Last week, Nikhil Basu Trivedi wrote a fantastic post on the rise of solo capitalists, a breed of individual investors who have raised institutional funding from LPs where the brand of the fund is synonymous with the brand of the individual. Confusing them with angels would be a gross mistake; Trivedi notes that these solo capitalists are capable of investing over $5m in rounds, not just co-investing but going up against venture firms to lead rounds and in some cases displacing firms in rounds entirely.
This trends speaks to the magnification of a venture investor's unique brand as a variable in their ability to get preferential deal flow and ultimately succeed. I would argue this is a relatively new phenomenon and that historically it was venture firms who accrued the benefits of a virtuous cycle of signalling effects.
Sequoia invested in Google, YouTube, Apple and LinkedIn. Kleiner Perkins invested in Amazon, Netscape, AOL and Citrix. Benchmark invested in eBay, Snapchat and Uber. If you're a founder, you'd give anything to raise from one of these illustrious firms - and for good reason. Successfully raising from one of these titans sends a strong signal about your company. This halo can help with hiring and retaining great talent, winning customers, and of course with raising further funding.
A partner at one of these funds rarely had to go out looking for the best deals. The best deals came to them. By dint of their brand and reputation, this tier-1 group of firms are able to favourably structure deals, win allocations in competitive rounds and secure additional rights. This is one of the many reasons why returns in the industry are so heavily concentrated in a very small percentage of the industry as a whole.
However, as Trivedi writes in his post, founders are increasingly prioritising the qualities of the partner they'd be working with, rather than the firm:
The importance of an individual's brand has been steadily increasing in venture capital for quite some time. Founders are more often than not picking an individual partner who they want to work in a financing round, based on the relationship built with them, and based on their brand and expertise, instead of the firm's.
There's more to an individual partner's brand than their thought leadership or content. In a 2015 study, Caltech researchers Michael Ewens and Matthew Rhodes-Kropf found that individual partners themselves explained variation in exit values two to fives time more than a VC firm. Their study measured performance persistence as partners moved between firms, finding that those partners' past propensity to generate IPO-sized returns is carried forward. From a founder's point of view, a track record is supreme.
It makes sense, therefore, for successful partners to set up their own shop on the strength of their cachet. Let's look at some examples of some of the most successful first-time venture capital funds and unpack some of the lessons.
Mary Meeker, Bond Capital
Mary Meeker's Bond Capital is one of the largest first-time venture capital funds in history, raising $1.25 billion for it's debut vehicle in 2019. Meeker's annual Internet Trends report is one of the industry's most widely-read reports, going back to the late '90's when she was underwriting tech IPOs at Morgan Stanley.
Her relationship with her future colleague, John Doerr of Kleiner Perkins, began in 1993 when she helped underwrite Intuit's IPO. She initiated a meeting with Jim Clark and Marc Andreessen the same year, going on to underwrite Netscape's IPO in 1994. By the early 2000s, her thought leadership on consumer internet companies was well-known, so in 2004 Morgan Stanley was able to secure the role of lead underwriter in Google's IPO.
In 2010 Meeker left Morgan Stanley to join Kleiner Perkins, one of the most storied venture firms around. At Kleiner she ran the firm's growth fund, investing in Slack, Uber, Peloton and Airbnb, among others. Meeker and the whole Growth team left Kleiner in 2018 after reportedly clashing with the firm's management about its future direction, setting up Bond a few months later.
Bond Capital's slogan on their website is:
Identifying global trends that drive innovation and change
As evidenced by her earlier coups as an investment banker and then later as a venture capitalist, Meeker's thought leadership on the evolution of the internet has been one of her most important assets in getting access to the best deals to be had. After securing those deals and establishing a track record, she built the sort of enduring signalling effect that founders covet. That then gets the flywheel going as preferential deal flow becomes easier to come by, the track record only gets better, and this virtuous cycle repeats itself ad infinitum.
For what its worth, Bond Capital's investments include Byju, Canva, and Nextdoor.
Lee Fixel, Addition
You may recall Lee Fixel's name from my previous post on Neil Shen, where I gave Fixel's example for the possibilities for value creation in emerging digital economies, specifically India. News broke recently (three weeks ago, to be exact) about Fixel's new venture capital fund, Addition, which is set to be second-largest first-time venture capital fund ever, coming in at $1.3 billion.
Fixel recently left Tiger Global after 13 immensely successful years at the firm, leading the firm's most prolific investments in India, including Flipkart. Unlike the rest of the industry, Fixel keeps a very low-profile. No investment thesis, predictions, podcast appearances, tweets. None of it.
Instead, perhaps one of Fixel's most defining characteristics is his diligence, which happens behind the scenes but nevertheless helps him secure allocations in competitive rounds and, more importantly, take contrarian bets.
Alex Konrad's profile of Fixel is genuinely worth your time, but here are a couple of passages that really capture how Fixel's investee companies perceived him:
A signature of Fixel’s startup courtship: lots of upfront research, like with Freshworks, where CEO Girish Mathrubootham says Fixel showed up in Chennai for a meeting, then surveyed his first 200 customers and provided the findings back to the startup. In Peloton’s case, Fixel sniffed around a retail location in Long Island pretending to be an interested shopper.
The investor had come across Peloton researching exercise options on vacation, he told Foley, and saw parallels to other disruptive consumer brands like Harry’s Shave Club in razors and Warby Parker in eyeglasses. “I’m in, shut down the round, I’ll wire $5 million next week,” Foley remembers Fixel saying. “There was a lot to like that he saw and nobody else saw.”
When Fixel's departure was announced, interested observers were all excited to hear what his next step was. Some believed it was inevitable he'd set up his own firm:
Entrepreneurs backed by Fixel are mostly unsurprised that the investor set up his own shingle and wanted flexibility in doing so. “I was surprised he didn’t before,” says Demet Mutlu, CEO of Trendyol Group, a Turkish ecommerce company she says now carries a $5 billion valuation, and in which Fixel invested at a $20 million valuation years ago. “The way he is as an investor, he very much has a founder mentality.”
Addition will invest in both early and late stage companies. Interestingly, the fund has a 15-year investing horizon, just like Steve Jurvetson's Future Ventures, which I wrote about previously. Just like with Mary Meeker, founders will covet the signal of successfully raising from Addition. Reference calls with his past portfolio companies ought to help as well:
“I only own one thing in life: it’s Peloton stock. I’m turning 50 years old and I don’t own one other stock, don’t have one other investment. I only have Peloton,” says Foley. “I strongly considered selling some Peloton and giving it to Lee. That would be the only other place I would put it.”
Theresia Gouw, Acrew Capital
Theresia Gouw and Jennifer Fonstad made waves in the venture capital industry when they announced the launch of Aspect Ventures in 2014, one of the industry's rare funds run exclusively by women. Gouw was leaving Accel after 15 years and Fonstad was leaving Draper Fisher Jurvetson after 17 years. Here are some stats that were released as part of the press release which really go to show what sort of pedigree Gouw and Fonstad had built:
Gouw and Fonstad have together created $10 billion in public market value, helped lead 15 M&A transactions and over 300 rounds in follow-on capital raised for their portfolio companies.
Theresia herself has been a mainstay on the Forbes Midas list, featuring every year in the last decade except 2015. She was Accel's first female partner and was responsible for setting up the firm's New York office. Over the course of her time at Accel, she invested in Interlace Systems, Trulia, Learnvest and Zimbra, among others. Even with such compelling track records, the pair had to begin Aspect investing their own capital. In 2018 Aspect raised a second fund, raising $181 million on the strength of their portfolio's latent value.
One of Aspect's hallmarks has been the diversity of both its investment team and its portfolio. Here are some stats from the press release for the second fund:
Among its startups, 40% include a female cofounder, above the industry average, while half include an immigrant or first-generation citizen and about 30% a cofounder from a racial minority. Those numbers almost perfectly match against the Aspect investment team, which is 40% female, immigrant or first generation and minority background.
Indeed, this was one of the reasons Melinda Gates gave for investing. Though I don't think Gouw tried to actively diversify her deal flow, she was widely recognised for her mentorship of female founders and investors.
At the end of last year, Fonstad and Gouw parted ways, due to differences in leadership style and 'different ways of operating at the portfolio level'. Gouw launched Acrew Capital, raising $250 million for its debut fund. Gouw stressed that a major difference with Acrew is its goal to build a multi-generational firm that can last for decades without tension between generations of leaders. A resounding message they're trying to communicate to founders is that Acrew is literally YOUR crew for the long haul - hence the multi-generational make up of the team.
As an aside, the firm has listed its investment theses on its website, spanning security, financial services, the future of work, community and IoT. Well worth reading.
Ophelia Brown, Blossom Capital
Coming back closer to home, Ophelia Brown is a founding partner at Blossom Capital and has been called "the most ambitious female VC in Europe". Blossom closed a new $185m Series A fund in January 2020, less than 12 months after closing $85m for its fund.
Ophelia joined Index Ventures in London after completing an MBA at INSEAD in 2012. After four years at Index, she joined premier European seed fund LocalGlobe as a partner. Armed with supreme knowledge of the gaps in the European venture landscape, she founded Blossom Capital two years later.
Like Acrew, Blossom is a high-conviction fund, making 5 investments a year in companies that have the potential to be category-defining businesses. Brown gave a revealing interview to Sifted in January, where she discussed how the high-conviction approach weds the firm's fortunes to the success of each company it invests in:
“Our philosophy is that we only succeed if the team succeeds; we’re in it together,”
One of the investee companies said of Brown:
“I’m probably in touch with [Brown] daily — or at least a few times a week,”
“It’s like having another partner in the business.”
In an interview with Techcrunch, Brown discusses how the Blossom team mapped out where unicorns in Europe went to raise their Series B, finding that the majority raise from US funds. The problem is that West Coast funds rarely invest in early-stage deals in Europe. Nor do those firms have the expertise and local knowledge to help early-stage companies mature and cross the chasm to Series B rounds. This is the gap Blossom is plugging by investing at Series A and building relationships with US investors. Brown noted in the Sifted interview:
“We wanted to establish Blossom as a conduit from Europe to the US in terms of raising capital,”
This list could be much, much longer. Some obvious names I'm missing here are Andrew Chen, Vinod Khosla, Aileen Lee, Chetan Puttagunta, Neeraj Agrawal and many, many more. But I think these examples are instructive.
Each investor on this list has gone out on their own after building a cachet and track record at reputable, tier-1 VC firms. Beyond the pedigree of the firm they worked at, each partner has cultivated a unique 'edge', which first helped them raise their own fund but then kickstarted the flywheel of preferential deal flow > returns > signalling effect > preferential deal flow.
For up-and-coming juniors with ambitions of raising their own fund, one of the clearest playbooks seems to be to build a solid portfolio of investments at a tier-1 fund and then go set up shop after you've developed your edge. Easier said than done!
Deals of the week
🔌 Lean Technologies, Saudi Arabia's equivalent of Plaid, raised a $3.5 million seed round. Plaid (acquired by Visa for $5.3 billion) and European companies like Tink and TrueLayer provide the plumbing for API-integrations between financial services apps. Asia and the Middle-East represent huge markets for companies that already exist in the West, simply because of the lag in their financial services infrastructure.
🗑️ Replenysh has raised a $2m seed round to revolutionise recycling by building a marketplace that connects sellers and buyers of recycled goods. The buyers will include a universe of corporates for whom recycling is a key pillar of meeting their contributions towards sustainability.
🧠 Kernel raised $53 million from General Catalyst, Khosla Ventures and others to accelerate our understanding of the human brain. I find this to be one of the most exciting undiscovered realms of knowledge out there, so you can imagine my fascination with this company.
The EU has begun consultations on a Digital Services Act which will force tech companies to disclose "killer acquisitions" that stop competition.. This is worth following closely.
After India banned TikTok, domestic alternatives are racking up millions of downloads. It's too soon to say anything about retention for these apps, but if they hold up then the hype around TikTok's AI could come under scrutiny.
Are SaaS valuations too high? Insightful post from FT's Alphaville on how multiples may be getting a bit out of hand.
Alphabet's Loon balloons launched in Kenya to a mixed reception. The product balloons beam internet to remote locations, but does Kenya really need it?
Why general artificial intelligence won't be realised. After reading Nick Bostrom's SuperIntelligence, this piece might be the only thing that calm you down.
Nathan Tankus is a 28-year making a living writing a newsletter on the Federal Reserve read by renowned economists. Oh, and he doesn't have a college degree.
Podcasts and videos
Charlie Songhurst's appearance on the Invest Like The Best podcast is a MUST listen. Aside from the golden nuggets of wisdom peppered here and there (he has invested in over 500 companies), I was blown away by how Charlie synthesised different fields to explain phenomena in entirely novel ways.
“The world that we encounter in ordinary experience is one in which we are faced by choices equally absolute, the realisation of some of which must inevitably mean the sacrifice of others.” - Isaiah Berlin