Prior to joining SVB in 2012, I was a founding partner of Selby Ventures where I spent 14 years working with really talented entrepreneurs and investing in some amazing companies like Pandora, Coremetrics, and BigFix. The venture market was quite different in 1998: There were way fewer funds and the term “micro VC” didn’t exist. In some ways it was much easier to raise a fund back then — with fewer funds, differentiation was less of an issue and there was far less venture capital in the system. There was also a big hole in the market between larger, established funds and angel investors who were doing the bulk of the seed funding.
Today I work with emerging VC fund managers, and am often asked about my biggest lessons learned and what I’d do differently the next time around. Leading up to an NVCA and Silicon Valley Bank Seed Manager Workshop, that we hosted with Jeff Clavier, SoftTech VC founder and NVCA board director, and Michael Kim of Cendana Capital, I recapped a few of those lessons learned during my time as a seed investor:
1) Develop your own framework for investing and when you have conviction, don’t worry about what other investors think. When you’re starting out as a VC with no brand or track record, it’s natural to want to co-invest and seek validation from established, brand-name firms. While it’s important to make sure there’s enough capital in a seed round to get to the next key milestones, don’t focus on what others think. And if you believe deep down in a team and company, be persuasive when approaching other investors to fill out a round (and don’t worry about the brands).
2) Be a contrarian. It’s easy to fall into the “follow the herd” mentality as a VC. Certain sectors get hot, a number of interesting companies get formed, lots of venture capital flows in and before you know it, you have a dozen companies funded with each doing almost the exact same thing. You can’t predict the future, but back founders who have a vision for what the future might look like and don’t be afraid of being wrong.
4) When you remove the founder/CEO early in a company’s life, your chances of building a successful company go way down. When you’re investing early, you’re betting mainly on the team, as there’s little data, traction, or market validation. Sometimes, though, you get enamored with a market and realize you bet on the wrong team. However, for some startups their culture and morale are tied to the founders. Once the founders are gone, it’s often hard to recover. Rather than replace the founder and put in more money, in my experience it’s better to cut your losses and get the company to a soft landing.
6) Investing out of a $10–$30 million fund is much different than investing out of a $75 million-plus fund. Our first fund at Selby was $30 million, and our second fund was $105 million. We thought by having a larger fund we’d simply follow the model from Fund I and write bigger initial checks and have more reserves for our winners. That was partly true, but leading and controlling rounds with larger checks creates a different dynamic and responsibility with the team and co-investors, compared to chipping in checks of $100,000–$250,000 to top off a round. As checks get bigger, elbows get sharper, and future participation and signaling (as well as forecasting reserves) become more important. I talk with GPs every day who have that similar mindset in growing their firms but who haven’t really thought through all the dynamics of this growth.
For more information on Emerging Managers, visit SVB.com
©2017 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.
Companies referenced throughout this document are independent third parties and are not affiliated with SVB Financial Group.
This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction.