviously, than Kleiner, but bringing this

idea back. You could maybe even say the acquired community is sort of an unbundled version of this. I was about to bring it to bundling. Yeah. So if you think about early venture capital days, again, in some ways, it was just capital that you got. Of course, you got the relationship with the board member, but likely more just for governance than it was actually adding significant value to the company, with the exception of sort of the Arthur Rock and Don Valentine's of the world.

of which there weren't many then. And so, you know, that was just capital. But now, because there's competition, so much competition to deploy this capital, it comes bundled with all this other value-add services. Again, we say value-added services almost in a cheeky way, because I think it's easy to make fun of what value gets really added and all that. But it's true. It's totally true.

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The next bucket, I think this is probably...

the biggest value driver? I don't know. You could debate, but it's certainly really big and real. I call this passive to differentiate from active and direct, but this is the brand halo effect. This is if a top firm leads you around, if Benchmark does your A, you know, if Sequoia does your seed or your growth round or whatever, like, or, you know, if SoftBank does your growth round, okay, not SoftBank, but, you know, whatever your sector is and stage is,

if the top one, two, maybe three firm leads you around, you're going to be a hot company. And the brand of that investor in that context, in that stage is going to transfer into the portfolio company. Now let's talk about where that's actually value add. Cause I think this is now that we're getting into a rhythm here, David, I think this is actually a pretty good format for like, uh, one of us to keep checking the other person on. Okay. But how does that

actually add value? Like, I understand that's a service that's listed on the firm's website. How does it add value? So... I don't know. Do any firms actually list that, like, we're a top firm and thus if we invest in you, like, you will be awesome? Somebody should just do that. In much less direct words, yes. But...

There's obviously the impact on your next fundraise. Like once you raise from one of these firms, it becomes it's never easy to fundraise, likely because you raised from that firm at a high valuation. And now you have incredibly high expectations on your company, especially for your next round. But there's sort of a almost momentum trading effect where you become worth more because you were able to raise from that firm.

I want to, for a moment, just like, let's tuck that away and not call that value creation. It's like paper value creation. So where does it, where does that really manifest? And I think the biggest example, and I know David, you want to get a word in, but I want to just like make this point. Keep going. You keep going. I'm taking notes here.

For the right types of companies, I think that that is really value creative in customer legitimacy. So if you're a B2B SaaS company selling to the enterprise and you get a top firm to invest in you that the CIO of that company has heard of and that company has been referenced in the Wall Street Journal and, you know, that's a little old school to say that. But like,

We were talking about the Kleiner Kuretsu days. Right, right. Then you could see how that could legitimately improve the likelihood that you're going to be able to sell to that buyer. Now, the next level of that would be like if your board member or one of the people on the platform team actually makes an introduction and has a relationship with that customer, that's even better. Specifically scoping to brand Halo, David, I think the biggest value that I would...

at least put here on the record, is that it's the customer legitimacy and hiring legitimacy. I think those are the two. So I had three areas where I think this is real. Customer legitimacy, biz dev, again, depending on your industry. Hiring, for sure, too. I mean, there are lots like if you're, you know, we see it too. Like, you know, if you get funded by Sequoia, you get funded by Magimart, it's all of a sudden overnight, it's going to become easier to

easier at every stage of your hiring funnel to attract candidates that they're going to be more interested in you and then ultimately closing them. So I would say those two are very real, but I think by far the biggest value of the brand halo effect is in raising your next round, particularly if it's early stage. I think this declines as you go farther. Like if Sequoia leads your D and

I don't know that it's going to make it all that much easier to raise your E unless you also raise it from Sequoia. But if, if Sequoia leads your seed, you were like, for sure going to get a ton of looks. You're going to get a ton of inbound. You're going to get a ton of preemptive interest in your, even before anybody really knows what you're doing. Now you can, we can argue whether that's good, bad, right, wrong, but that's just the reality. Yeah. Super fair.

So I think that's the biggest area where Halo Effect helps. Similarly, there are two kind of valences to the Halo Effect. There's the firm Halo Effect, like we were just talking about. Sequoia, Benchmark, Emergence and SaaS, et cetera. This is, I think, the big reason why Hamilton talked about on our show, and there's good research on this, that there's persistence in the top performing venture capital firms. The brand of those firms is worth a lot.

Interestingly, there's another valence too, and that's the individual brand and platform. So like the canonical example here is Fred Wilson at Union Square. Union Square is a great firm, great brand, but especially in the early days, like Fred was the OG out there blogging and creating ABC. And, you know, that really did so much, you know, for him, obviously in USV, but also for his portfolio companies, like that was a platform. And so now all of a sudden he could really help those companies and,

It improved his ability to get into deals. It was great. Right. The quality of his relationships improves and therefore whatever relationships he's able to bring to bear to the companies that he works with are improved because so many more people know him from reaching out because of his blog or...

Huge reach. Yep. Brad Feld, too, you know, similarly, uh, wasn't as, uh, he doesn't blog every day like Fred, but, uh, um, but also, you know, it was part of this early movement. And today, I mean, this is happening again, like Turner Novak on Twitter, great, super smart. He's building a great platform on Twitter. Yeah.

Patrick, obviously, it invests like the best in his new venture fund, positive sum. There's a lot of interesting new stuff happening here. So David, because you referenced persistence of returns in venture as an asset class, and you just brought up Patrick's show. So Patrick just had Michael Mauboussin on who is like, I think Michael's been like three of my carve outs on the main show. He was the head of...

He's a lead analyst or something at Credit Suisse First Bross Boston. And now he's at Morgan Stanley, Columbia professor. Yeah. I think he teaches, does he teach Ben Graham's old course now? Oh, I don't know. I think he might. Interesting. Okay.

He just puts out these prolific papers and books and talks. And I think I've recommended Untangling Skill and Luck, the presentation that he gave at Google as a carve-out once. But his most recent paper analyzes the flows of capital into public and private markets and sort of the performance over time and the variance between firms, the variance from company to company by asset class. It's really interesting and very approachable, digestible paper.

He went on Patrick's show to talk about it. So I read the whole paper. And one of the very interesting takeaways is I think venture of all the asset classes he studied, which mostly focus on venture capital, public markets, and leveraged buyout firms.

And of the three, as sort of most people know, hedge fund managers have incredible reversion to the mean or regression. Zero persistence of performance. Exactly. So like the top five firms or people one year or, you know, one decade are completely are not to be seen at all the next decade and maybe not even the next year. And it's it totally rotates.

But among venture firms, you have this tremendous persistence where even for decades, you have a firm that did well, that sort of continues to do well in the future. And I think, David, this notion of what you're sort of referring to of the sort of accumulation, frankly, if we want to go Hamilton-Helmer on this, the power that sort of accumulates for a venture firm where- It's brand power. It's 100% brand.

That's exactly what it is. And so you have higher quality relationships with downstream investors, which we'll talk about. You have higher quality relationships with potential customers, potential employees. And of course, the most important one, higher quality relationships with the next entrepreneur that you're going to fund. And that's why you just have this tremendous amount of, at least in the paper, he doesn't

specify the answer, but he hypothesizes because he's a good scientist and there's no way to know the answer for sure that the persistence largely comes from this sort of brand halo that comes from being able to attract the next great entrepreneur because you've had great returns in the past. So by being a company in your fund, maybe it's causal and they'll cause your company to generate a great return too.

The point I want to turn land here is that like, it's real. It is a self-fulfilling prophecy. Like, it's ephemeral, but it's also real. And if you are funded by one of these firms, you will feel it. Because we're here and because people who are listening to this episode have almost certainly listened to our Sequoia episodes, we did ask Doug Leone about this directly at the end of the Sequoia part two episode.

And there's almost no way Doug was going to say it on our show that that sort of like it's easier at Sequoia now than it used to be because they have this brand halo. In fact, he said the very opposite, which was that we have to not become complacent and it's all about our our next investment. And he had the great quote about the chickens running around in the back. Yeah.

For sure. You got to go listen to the episode. I can't do it justice. For sure. Especially in that Doug voice. It was unsaid on that episode, but is absolutely what we're talking about here is that firms like Sequoia have just like an unbelievable brand halo that creates that persistence of returns over time. Okay, so the final bucket is a fun one that definitely bears discussing.

And that is simply doing nothing. It's very rare. And this is, I think, where a lot of the rightly justified teasing of the VC industry comes from, of everybody trying to add value. But this is sort of, you know, just following the, uh, the Hippocratic oath, you know, uh, uh, first do no harm Maxim and say like, like, I'm not even going to pretend to add value. I'm just instead going to focus on making good investment decisions. And like, that's all I'm going to do. There's a funny story that, um,

I'll tell on this friend who I'll just say, because it was so long in the past, worked at Eventbrite in their early days. And because we just had Kevin and Julia on the show, they were raising one of their early rounds after the Sequoia round. He was talking to one of the VCs and the VC said, look, when it comes to VCs adding value to your company, there's like 10% of the folks out there

are really good. They're really going to add value and help you build your company. Probably, you know, 70% of the folks out there are going to like actually detract value from your company if you follow all of their advice, you know, and then there's the middle where it's like neutral. And, uh, and my friend was like, well, okay, well like,

who are you? And he was like, Oh, I'm not going to tell you anything. You're just going to take my money and you're never going to hear from me again. And I think they, I think they, they did end up going with him. And this is a totally viable approach. You know, they would probably protest here, although I'd be interested in their reaction. I would put founders fund in this bucket. They have a good brand and there's definitely some halo effect from that brand, but I think they're pretty open about like, look, we focus on making investment decisions and,

every investment decision initial and follow on we'll get to follow on later in this series we make a first principles decision on each of those and look you know if we can help your company we'll help your company but like don't count on that from us you know we're just here to provide capital that's not why you should go with us yeah that's interesting

I mean, I think to your point, to give one more anecdote, I asked a founder fairly recently in the last couple of years about a certain firm. And I said, well, what percentage of the sort of like net value came from the capital? And this person was like, oh, 110%. So it was negative 10% from everything else. Yes. Yes.

And so, yes, there are many people who do worse than sort of providing absolutely no value. I will say another thing here, a way that a firm and a good question to ask if you're an entrepreneur is, so what's your follow on strategy? Because a way that and I did, David, I can't remember if we're going to get to this in the outline, but

A way that a funder, especially an early stage funder, can be helpful later is by continuing to participate in future rounds, by continuing to signal to the market, I have inside information and I'm still excited. If you want to be skeptical and round portfolio services to zero, which there are some you should and some you shouldn't, this is definitely one that's sort of like unquestionably value creative for a company, which is being able to generate positive signal in the market by using your own capital.

a positive signal in the market. Also, if you like truly really hit a rough patch, a beautiful example of this is, is Smartsheet, the great company in Seattle. Like if you hit a rough patch and nobody else is willing to fund you, but this VC firm has a track record and the capital available to, you know, if as long as you're not like, as long as you're trying that they're going to give you capital to do that. I mean, Madrona did this multiple times with Smartsheet company really struggled in the early days. And, uh,

And now it's a $5 billion plus public company. So there is a lot of value to that. Do you remember what Madrona owned according to the S1 in the IPO? Oh, it was almost 30%. And it was through doing these multiple bridge rounds and inside rounds funding the company that

when nobody else would. What kind of early stage fund gets to own 30% at IPO of a multi-billion dollar company? It's incredibly rare because of the future dilution that happens. And David, it's because of exactly what you're talking about is continuing to support through rough patches. Yeah. I mean, talk about value creation. You know, you're capturing some of that value by getting more equity in the company.

But like the company would have died. And not only is it not dead, it's a multibillion dollar public company. So this stuff is real. This is also a good place to make the point. I was going to do this later, but we should, we should have done it up front of, um,

you know, there certainly are VCs who either don't think this aspect of being a VC, the company building part is, is that important? You know, some who just abdicate altogether. And I respect that in the do nothing bucket, but like, this is like people's lives that you're affecting here. And I think it's really important to keep that mindset as a VC, especially if you're a board member or close to it, like,

The decisions that get made impact these companies, impact people's lives. You really need to take that responsibility. I certainly do take that with like a high degree of responsibility. For sure. For sure. Okay. Those are the buckets that we just covered, you know, sort of direct you personally active in portfolio services, passive and brand halo effect. And then, and then the, the do nothing approach, um,

And I will say one more note on the do nothing approach. Being a supportive board member, this is like, this is a great Brad Feld one. Just being a supportive person who's there to sort of ask questions and not even necessarily offer heavy handed opinions. You know, Foundry Group is like notoriously good at this of like,

be there, listen. They're helpful in many ways. I mean, they have kind of a benchmarky approach of we're sort of partners and not that much else. They famously have this sort of mesh network approach where they'd rather each company help each other rather than this sort of like top-down heavy, heavy services thing. But like their ethos is very much like we invested in you, you know, we'll continue to make obviously decisions about future financings and things like that. But like

we're here to be supportive for you, not necessarily that active, but like do table stakes supportive things as humans to make sure that you can do your, operate at your very best. That could be loosely qualified under do no harm, but it's amazing how value creative that can be. I would put that as like way more than doing no harm. Yes. That's like the most evolved I think is like do no harm while also being actively, you know, caring about and helpful. Let's talk about the actual like stuff.

stuff where we've been talking about buckets. We've been talking about value company bill. Like what do you actually do? What are we talking about here? David, we talked about it's value. What do you mean? Why do we need to get any more specific than that? Tell me what you do here. This is, this is like the, uh, always sunny episode where Frank, uh, goes back to work and

And Frank is Danny DeVito for anyone who hasn't watched. He's like goes back to this weird 80s conglomerate that he started, you know, 30 years before this episode. And he's in like his suit and tie and everything. And at some point, Charlie asked him, so like, hey, like, what does the company make? And he looks at me, goes, I don't know what you mean.

He's like, no, like, what do we make? And he goes, we make money. He's like, no, like, what do you produce? What do you? And he's like, money. And it's left unsaid the entire episode what this like 80s pinstripe company actually does. That sounds just like a VC. Oh, boy. Or an episode of Silicon Valley.

First, we're going to talk about sort of like the routine, probably going to do this in every company, the good stuff, the day-to-day stuff. First and biggest bucket of this is board work and board meetings specifically. As Ben, as you mentioned, there's two elements to a board and board works. There's the governance element of it, and that's everything from setting the plan for the year, the financial plan for the year, the organizational plan for the year, and approving that.

and firing, doing various shareholder approvals like option grants and stuff like that. You know, that's like important, but fine. The stuff that gets written down in the meeting minutes. Yep. The stuff that the lawyers take down and then paper afterwards. Then there's the advising aspect of being a board member. And so this is, you know, input and perspective on company strategy, operations, various topics, recruiting, a lot of that.

And then certainly fundraising and future financings. I'm actually going to talk about that outside of the board context because I think it makes more sense there, but that also gets wrapped into many board meetings. We'll go into the nuts and bolts of some of that, but I think it's interesting here to pause first. And as I was thinking about this and my time in BC starting in the

Over 10 years ago now. Wow. Crazy. I think there's been a pretty big evolution of how boards and board meetings operate over the last 10 years as there's been lots of change in the venture industry.

So when I first joined, you know, it was a legacy of a lot of what we talked about. Board meetings were six to eight times a year. They were super formal, old school. Like, you know, there were major, every major company decision and strategy was hashed out at them, sometimes across multiple discussions before, during, after the board meetings. And even early stage. Yeah.

Even, yeah, Series A stage companies. These are three to four hour sessions, the entire executive team, the entire board, nobody would call in. It's all in person. Usually there's a dinner the night before or afterwards where the discussion continues. It was very heavyweight. Now, there are pros and cons to this, which we'll get into later.

I think one thing that's really interesting that is more lost now but was a big pro of that approach was it was focused on everybody working together as a team. So like the board worked together, even though you had different board members from different venture firms, in the context of this company and everybody coming together, everybody was on the same page. You're working as a team across the aisle, so to speak, right?

which actually from a fiduciary perspective makes a lot of sense because not only are those our board members fiduciaries to their firms and the investors that are the pool of capital for their firm but when you join the board of a company you're also a fiduciary to that company so of course it would make sense that you have this camaraderie and teamwork and incredible amount of time together to work as a group you literally become a director you know director and it's called directors and officers insurance for a reason like you're an official position of the company

You should be working as a team. But the days where everything looked just like that are pretty much behind us, I think. Now, lots of companies can do and should occasionally operate in that function, but it's not constant. It used to be that like that was the only context of board work. Now things are much more real time, much more iterative, much more fluid and informal.

Most of the actual work discussions, strategy, both setting and operations happen outside of a formal context like that. They're in informal one-on-one or small group discussions. They're over phone calls. They're over texts. They're over Slack. You know, it's like everything in our business world today. It's 24 seven. It's not a, it's not a moment in time. There's two things that are a

part of this. One is what you just said, that everything became the sort of always-on world and conversations happen in real time and through many communication channels. The other one is that so much money flooded into venture capital as an asset class that every check at every stage got two to three times larger. And so you have seed rounds that used to be 500k that are now

$2 to $5 million. That can be 10 times larger. And so suddenly you have these checks being written for $3, $4 million when a company has done virtually nothing yet, has no customers. It sort of depends on not anybody's going to go out and raise $4 million for a company without having any customers, but lots of people do.

you've got an amount of governance that tends to come with that. Like you're not putting 4 million in on a safe and not having any governance rights associated with it and saying like, well, all right, that's my capital's in there. And like, let me know what the next round, that's the thing you would do for a hundred K. And so you have a board member now because there's governance associated with putting that significant amount of capital in, but the company is actually not mature enough to,

to do things like six to eight times a year board meetings where everybody comes and you review the numbers and you review the pipeline and you talk about the hiring plan. And because like your hiring plan is going to be like, yeah, we want to add two devs this year before we hopefully launch and then hopefully find product market fit. Like the amount of capital is mapped to the governance requirement of having a board, but the company maturity is completely mismatched from where it used to be when you had a board. Yeah.

That is absolutely true. I think that's one of the reasons why this all sort of started moving in this direction. And then I think, again, we will debate here, you know, rightly or wrongly, pros and cons. I think that has also kept trickling down that even as companies get larger, get more, start maturing more.

The number of companies that I think are strictly in the old school board practices format these days are pretty few, even larger companies that are mature enough. They do board meetings, but they don't do them six or eight times a year. They do them four times a year. Some companies, those four times a year are really like everybody prepares ahead of time. It's a big lift. It's a big thing.

Some of them, I know companies like this where the actual board meetings are, no, they're like an hour or 90 minutes. Lots of people do it over Zoom. It's literally just about the governance approvals and then you're in and out. I'm on an early stage board where literally it's just a Notion doc. So there's no big, expansive 40, 50 page decks.

We do board meetings four times a year, and there's an every other week catch-up call that's 30 minutes. And it's like exactly the high-resolution thing you were talking about, David. It's like many more one-off conversations, but not convening the whole board in a big formalized setting as often. Yeah.

So an obvious pro to this is like, hey, business and life doesn't happen in six to eight week chunks anymore. Like, you know, everything is real time. You need to be much more reactive in terms of strategy, in terms of operations, in terms of being dialed into a company. That's all good.

I think what's lost is some of this time to reflect, time to step back, and some of this team element too. Like when you're doing these high resolution, more individual conversations, you're doing it with one-off board members. You know, you're not getting the whole camaraderie approach. But the thing you're trading and you are getting there is by having more touch points with more of your investors, there's more opportunity for them to add value.

And like we started this section promising how like what that value was going to be. So we should get to that. But like just to tease, like if you learn something new about your customer segment and you say, do you know anyone in X, Y, Z industry? You know, you can get that information much more real time and get a potential customer introduction and much more real time. Or you open a headcount. Boom. You can quickly inform your your board of leads, find the right search firm. Exactly. Yeah.

You can sort of move more quickly on those things and tap the network and resources of your investor. We should say, too, this is a great part of the reason why a friend of the pod, John Malaskiriazi, started Quaestor with his co-founders to provide a platform for governance for companies as people are moving towards

this more higher, what did you say? Higher resolution, more iterative board structure. Like some of the governance gets lost. So shout out to John and thanks for sponsoring our last special. Ben, what actually happens in these board meetings and some of these decisions, whether you're doing it in a formal or an informal process?

Well, usually you save anything that's like the Robert's rule of order type stuff for the end. So I was on a board last year where the CEO would ask the lawyers what the magical incantation was that we needed to say to approve the previous minutes. And so, you know, someone moves to approve and there's a second. And for anyone who hasn't been in a boardroom setting before, it will shock you that that you actually do all that. It feels strange.

You're either in a British court or a fraternity house, but one or the other, it feels odd to be doing. You might as well be saying these things in Latin. Yeah, so of course there's those things. The things that tend to happen are a review of the business. So you're talking about how you did since your last board meeting on KPIs, including the financial ones. You're doing...

forward-looking forecasting, both on finances and what those KPIs are for next time, debating them, what should our goals be, the CEO coming with a recommendation, the board sort of formally or informally approving the plan. And it could be a budget plan or it could be, you know, here are the targets that we want to hit on various KPIs in our business. But basically, the purpose is to get everyone aligned.

So that if those goals get hit, then everyone looks at each other and says, that was a success and we all agreed on that plan. And you don't end up in a situation where the CEO is over executing something and the board's like, wait, wait, wait, even if we succeeded at that thing, we wouldn't be happy about it. It's a lot around alignment and it's an opportunity, hopefully, if you pick the right investors, to be able to tap the collective wisdom of a group of people who should weigh in on what your goals should be.

Right. It's like our plan is to grow 100% this year. Is that good or bad? Like, well, really depends on the context of, you know, if your industry is growing 400%, like then you're really sucking wind. But if your industry is going 20%, then you're doing great.

I think also at some point in time in the transition from early stage company to mid and growth stage company, when you find product market fit, I think there's a really important process that Hamilton talks about in Seven Powers of finding your power. You've gone from invention to now you have to figure out what's your power, what's your defensibility.

And this is a role that, you know, again, a lot of VCs and board members harm more than they help here. But having somebody who's really good, really engaged, really deeply thinking about your business, your industry, the dynamics, and has the experience and pattern recognition can really help here.

The things that I discussed a minute ago were largely execution topics or tactics. And David, here you're talking about strategy. The other part of the board's responsibility is to set strategy for the company. And the CEO similarly comes with recommendations, but usually will come with, here's the open topics that I really want to discuss. Here's my thinking on it, but let's decide as a group and we'll take

You know, I'm open to if this is a two hour board meeting, let's take an hour and work on this meaty topic because I think it's the most important, highest leverage use of all of your minds in this sort of collective forum. Because rarely, David, like you said, are we actually all together to be able to quickly get on the same page and not be trading a bunch of one off emails that are hard to get alignment on when the company could go a lot of different directions.

And so if you like this stuff, like I do, and I suspect you do too, Ben, this is the really, really fun stuff, at least for me. When there's a question like this, when there's a formal board meeting, I just have so much fun. Preparing before the meeting, usually the CEO or the management team will send out a deck or some more narrative or some materials in advance. What I try and do is...

you know, get those, give them a quick glance just to like understand what the context is. But then before reading them kind of in, in detail, I like to think like, okay, I'm going to step back. What's my perspective coming into this? Like write that down. Like what do I think the most important issues are? What do I think the biggest needle movers are? And then what I like to do is actually go back again, still before reading this, this,

you know, board iteration, uh, materials is go read the past, the past one and be like, okay, what was important then what's changed since then. And then sit down and try and prepare like, okay, coming into this board meeting, like, um,

What's my perspective on what's going to be the biggest needle movers? There's an old Sequoia blog post about kind of questions to ask yourself as a board member, like pre and during board meetings. And I think these are good. First is, are we executing? We meaning the company. Are we executing? Are we innovating? Are we hiring? Are we building a management team? Are we growing the customer base?

And are we doing so according to the last plan that we laid out? And depending on the answer to that question, is that plan still good enough to win or do we need a new plan and new targets? It's missing the power development. But again, that's specific to a certain stage. But I think the more you can be asking yourself these questions ahead of time and during, the better you're going to be prepared to help.

Bringing in the way that we opened this episode by saying that the entrepreneur will, of course, be the most domain deep in their business and the investor offers a valuable but different perspective sort of by seeing lots of businesses. There's a similar thing here, David, which is what you're talking about, where the investor has fresh eyes.

And there's value in having fresh eyes. And so a way to add value as a board member is if you are a smart person who's experienced in this area and has fresh eyes, that on its own a priori is valuable. And so if you can establish a good partnership where you trust the crap out of the management team for being incredibly deep and deferring to them on most important decisions because they have the most data, but bringing your fresh eyes and saying, hey, I haven't thought about this as much as you

here's my opinion and why I'm thinking this, like, let's have a debate. And do you see where I'm coming from? And now I can understand where you're coming from because you actually do have more data. And that, that tension in itself just has value. This is a thing that is not on your agenda, but it came up and I want to like, I want to talk about it here. So we've made sort of like snarky references a few times to VCs detracting value and,

And I want to pose the question, do you think that is all because of misaligned incentives or do VCs detract value for other reasons?

And while you think about it, I'll offer a little more context. So the VCs are dual fiduciaries. They have a fiduciary responsibility to their investors and the fiduciary responsibility to the company. And basically what that means is that they want to maximize the value creation both for their investors, but then for the company, for all shareholders of that company. Right. Right.

There's lots of places that incentives could get misaligned. But do they really care about the other shareholders? Right. The way that VCs could ostensibly detract value, that's not because of incentive misalignment, but really just because they're trying really hard, but it doesn't actually move the needle, is more in ineffective portfolio services where you can sort of distract and waste a lot of time if

It's a very specialized company that needs to hire from a very specific talent pool, but the firm's talent resource has no ability to access that talent pool. I'm just throwing out an example of a way that the firm, with its attempt to create value, could actually take away time and focus from the business and detract value. But I'm actually having a hard time coming up with other ways beyond misaligned incentives that...

value detraction occurs? I'm really glad you asked this question because it's, I think this is an important thing to think about and reflect on. I wonder if actually the industry has kind of moved past this would be my answer. My hypothesis is that

some of the value detraction in the past and to the extent it still goes on currently is due to misaligned incentives and that's real that happens for sure but i think a lot of the the trope about this in the past was like old white dude who doesn't get it anymore in a patagonia vest at the meeting just spouting off about some random stuff that like clearly this person has no idea what they're talking about and didn't even read the deck you know i i

I think that actually happens a lot less if at all anymore. I think it used to happen because VC was this sleepy industry that was really hard to get into and even harder to get fired once you were in it. And so you just had like all these people around that like didn't need to be around anymore or didn't deserve to be around. The industry has gotten so much more open and competitive since then that I think like you have a lot more aggressive, uh,

well, you've always had aggressive people in BC, but like aggressively intelligent and sharp and like doing work to stay at the top of their game, people in the industry now. So I think that probably happens less of the just like, this person has no idea what they're talking about. Because you as a board member represent three things. You represent like

obviously the company, your firm, but then also yourself in the world, in the way that this whole solo capitalist rolling fund, build a social media presence thing is happening, you have a lot more people who now have a third pull, which is to build their own brand in addition to the dual fiduciary. And I think that actually creates more misalignment. Oh, and more misalignment. Misalignment, yeah, where you have people who are...

noisier on Twitter, but less helpful to the company than they sort of would represent. So obviously the chickens have to come home to roost there. Like if you're, if you're legitimately not adding value, then you can't build a big reputation of adding value. I think that's probably more harmless though, because people like that often aren't actually board members or, or influential advisors to these companies. So like, it's just noise. They just sell really hard to get on the cap table. And then when they don't show up there, they're neutral. Yeah.

Yeah. You definitely used to have, you know, VC because the industry was so much smaller and like there weren't that many firms, there weren't that many people at these firms. You'd have VCs who owned a lot of your company were on your board and like didn't read your decks and didn't even remember what you did. Like, I think those days are over. Yeah. I have a buddy who's a, who's the head of product at a

late-stage unicorn sort of IPO SPAC target who is telling me that in board meetings... IPO SPAC target, yes. In board meetings, everyone sort of like looks around the room, like the executive team, toward the CEO to know if they should listen when a board member spouts off. And there's really only one member that they sort of consistently listen to. And otherwise, there's like placation that goes on where everyone nods and says, great idea, thank you, yeah. Yeah.

Oh, so good. So that brings up the next important point, which is how you should behave during these meetings. Like many things, Bill Gurley has had a lot of good sayings and writings about this. I think it is really important, just like you're saying, Ben, to like in the context of these meetings, like,

keep a filter on yourself. So like everything you think about saying during a board meeting, you should ask it in your head first. Think about whether it's going to add value in that moment or if you should ask it in a one-on-one or over email afterwards or if you should not ask it at all. I love this. Even Bill, I've heard reference this as the write it down philosophy. When you have a thought, you write it down and then by the end of the meeting, you have a big list and then you decide what of those things actually should be addressed in the room.

Yep. In the room or, or by a followup or not at all. And, uh, I actually really love this cause Ben and probably listeners as you know, I, I'm naturally not like this at all in my day to day life. Like I, I love spouting ideas, but there is something kind of sacred in, you know, a board meeting again, back to like, this is a company, this is people's lives. This is serious work. Like you better take this seriously and you should write down your thoughts and think about them before you say them. Then followups after the meeting, you know, related to this, uh,

What I like to do, and you know, I shamelessly ripped this right off of Bill Gurley is then send the CEO or the whole management team or the founders follow up email afterwards with like, after reflecting on it and writing on it myself, like, okay, here's my understanding of

of what you know I think we we decided is the most important thing here are maybe some follow-ups that I didn't bring up during the meeting that might be worth you know pursuing and and then what's great about that too is you once again you have a written record of like that you can then reference before the next board meeting of like great

okay, this is what I thought last time. This is what I said. You know, Hey, it's a good discussion, uh, kicking off point with the management team itself, but, but then you can like keep yourself like, okay, yep. Got this cadence. Here's the last time. Here's this time. Here's next time.

There's so much information that comes at all of us all the time. And the news cycles are so short. And I don't just mean that in a news cycle sense. I mean that in like a company sense to like so much around the company happens so quickly, especially because all these investments tend to be in developing industries.

it's actually very useful, not for any sort of like, now I have a written record so I can like use it in any nefarious way. It's more like it would be great to really like have that codified somewhere what we decided so that like I can remind myself because this stuff changes so fast. Totally. Especially because GPs at, at,

established venture firms who've been investing for five plus years, like if that's who you have on their board, they're on 10 other boards or more. And so like any shortcuts to be able to sort of like get high leverage on time and make it the most sort of like effective and hopefully value adding to the company in the time that the management team has with that board member, the better.

Totally. All right. So I think that wraps it for board work, unless there's anything else you wanted to add. To summarize it, like the best thing you can usually do in a boardroom as a board member is stay quiet and be thoughtful and write stuff down and then follow up about it. The second most valuable thing you can do is think about...

If you have a divergent opinion on strategy or on execution, think about, am I qualified to push that we should do something else? Because the management team has very likely thought about it much more than the investor. And so what is the reason that you are entitled to believe that we should go another direction? And to be clear, that doesn't have to be

I have this direct experience. It could be like, no, I'm going to go do some research and think about this and see what other context is out there. And can I bring this other context in perspective? Right. That's an important one. And then thirdly, I think there's in what way is my firm or my network a shortcut for the way for this company to figure it out? Totally. This is a primary, again, whether in a formal or an informal kind of board context, this is the primary conduit for, you

your firm's resources to come to bear for in help of this company. So that's board meetings. The next buckets will be shorter than, than board meetings. We promise, but it is just like a board meeting. So long. You should really listen to this as a pleasure podcast. You know what you do in your free time, but we have such fun banter. Yeah, sure. You keep telling yourself that, Oh man, I am a PC. Can't get away.

Okay. So the next bucket is future financings, follow, you know, raising your next round and exits. So I think this is an area where investors can have a huge impact on companies because like you do this and see this all the time. Founders do this very infrequently. And especially if they are early stage, first time founders, like not at all. Like they're, you know, you may have just led their first round or even their second round. Like, great. They've done this one or two times.

The next time they do this, they're still neophytes, essentially. This is the exact thing that we were talking about recently with regulatory capture, where like the regulators and the CEOs of the entrenched companies see each other much more often than sort of the innovators who are trying to do something outside of regulations. And so the regulators are sort of beholden to the big company CEOs.

And this works kind of the same way when you're thinking about that next round of financing. Like what Series A entrepreneur has had 10 years of relationship building with Series B financers? Like you're going to have like one or two contacts, whereas this venture firm is playing a iterated game. Maybe if they were a VC before starting the company. Yeah. Yeah. I find myself continually...

even 10 years into doing this, uh, surprised and having to revise, you know, reset this calibration because it's so natural to me to us. Like, Oh yeah, I know lots of investors. I know people at every firm. Like this is what I do. It's an abnormal thing to have relationships with 100 VCs. Like that is a, yeah. There's obviously your network and direct introductions for early stage founders. There's lots of, you know, coaching on, on, on,

the pitch on the context, on the positioning, on the process, how do you manage the process? And then depending on the strength of your relationships with people at various firms that are considering, you know, investing the back channel, like, you know, the helping and another great girly quote, uh, you know, that he used to say is people think being a VC is all about like you invest and make these decisions. And then you, you know, get in board meetings, you talk about company strategy and

mostly what you're doing is selling like you you are selling you're selling the next round investors to come in you're selling candidates i've thought about this as like a younger person who's uh who's writing checks like even if you don't feel that like it's a big deal to talk to you like if a ceo is selling hard for an employee to join the company and they say look i i

You know, we've had a lot of conversations. Do you want to talk with our board member? Like the office carries weight for someone who's new to the company to be able to speak with a board member, get their different perspective on it. It's just a very different thing than talking with someone that you've talked to 10 times about joining the company.

the thing I was going to add to what you were saying, you know, in a, in a recruiting context is we're talking about more mid-level people, not like senior execs are going to expect to talk to a board member. But if you, as a board member talk to, you know, more middle or junior level people in the company during a recruiting process, it shows you care, like almost no matter what you say, like you care. And that is a huge differentiator.

Yeah, that's a great point. So like popping up to, you know, leaning on investors to help you raise that next round and to recruit. This is like the no brainer way to add value. This is the structural systemic way that that investors can add value. It's almost like it's not quite table stakes because like it doesn't say in the docs that the investor should help you raise your next round. But like that is the thing that they are uniquely positioned to do that. If you're a founder, you should lean aggressively on that investor to recruit.

Run through your deck over and over and over and over again, like put yourself through their cauldron of revving you on the deck and coaching you on your deck and coaching you on how to navigate that next fundraise. Because as good as an entrepreneur is at telling their story, a VC is 10 times better at understanding how it will be received by other VCs who have similar incentives to them. It's a specific context. I've been thinking about this with one company in particular I've been working with.

as a founder and a CEO, you're telling your story in lots of different contexts. You're telling it to customers, you're telling it to recruits, you're telling it to like, but an investor context is a specific context that is often different from those other contexts. And so an experienced VC who's already invested in your company is going to be able to help you shape that positioning. Like, what do you describe? Like, yeah, like if you're talking to a customer, you should talk about like the benefit, like what a customer is going to get out of using this.

a VC is not going to care as much about what your customers get out of it. They want to know, is this market big? And why is this an opportunity? And why are you going to win? Yeah, that was a mistake I made for a long time as a founder was having similar sales decks to pitch decks. And like the most glaring example is like,

investors want to know how big your gross margin is and customers want to know how small your gross margin is. And they don't, customers aren't going to think about that in that exact way, but like you want to almost pitch exact opposite things to both of them.

Again, like not to say investors don't care that you serve your customers. Well, they do. They want you to do that. But in service of building a big company, this is a nuance that I think is important. It kind of only comes, I think only really comes with experience and building your network within the investor community. But we're talking about selling, right? Like on behalf of your portfolio companies as they're raising their next round, right?

selling like a salesperson is not going to work. You know, if you, if you start calling up your VCs that, you know, other VCs, you know, and you're giving them the, you know, laying it on thick with the pitch, that's probably not going to go over very well, especially with more experienced ones. They're going to be like, yeah, okay. Why, why is David calling me and pitching this one so hard? Again, it comes back to sort of positioning what, what I think you want to get to over time that I think leads to being successful at this is

is you really get to know other VCs in your network, what they are looking for. And because the reality is, especially once you become more seasoned as a venture investor, you know your strike zone, you know the deals that you're going to do that you're looking for. And you're just going to do those. It's going to be really hard for you to,

to get across the line to do something that's not in your strike zone. If you can start to learn in your network, what are the strike zones of people in your network? Then you can be like, okay, great. Like this company is raising around these set of investors. This is in their strike zone. I can call them and say like, yep, you're going to love this because of X. Great. And then I just saved the entrepreneur a ton of time from going and throwing balls to, you know, investors that aren't going to swing.

We have a thing in PSL that we call fundraising as a service. That's basically like the process of building your pipeline and like the investor pipeline and who you should be pitching at what firms and when and scheduling the cadence of that. And actually, it's interesting being in Seattle pre-COVID. It was when should you plan on scheduling your trips to the Valley and what days of the week should that be? And when are you going to have to come back for partner meetings? But like your...

So existing investors are going to be, in addition to telling your story, the very best at understanding who you should be pitching, when, what your funnel looks like, what your, you know, have them run this as a CRM process with you. Because again, this is a thing that is a structural component where no matter how good the entrepreneur is, they do it once, twice, three times. And the VCs, this is like, they're in and out of this all the time.

So then there's exits, which is basically the same thing except with acquirers or bankers or SPACs, you know, et cetera, instead of other VCs. You know, it's kind of interesting, like some firms invest a lot in this. So like Benchmark is actually really, really great at this. Like if you look at their portfolio companies and their exits, they're

The time to exit for a lot of their big winners is vastly shorter than the rest of the market. So like snap, Instagram, duo security, stitch fix Zillow, like all these things are going public or getting bought and,

like six years or less. And playing the IRR game more than the cash on cash game. Yeah. You know, and there's value to that. Like some of these companies should be public companies or acquired. I think this is one of the reasons why Gurley campaigned so hard against stay private longer and probably why Uber was such a

thorn in in everybody's side there like because it's kind of against their ethos now interestingly sequoia is the opposite here right like they really don't care like if things are going well if your company is doing well like they just want to be a compounding shareholder as long as possible like you could be public you could be private really don't care ruloff is still on the board of square sequoia is still a large shareholder in square years after going public like

Don't care. You get burned from Apple once in the seventies and you forever are changed as an organization. Yep. It's a, it is amazing. Like the, just how histories of various firms shape their, uh,

organizational dynamics and strategies. You raise the exact same point that like your investor is going to have way more downstream investor relationships than you are. It's not as true because it's more industry specific, but there's a chance that it's also true for potential acquirers where a good CEO is constantly doing business development with

potential acquirers, potential partners, people in the ecosystem to be on their radar. But if you have an investor that invests a lot in this space or maybe knows the corp dev person at that company, then or the exec who's going to potentially sponsor an acquisition came from one of their former portfolio companies, something like that. Not only is it a different Rolodex, but it's

potentially a sort of more, it's a broader Rolodex if the company wants to think more creatively about who should we sell to that isn't one of the obvious three people that I've developed deep relationships with.

Yep. I mean, it's like, um, the, I am thread conversation between Matt Kohler and Kevin Cistrom that came out in the legal, in the antitrust hearings, which was so great. We did our little YouTube discussion of that. You know, yeah, Matt was the senior executive at Facebook who reported to Zuck. Like, of course he's gonna like help navigate that for, for Kevin and Instagram when that acquisition process got started. Yep.

Great point. Everything we've said so far is basic, neutral to good things. I think it's worth spending a few minutes on the challenging stuff of company building, right?

Two buckets I want to talk about here. The first is in my mind, like the really, really hardest, hard stuff. Everything else is easy compared to this. And that's co-founder and executive turnover. This is super hard. There's a bunch of different approaches. You know, the old school VCs made it easy. They were just looking to fire the founders as soon as possible after the investment. That was one approach.

New school VCs, you know, I think we're now coming out of this era post Uber and a lot of stuff that's happened, but the never fire founders approach that VCs took for a long time. You know, the reality is like there's probably the right fit is somewhere in between. Like you for sure don't want founders to leave the business. Like that is bad no matter what. But sometimes it's

necessary, hard and things happen. And, um, you know, this is where there's almost, I don't think too much to say around like a prescription of how to do this because every, every situation is, is unique. And this is like,

so emotionally painful and draining for everyone, especially if you really care about the company. So I have some thoughts, but I don't know, Ben, anything else you want to add to tee this up? Yeah. I mean, two things. One is again, getting back to the checks being bigger now and,

are that more money is going into less mature companies, so it's more likely that an organic founder breakup is going to happen after it's been capitalized. Because a lot of times founders or any relationship doesn't have to get tested until it gets hard. And so you don't really know if you're a good fit until there's something hard and scaling or, you know, dealing with how to spend money when you didn't used to have resources and now have resources like those can create friction.

Also, just virtue of running a company of any size together, you know, for more than a few months, I think going into years is hard. Totally. It's like a marriage. Totally. And so that's point number one. Point number two, this is quite the tee up, is that co-founders you are actually less wedded to than investors. Right.

And I don't mean emotionally, but from a docs perspective, it's pretty wild that when you bring on a preferred shareholder, especially a board member, especially one with all the rights that come with being a board member in standard NVCA or anyone else's doc,

Whether or not you like each other, you're pretty much in it, unless there's something really, really drastic that happens that meaningfully would impact the financials for a firm, like the firm decides to totally write off the investment or sell all their shares or something like that, something very, very unusual. But the far more common thing is a founder breakup, and founders are...

early in their vesting. They're only bound by an employment agreement. And so the founder could walk away. They own 10%, 20% of the company, 30% of the company, whatever is vested. So it sucks that there's all this equity that's already been doled out that you no longer have to incentivize people. But it's a relatively clean break. You don't get a clean break with your investors. And

And so there is this very interesting, like if there's a founder breakup, the thing that endures is whoever stays continues to deal with the investor pretty much no matter what. There are really two types of departures that you deal with at any company. One is simply like a person is not the right person for the role that they are currently in anymore. That's the pretty straightforward thing.

Usually this happens with non-CEO founders, although sometimes CEOs are no longer the right CEO for the company for whatever reason. Those situations are, you know, again, not easy, not easy at all, but the easier version of this, because like if everyone can step back and be rational either immediately or with some time, usually people know when they're not in the right role and they aren't happy and they aren't fulfilled and like, you know,

In many cases, there is still a role for that person at the company, just a different type of role. Or maybe it's a founder becomes a board member or, you know, whatever, something like that. Again, I don't want to say this is easy, but like when I see these scenarios, it's like, okay, you know, this isn't gonna be fun, but we can get through it.

The much harder scenario is I think mostly what you're talking about, Ben, which is real breakups. Like it's not motivated by somebody's role or performance. It's motivated by an interpersonal dynamic between co-founders where like the relationship is broken, right?

And in those cases, it's just like, it sucks because it's like a divorce. Like, you know, you can say as a board member, you can be like, well, we, we need to, you know, let's get a coach in here. Let's get therapy. Let's get couples counseling. If it's done though, it's done. And, uh,

And it's, and it's hard. And, and, and when, when that happens, I don't know, I'm curious what your experience has been with this bend. Cause it happens a lot, especially with these early stage companies. You know, I've seen a bunch of these and I think generally when this happens, it's almost like a horcrux, you know, from Harry Potter, like you're splitting the soul of the company. And when someone leaves like this and you're never going to get that back, like you're

companies can still recover, do okay, go on to new lives. But, um,

this is a like it's a major blow when this happens and it sort of depends like if if they had already bottled lightning then yes but if they hadn't bottled lightning then what is true is you're stuck with the i don't know what that right harry potter analogy is but whatever's left after the horcrux like you're left with the soul of the people who are still there and if if what you had before was magic then it's a bummer because it's it's

very difficult to find magic again. If you didn't, like could be a good thing and is often a good thing. So let's go back to the topic of this episode, which is like actually company building. So the job of a VC helping in the company building process. So in these situations, how can the investor do that? Yeah. I mean, well, David, how can I be helpful? How can I be helpful? Well,

stepping back and thinking about, okay, with what has departed from the company, is there still potential for magic here to be created? And again, we're talking about all like, you know, pre, if you're already like well along the way of building a company and scaling, that's one thing, but pre that, if the answer to that is yes, then,

Then it's supporting the remaining founder or founders in the post-divorce period, so to speak. And this is hard to do. I mean, I've never done it, but having seen this a bunch now, I wish I had. And I think I will going forward. If you think there's really not going to be potential for magic going forward...

Just shutting down the company. Like, cause I think in that case, it's just going to be much better. I experienced this once a number of years ago with a company I was on the board of and, uh, you know, something like this happened and there was a, an angel investor in the company who was a retired Sequoia partner and he emailed the board and he was like, look, when this would happen at Sequoia, we would shut down the company immediately. And we were all like, no, no, we're not going to do that. We're going to salvage it. There's a path going forward. Um,

He was right. There was no path going forward. It would have been better saved years of everyone's life if we had just been like, nope, like you're all talented people, but like this configuration not going to work. Let's shut it down, return the capital, move on to our next things. Fascinating. And there's another interesting data point that's related. And I

I'll think of the name of the post and we'll put it in the show notes, but it's a Fred Wilson post to bring back our ABC conversation from earlier from a few years ago about how I think it's something like pivot versus shutdown. And he's sort of taking the contrarian take that most people take, which is like, look, everything you have before is baggage, your team, your capital, the capital structure, like everything

Cap table. Yeah, in all likelihood, if you have a new idea, like you should just go start a new company, get new investors on board, get new stakeholders broadly, you know, employees, everyone on board for your new idea and don't cart all the old baggage of the old thing along with it. And like, there's no right answer here, but it is worth, for anybody thinking about that, that's a great blog post because it's worth sort of- It's really good. Weighing the pros and cons of like taking all the assets and accumulated stock

sort of like goodwill in the world and cohesion that we've built in the past? And like, is there enough transferable stuff to bring with us where it's actually better than starting over? Even though starting over is going to really suck, it might be hard to raise money. It might be hard to get it off the ground again. It might be hard to rehire the team, all that. It's just an interesting set of trade-offs to think through.

Yep. Totally. Well, I'm glad you brought that up. That's such a good post. We'll, we'll try and link to it below, but if we can't get it in there, just Google the ABC Fred Wilson pivots. If it's on the internet, we're going to put it in like, all right, all right. You're putting us, you're putting a stake in the ground. We're putting it in the notes. That's our commitment. Pivots. That's the last discussion here. So this is sometimes related to co-founder departures, but I want to separate it out.

This is interesting. So like I agree with a lot of the Fred Wilson post about this and having seen and lived through a bunch of pivots and legacy cap tables and all that, like it is very worth considering shutting down, returning capital, starting a new and fundraising, regardless of how you do this from a corporate structure perspective.

I love these moments personally, when you've got a team that the team is still committed and wants to work together. They've had an experience where they tried to do something and it didn't work, but they still want to work together.

Those moments are just magic for me because like now you can throw away all the rose colored glasses, all the baggage, all the sacred cows. Everybody can commit to like rationality. I find there's like hyper clarity that happens around then. And yet you have to find an idea.

And something that could potentially a product market fit, but everybody's so motivated because nobody wants to experience what they just experienced of like slogging through not having product market fit. And I love moments like this. So there's a lot of, a lot of diverging opinions. Lots of investors are like, man, if there's a pivot, like I don't want to have anything to do with it. I just want to bail. Like nothing good comes of that.

I am of the complete opposite opinion. Yeah, I mean, there's something special when you lose it all and then you feel like you have nothing left to lose. There's immense clarity that sort of comes from that. And there's also a weight that comes off of, like, when you were trying to do something really hard that wasn't working, there's a weight that's lifted off your chest of everybody, including the investors, looking at each other and saying, we're going to stop trying to do that now because it's not working. And, like, that frees up

Oh, it's so free. A management team up to be creative again. Oftentimes you can't be creative when you feel that weight on you. David, I'm stealing from your next section here a little bit, but like the most valuable you can be as an investor at this point is if you are committing to, yeah, we're going to do a pivot, like committing to lifting that weight off and enabling the sort of creativity and newfound motivation to go run hard at something to let that happen. Yeah.

Well, I think there are two elements to that. That, once you're into it, which is...

great and valuable. I think even less so because a lot of that motivation is just going to come from the team internally. I think now this is super, super hard, but you know, looking back on my past 10 years working with companies, one of my moments that I just like, I know I'm going to remember for the rest of my career is helping a team identify that they need to do this. Because sometimes when you're, you know, a team and you're

You're running hard at something and it's not working, but you're so locked into it and you've got the blinders on and like you're pushing that boulder up the hill and you don't want to give up. You don't want to be a quitter. This has happened one time in my career where I was just like,

Right. No one wants to be the one who said this isn't working because you don't want to be the black sheep of the group. And like you're a little bit of a detached third party as the investor. So you can be the one when everybody sort of like knows it's in zombie mode, but no one wants to be the one to flag it. Again, this is delicate. And you got to, again, keep in mind, like this is a company. This is real. This is important in people's lives and work. Right.

But there's also the upside. If you can say like, look, this isn't working, let's find something that is. And it gets into that freeing moment like, oh, it's just so much fun. Yeah. Again, this is where breadth versus depth. And I think that's probably the theme of this episode is figuring out when to apply the values of depth and the entrepreneur bringing the company, bringing everything to bear on that side. And when breadth, it makes sense to index heavily on breadth when the investor can bring something.

their sort of worldview to bear. This is definitely one of those where David, like, how did you know what it looks like when something is working and what it looks like when something is not? It's because you've been involved with companies that were working before at a similar stage with a similar business model. And so- And companies that were not working. Right. It's almost like rather than sort of like looking at a world that's made up of a bunch of mysterious shapes, like you're the one who has the glasses that helps you like make sense of the shapes. Yeah.

I'll point out to bolster my case for any investors that are screaming at us on the other side of like, it's not worth your time. Here is a short list of companies, most of which we've had as main topic episodes on the show, some of which we haven't and need to, that were pivots born out of moments almost exactly like this. Seed stage, very early pivots. Yep. Pinterest, Instagram, Discord, Slack, Twitter.

Twitch, PayPal, all of those born out of moments like this. Yep. It's a great point now, which isn't to say if you pivot, you're going to be successful, but there is this like massive survivorship bias in that list. Exactly. And it really is, is a fun moment when it's, it's my favorite company building moment when, when that can happen. Yep. All right. Bring us home. What are, what are some, what are some truths that you've experienced that have worked for you?

You jump in too. So, okay. First kind of like wrapping up point here. I think there is a great deal of truth to this first do no harm ethos. I think also maybe having some, um, especially early in your career, but even as you go on having some, uh, self-compassion, like you are going to make some mistakes, you're gonna, you know, F up some companies. It's, it's gonna happen.

I've done it. Everyone's done it. Even the best investors have done it. Doesn't mean you shouldn't beat yourself up about that. Doesn't mean that you shouldn't take the weight of responsibility super seriously. If you choose to engage deeply as a company builder, that's going to happen forever.

try like hell not to have it happen. Two is, you know, I always talk about, I talk about this with Jenny, my wife, a lot about like doing what makes sense. That's something, a perspective you can bring as a, you know, board member, VC, outside sort of breadth perspective of like, hey, I'm not sure what we're doing here makes sense or doing this might make sense. And having an honest conversation around that

Is great. And I think the point I want to make here is like fostering relationships with the founders of companies and management teams where you can get to that point to like rather than like they're trying to impress you or you're trying to impress them or whatever, like the faster you can just get to like, OK, nope, run the same page, run the same team. Let's figure out what makes sense and do that.

I'm going to steal your next one because I think it's... Yeah, go for it. I've experienced it and it's so valuable. The shock absorber. So, and I've experienced it on both sides. So when you're running a company, many times a day, your ups and downs are spiking enormously. And especially when you're younger and less experienced...

You don't sort of self-soothe or self-smooth those. You just kind of like let them grab you. And so, you know, it's the best. This company is going to the moon when this customer sends a nice affirming email that they're interested in continuing or that that investor says, yeah, I'll take that second meeting. My team's really leaning in, which like the whole episode to be done around how to interpret investor speak.

Then it's the worst thing ever and the company's screwed when a key hire tells you they're leaving on the very same day that a customer says they had a budget freeze. And these things just happen. This is the nature of startups. You're so nascent and if you're doing your job right, you're moving so fast that there's lots of these things in play that are just coming at you all the time.

And so by just being the steady hand and being non-reactive to the spikes when they happen and only paying attention to, hey, this thing's been happening like a lot over the last couple months, like that's when we talk about it. And we don't over index on little things when they're happening and we don't blow things out of proportion, we being the royal we in this one.

We, the investors, understand that the founder likely is in a more temperamental mental state because they have a more difficult, more trying job and they've put more on the line than the investors have of their personal livelihood. Being able to say, hey, I'm coming at this from a different mental perspective than you are and so I'm going to do the job of smoothing for you and not explicitly smoothing.

But, you know, everybody is always looking to the other shareholders in their company to sort of validate or invalidate their thinking. And so if you're a board member and a CEO comes to you and says, this is the worst thing ever, like by just not repeating back, you're right, this is the worst thing ever. And saying like, oh, you know, you don't even have to say anything positive, but just like by not sort of doubling down on the negativity, you can do a lot. The best way I've ever had this put to me is, you know,

As a CEO, you're freaking out a lot of the time, especially an early stage CEO. Your job as an investor is not to freak out. Well put. Like the CEO is freaking out. So if you freak out, you're just going to amplify. It's going to be a freak out amplification feedback cycle. You need to break that feedback cycle. Yep.

And then the last two I have here are related that I've only just kind of like really come to be noodling on this in my own life and career. But I think one of the best ways you can help be a company builder, and this is also related to making investment decisions, is understanding how and why people are going to succeed and fail at different things. And I generally believe and I'm coming to believe that like

the way that people are going to really succeed at something. And really the only way that people are going to really succeed at something is if they just have like a deep internal desire to do it. It's like, to the extent we've had any success with acquired, I think it's like you and I just love doing this, right? Like, and yeah,

You kind of can't fake this. This is like the, we've talked about the Bill Gurley running down a dream, uh, talk that he gave on YouTube, which is so good. And I think this is what he's trying to say. Like if you love something and you, or you really, really want something, uh,

you're probably going to succeed at it. Commensurately, if you don't, you probably won't. And so I think is in your role as a company building activities, as a, as a VC or an investor, you can help kind of calibrate and align that sort of stuff within a company that can be a really powerful role to play. Not one that you want to be like parachuting in and changing roles and like messing stuff up all the time. But like,

kind of understanding motivation of people and how that drives their behaviors, I think can just go a long, long way. Yep. All right. Well, that's a great place to leave it. Indeed. So hope everyone has enjoyed this deep dive on company building.

Next time, we are going to go in a very different direction and cover portfolio management within a firm, which sounds boring, but this includes stuff like follow-on investment decisions. Should you bridge a company that's struggling? Should you not? How do you allocate money?

a fund across a whole set of companies and opportunities. How many companies should be in a fund to be risk diversified enough? How should you think about which companies are the higher risk, higher reward bets versus the lower risk, lower reward? Should you blend those two things in a single portfolio? Stay tuned.

Stay tuned. Thank you all for being part of this community here in the LP program and acquired yourselves. Also, people have asked us recently about teams memberships for, for the LP program, for their teams, either venture funds or companies or work or, uh, what have you. We definitely do that. If you're interested, email us or DM us on Slack and, uh, we can get you and your team hooked up with that. Yep.

There's sort of a call to action here around sharing with your friends. I don't really care if you share the LP show with your friends.

We just sort of have this belief that if people listen to the main show and they like it and they're a practitioner and a company builder themselves, that they'll sort of find their way here. Sure, if you think this content's valuable, but if you like the main show and you like what we do here, pick your favorite episode, share it with a friend or a colleague who you think would really enjoy it. Share it on social media if you're open to that sort of thing. As David and I have recently rediscovered, we are a

massively an organic growth engine, which is the sort of gift of inexpensive, but the curse of lack of repeatability. And so to the extent where you want to help more people discover acquired, that is how you can help. And thanks so much to those of you who have already shouted it from their local hilltops. Indeed. Always, always appreciated. Thanks for being here. Thanks for being LPs. And we'll see you next time. See you next time.