Transforming the VC Industry

Building an Impact VC Fund

It's not a hidden fact that the VC industry is still struggling to show some tangible success to the investors, and hence, it's up for disruption. In spite of being the champions of supporting disruptive technologies, the VCs model has not been disrupted or challenged.   

In this, I am covering two podcasts - Nick Moran with Bryce Roberts and Mark Suster around transforming the VC industry. 

Podcast: Economic Theory in Venture Capital 

  • VC is a people business. VC is a glorified HR job. VC job is to figure out to reach out to best possible talent and make them join armies 

  • VCs don't know much about the business or any specific technology, but they are good at what is not working and which models don't work

  • Syndication Agnostic? - driven by own sense of conviction, instead of depending upon (Brad Feld coined this) 

  • Mark Suster: Helping other fund managers - how to fundraise? How to do portfolio management? Etc. Takeaway 1: Develop a niche/ narrow focus. 

  • If you want to build, which has a massive scale - make something globally. 

  • Growth vs. Profit - If the venture is focusing on marketing, branding, product development, then the company can be profitable, but they are focusing on the scale. If you have access to capital, grow. If you don't, then focus on profitability 

  • Economics is not purely rational but rather influence human behavior and psychology. VC work: Eliminate the ideas that won't work, get the most talented people to work with (instead, you focus on finding out the vision first and then mapping the entrepreneur - that is tough), supplement the teams with what is missing. VC should not predict the future but back the right talent. 

  • Play in blue ocean strategy - creating new markets and fundamentally redefining the market. The price is significantly smaller.

Podcast: Reinventing Venture Capital (Bryce Robert, IndieVC)

  • I love that they're trying to create a whole new ecosystem. Ironically in tech, VC's should be looking at how to scale their model as they ask their portfolio companies to do, but they aren't. I wonder if IndieVC believes it's possible to more easily evaluate and invest in companies so they can automatically diversify and thereby have many small income streams as opposed to a few huge ones.

  • They are using revenue share, tied with equity - kind of self-liquidating structure - I didn't know that anyone else is doing. It's innovation in its way. I have done it while being at Gray Matters Capital; I have built the V0 model of the self-liquidating structure that I showed you guys before. 

  • Role of seed capital - what is the part that our capital fund is playing? Are we identifying unidentified entrepreneurs and backing them early on when others are skeptical about the sector, and they want to see more traction? Or should capital creates optionality?

  • Seed capital in present form forced entrepreneurs to continue raising capital every 12-18 months, which reduced optionality

  • Profile of Indie.VC companies: US$10-20k revenue per month, cash efficient sectors, not in the R&D phase, not necessarily focused on being monopolistic, tech and tech-enabled

  • Terms/ Agreement - Convertible note, 3 main features to IndieVC agreement:

    • If the founder wants to sell the company, then IndieVC converts to common stock at previously agreed %,

    • if the founder does the follow on round, then indie converts to preferred stock at previously agreed upon % and

    • Cash payoffs - between founder, employees, and IndieVC until a return multiple of 2 is reached, When the founder decided to take more than 150% of their agreed salary, it creates a cash distribution scenario. After 2 X return, they take a piece from the profit % up to a max of 5 X. If the company hits 5X in 4 years, IndieVC cuts its equity by half. 

Reference links: 

With Love,

Sagar

About

"first followers" is founded by Sagar Tandon, a founding member at Moonshot Ventures. You can reach him at sagar@moonshotventures.org.

Occasionally, he blogs about the responsible investing, tech for good, venture capital, investment thesis, conscious capitalism, collaborative consumption, community, and humane lifestyle.