Team-building is hard because it is partly a function of filling in gaps, not only in bandwidth but also in ability and skills. And for super motivated, opinionated, stubborn, high-performing individuals, it isn’t always easy to say “I suck at this: I really need to get someone who is much better than me and from whom I can learn.” But the best find a way to do this. And this isn’t just about Mark and Sheryl or Larry, Sergey and Eric, but about every start-up, every large corporation, and every focused unit where there is a concrete mission and a need for diverse skills and perspectives to achieve the mission. Running a bake sale. A Little League. A product team. It doesn’t matter: the requirements are the same.

My experience in constructing the IA Ventures team is a microcosm of the team-building challenge. When I first conceived of the firm, I recognized that to fulfill my vision of being the go-to seed stage venture partner for all things data I needed several elements, many of which I did not possess:

• Deep technical and product knowledge, Ph.D-level depth plus years of practical experience, that could be used to both assess and advise companies on technical issues such as scaling, managing the release cycle and bridging the gap between technology and product. This is a skill set and range of experiences I definitely did not have.

• Operational start-up experience, as one who has started a company, built the infrastructure, models and controls, yet has the skill sets of a financial manager that can help advise seed stage companies on modeling, budgeting and tactical decision-making. My experiences touch these areas but don’t represent the ways in which I can personally be most valuable as an investor, adviser, mentor, strategist and partner.

• Higher-order financial modeling skills together with a voracious appetite and aptitude for understanding markets, analyzing the competitive landscape and constantly asking questions to keep our firm’s thinking rational and pure. This is an essential part of the connective tissue that keeps everything humming among the firm, the portfolio and the market.

To this end I went out and was able to lasso Brad and Ben, and subsequently Justin and now Jesse. They are all awesome but they are awesome not merely as individuals but because of the separate yet distinct roles they play on the team. Brad sits on a handful of Boards but has helped most if not all of IA Ventures portfolio companies as a sounding board on technical issues, tech recruiting, product roadmap and myriad other topics. Ben also has his complement of Board seats but has certainly helped the majority of IA Ventures’ companies with their budgeting, staffing and financing strategies. And Jesse is a gem of a resource that has literally helped several companies rebuild their financial models, perform very targeted research and stay on top of market developments. And I lead several investments while assisting all companies in our portfolio with financing strategy, business development, recruiting and ensuring that our portfolio company teams know each other and ways in which they might help each other. Rather than feel threatened that I have teammates and partners who are better than me at a bunch of stuff, I am so thankful that our team – the machine – is working well for the benefit of our company partners, our LPs and our firm. It was a very deliberate process and it has been the single most important thing I’ve done since starting IA Ventures. Without all elements of the team we wouldn’t be where we are today.

For the last 25 years I’ve been in pursuit of the perfect machine, that just-right group of people with whom to pursue a shared mission. Sounds a lot like the challenges of our founders, no? It is. Team first. Because with a great team, achieving even big, honking, seemingly insane and audacious goals are comfortably within reach.

The same is true for investors. All the noise around crowdfunding, party deals and all-angel rounds changing the face of the venture industry doesn’t resonate with me. What it does say is that there is more seed stage capital available from a broader array of sources that will give more chances to more people to start companies. All I have to say is: Bravo!

But to be clear, I don’t perceive this as a threat to early stage venture for many reasons. As a venture investor who is comfortable with the way I and my partners do business, I am confident that teams which see the value in working with us will choose to work with us regardless of the other options out there. Also, more interesting businesses seeded by others provides us with additional data concerning product/market fit, adoption and engagement that can go into our decision-making and relationship-building process. Nothing scary here.

Also, I’ve found that many seed stage start-ups actually want a heavier-weight, more engaged lead investor than a more diffuse group of awesome investors but where no single investor has a deep commitment to the company’s success. I completely acknowledge that lots of start-ups don’t feel they want or need this at the seed stage, and that’s totally ok. But those often aren’t the start-ups that we’re investing in. It’s just not our game.

But the bottom line is that for us it isn’t necessarily about leading or following, small investment or larger check. It is much more about team fit and excitement for the mission. Because when there is great chemistry and trust between ourselves and our founder partners, the relationship tends to work itself out in ways that benefit both parties. We might want to buy up in the company, and the team is psyched to get us more involved and more economically aligned with them. And when this happens it is an incredibly exciting and fulfilling thing.

But the key message is: know what you’re about, forget about what other people are doing and be comfortable in your own skin. Successful venture investing is a long time scale business, and the results of investment decisions will stay with you for years. So be confident. Be comfortable. And by all means do not simply follow the pack because it’s popular. Make no mistake, it’s hard to stay strong against the trend when others seem really successful and are getting all the kudos. But don’t fall prey to this dynamic. Just play your game.

Know the facts before taking a stand. When news of a “London Whale” came to light a month ago, and this trader was linked to JP Morgan, Dimon issued a strenuous denial that his was a big deal. According to the Wall Street Journal, and I’d tend to agree with them, Dimon didn’t understand the true extent of his trader’s activities or the risks it posed to the firm. Fast-forward to today: he looks like a terrible leader, one who allowed a trader one of the biggest risk books on the planet without knowing how it was impacting the firm’s financial position. Why on earth would he make a statement about this trader’s activities without truly understanding their impact in depth? His typical bravado backfired in this case. He should have heard the rumblings, did a deep forensic dive into the facts, developed a view and then communicated to the media. He chose not to follow this approach and got absolutely skewered. And deservedly so. He failed Crisis Management 101. Perhaps he should have learned from J&J’s handling of the Tylenol scare. Lives may not be at risk here, but given how far out on a limb he had gone in denying any problem (and now knowledge of the problem) his PR morass is pretty hairy.

Avoid taking self-righteous positions. For all the skill and opportunism with which Dimon navigated JP Morgan through the financial crisis, he has long touted his emphasis on risk management and on prudent risk-taking. He specifically sought to paint his firm as distinctly different than those “cowboys” at Bear Stearns, Lehman and the other investment banks. Better diversification. Greater breadth. Better risk controls. These were the hallmarks of JP Morgan as a world-beater, largely immune to the troubles of its bulge bracket peers. Both the communication breakdown and lack of risk controls giving rise to this massive loss are completely at odds with his characterization of the firm. If you put yourself on the top of Mt. Olympus, you are always prone to a nasty fall if messaging and reality are found to be mis-aligned – as they are in this case.

Stop thinking that VaR has any linkage with reality. While Dimon himself may not have been aware of the magnitude of the Whale’s risk position, certainly his risk managers were. And if they were using VaR, they should be skewered as should Dimon. Have we learned nothing? I was musing about problems with VaR and Sharpe Ratio six years ago, and in between we’ve seen the 2008 crisis and myriad mini-crises in between, and the fact that VaR is still a bedrock of financial disclosure – and financial risk management – is chilling. But hey, we’re still in a world where there are huge arguments over the imposition of true mark-to-market accounting rules, enabling financial firms to present something less than a true picture of how assets and liabilities are valued on a liquidation basis. We should isolate long-term assets and liabilities – those that are truly match-funded on a duration adjusted basis. Then we should look at those short-term assets and liabilities and look at the costs for hedging out the residual risks, understanding the market’s assessment of the true mark-to-market exposure. Why this isn’t current best practice for disclosure is beyond me, but at the very least these tools should be employed within all financial firms, not only the JP Morgan’s of the world (though given their systemic importance they should be mandated by both regulators and the FASB). 

Acknowledge that the SEC will forever be playing catch-up. The metaphors that come to mind are Network Security Specialists vs. Black Hat Hackers. Or WADA (the world anti-doping authority) vs. Steroid Using Cheaters. It is a classic good guys vs. bad guys conflict (though I am operating on the assumption that the SEC are the “good guys” – I believe they are trying, just failing). They are out-manned. Out-paid. Out-incentivized. Out of luck. The fact that Mary Schapiro just uttered “I think it’s safe to say that all the regulators are focused on this” is akin to the fire department showing up after the house has burned down. The system is broken. The accounting rules are flawed. Risk analysis and disclosure is flawed. And the regulatory framework is broken as well. Losses of this nature should not come as a surprise. They have and will continue to occur in the absence of common sense disclosure and elimination of all the obfuscation that has been allowed to pervade balance sheets for generations. It’s just that the ante has risen given the magnitude of the risks being borne, the inter-connectedness of the major players in the financial system and the complexity of the tools being used to take risk. It’s not your father’s bond and risk arbitrage portfolios any more: it’s derivatives of all shapes, sizes and liquidity. Until rigorous mark-to-market rules are enacted that facilitate the transparency required to regulate properly, the SEC is fighting a losing battle. All good things stem from transparency. But a broken SEC is good for shareholder-funded speculators. The longer it stays broken, the longer they get to continue making asymmetric bets in their favor (heads I win – tails you lose).

While to many the JP Morgan trading revelations might have been shocking, they should’t have been. The system for deeply understanding financial institutions’ risk is flawed, both inside and outside the house. Until this fundamental weakness is addressed, it doesn’t really matter what the SEC does. Our banks have more than enough latitude to get themselves – and our financial system – in trouble.

The role of the Board has been written about both extensively and well. Suffice it to say, a good Board is a very powerful tool for helping a CEO achieve a Company’s full potential. However, as noted above, members of the Board are not a proxy for a trusted advisers or independent mentors. They may act as advisers and mentors, but in a highly bounded manner because of their power to act on the CEOs words. External advisers and mentors have no such power and don’t have split loyalties, whereas the Board member has fiduciary duties to their own Limited Partners in addition to all stockholders of the Company. It is a delicate dance that by definition causes CEOs to avoid full disclosure and share the true depths of concerns weighing on their minds and in their hearts.

This is why it is critical for CEOs to cultivate a rich set of mentors and advisers to whom they can turn for hard questions and candid insights in a private manner. Building and running a company, especially a start-up, is incredibly difficult and stressful, and it is critical that the person bearing the brunt of expectations have a release valve. It’s just that this release valve sometimes can’t be a member of the Board.

As an investor and partner with management I believe deeply in the value of a strong Board of Directors. However, as an investor and partner with management I also feel passionately that CEOs have a portfolio of people outside the Company from whom they can get honest advice without worrying about disclosure. Both roles are essential to the building of a healthy Company (and the maintenance of a healthy and well-adjusted CEO!).  I have lots of experience playing both roles, and it is hard to say which one I like better. I think the potentially more interesting question is which role actually conveys the greatest influence – legitimate authority (as a Board member) or expert authority (as a mentor). It would make for an interesting debate.

But then my Apple lunch companion wondered aloud: “Why don’t more CEOs bring greater clarity to what their companies should not be doing?” It’s a significant question. 

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In some ways, it makes perfect sense. CEOs often want to keep their options open. If they put all of their energy behind a single idea and it goes wrong, they will feel the full brunt of the blame. Yet, by pursuing too many priorities, these CEOs may actually be risking future success even more.

My friend and co-investor Mark Suster raised a similar point in a post published today:

It’s tempting to take on new projects, new features, new geographies, new speaking opportunities, whatever. Each one incrementally sounds like a good idea, yet collectively they end up punishing undisciplined teams. I like to counsel that the best teams are often defined by what they choose not to do.

This is an area where we spend a tremendous amount of time with our companies. We are passionate about focus, especially at the earliest stages where distractions often mean not shipping software, and not shipping means not being close to customers and getting feedback, which essentially means flying blind. Once a start-up begins living in its head and not in the market working to make customers happy, the chances of actually achieving happy customers and product/market fit fall off a cliff. This frequently happens in nascent markets, where the possibilites to make customers happy seem endless and inexperienced but eager managements want to keep all options open until it is virtually certain what customers want. In real life, however, this is not the way it works. 

Success – and failure – is bred of having a hypothesis, aggressively testing that hypothesis, collecting feedback, seeing if the original hypothesis has been proven or disproven and going from there. If the hypothesis has been proven, fantastic. Live close to the customer, identify KPIs, use cohort analysis to inform tweaks to optimize the user experience and scale like crazy. If the hypothesis has not been proven, however, there are a few options:

1. Pack it in – you are far away from something real people care about and the learnings you’ve derived don’t spark a new and better hypothesis;
2. Refine the original hypothesis – while you haven’t demonstrated product/market fit and created happy users, you have learned enough such that the original hypothesis can be modified in light of user feedback and a new product can be developed an introduced. 

Either of these are perfectly reasonable outcomes, because they involve being in the market, testing with real users and applying the full resources of the company to the challenge of achieving product/market fit with a single product. It is hard to do this in a disciplined manner with even one product much less a diffuse set of products, ideas or hypotheses. In order to really test a hypothesis I believe founding teams need to “burn the boats” – go all-in on a particular hypothesis and see it through. While it might seem smart to keep options open by spreading resources across several initiatives, in reality this only lowers the likelihood of any one initiative actually succeeding. Making customers happy requires maniacal focus, focus that is impossible to achieve when preserving optionality is a primary goal.

Venture capitalists have inherent optionality by virtue of portfolio diversification. Great entrepreneurs have no such luxury. They are all-in on a particular idea or hypothesis. It succeeds or it fails, is proven or disproven. If failure is done well, it can either lead to success in the current venture or spark success in future ventures. Founders who fail well are generally viewed with respect by the angel and venture communities and have the chance to start over. This is where valuable “founder optionality” comes in. But intra-venture founder optionality? I don’t think so.

Founding is hard and scary yet also emancipating. If you’re going to do it, then do it. Don’t hedge. Go all-in and do it well. Because if you do, succeed or fail, you will have the kind of optionality that really matters – the chance to try again. 

This is an issue I personally experience every day in the building of IA Ventures. I came into the business with several hypotheses about investment theme, investment selection and portfolio construction. I also had several hypotheses about the way we should engage with teams, participate in financing rounds and take board seats. There are a large number of variables at play with few clear “dos” and “dont’s” marking the path. And to make matters even more confusing, there are people whom I respect greatly that are taking vastly different approaches in how they invest in and advise companies as well as shape their portfolios (think 500 Startups vs. Union Square Ventures). Who is right? Who is wrong? Who knows. Nobody does. It is easy to get caught up in the advice and approaches of others and to lose yourself in the process. Successful builders do not let this happen. 

I’d love to say that if only founders followed a particular path they’d be assured that their company would achieve its maximum potential. Reality is quite different. Having deep conviction around solving a specific problem or engaging users in a meaningful way is the essential element for starting a company. From there, however, art and science diverge. As you build the company, shape the product and spend time working with and trying to acquire customers, you will collect a bunch of data. This data will give you a sense of whether or not you are on the right track and if a broader array of users perceive your product’s value in the way you do. You will also likely observe others in the marketplace, both direct competitors and those whom you aspire to be which will influence your thinking. You might also have mentors and advisers with relevant experience and perspective who will weigh in, filling out the information mosaic.

Distilling relevant input and shaping the product  without losing the essence of the vision and mission is the delicate balancing act most founders face. Some founders hit product/market fit just right the first time. But the overwhelming majority do not. They have to synthesize massive amounts of structured and unstructured data and make good decisions. This is the magic of great builders. 

As I reflect upon my own learnings, I have tremendous empathy for the challenges faced by founders. To have conviction but to avoid being pedantic or foolishly stubborn. To be flexible and adaptive but to maintain the essence of the mission. Being a great builder, whether in start-ups, large corporations or any other place where leadership matters is a matter of balance. And achieving balance requires confidence. NB: Great builders are confident – make no mistake about that.

Entrepreneurs are the customers of the venture investor. A big difference between the VCs customers and those of, say, Dropbox, is that there is far greater heterogeneity among the VCs customers. While there are myriad use cases for Dropbox, the scope of product that satisfies those use cases is well-bounded. Not so among the VCs customers. The range of variability arising from different personalities, experience levels, competitive landscape, skills sets and team chemistry creates a need for what I’d classify as a “customized” product. It is more akin to a custom-made suit than a pair of athletic socks. It is not a game of portfolio diversification: it is a craft, with each company as its own discrete project warranting that level of attention, guidance and support. This, of course, presupposes that the venture investor actually adds value, versus the view that money is fungible and investors are undifferentiated.

I can’t speak for the entire industry but I can certainly speak to a sizable group of venture investors I know who definitely have a material positive impact upon the performance of their companies, and I certainly hope IA Ventures falls into this bucket as well. Because if money is really all that matters, then why is there a perceived hierarchy in the industry at all? Why should one firm’s historical performance or star partners give them an edge over anyone else? Answer: because it does matter. Great investors make a company more valuable by helping the team think strategically, recruit, react, problem solve, make difficult decisions and handle hard times. And it is this value that can sometimes lead a company to choose a lower offer from one partner they think can make the enterprise much more valuable than another. It actually can be rational to take the lower offer in the short term for a far greater payoff in the long term. 

Investors like Dave play a hugely valuable role in the startup ecosystem and help lay the foundation for others who manage smaller, more focused portfolios and are able to invest a lot more capital and to spend a lot more time on a particular company. I do not believe the industry would be best served by all firms looking like 500 Startups. Venture investing is its own “attention economy.” There simply isn’t a way that a great partner’s attention can scale beyond a certain point, and then the question is whether or not providing a lot of attention to a smaller number of companies into whom one has invested larger dollars makes sense. I personally think it does and have built my business around this premise.

I believe firms like IA Ventures play a vital role in the company building process, just a different role than investors like 500 Startups. And I can assure you, we don’t scale well. I actually think scaling in venture capital has rapidly diminishing returns beyond a small number of investing professionals, when the weight of organization begins to place a tax on attention beyond what is spent working with companies and getting valuable input from one’s partners. This is why I respect firms like USV and Foundry who have a commitment to remaining small and working closely with their portfolio companies.

In sum, I applaud Dave and the transformational effect he has had on the seed stage investing scene. I think start-ups could definitely benefit from more firms like 500 Startups. However, I think it is a valuable but insufficient component of a robust venture capital industry. I fundamentally believe concentrated attention can be value accretive, but that this type of engagement doesn’t scale. So what – why does it have to?

The amazing thing is that these techniques form the very foundation of the money transfer business. How often do you walk through airports and see words like “no fee money exchange” and the like over those little booths with the thick glass staffed by young, well-coiffed people sporting big smiles? I do all the time both here and abroad. And you know what? They make a fortune. Why? Because while there isn’t an explicit fee, the bid/offer on the foreign currency transaction is mind-boggling. It is among the most attractive businesses on the planet – at present. It is a shining example of false advertising, as well as lack of transparency around the economics of the relationship. And it’s not just the money changers that follow this practice but large banks as well. Try and wire money cross borders and people are focused on the wire fee, while all the real money is being made on the spot currency transaction. No risk. Almost infinite ROI for the banks. 

What we’re now seeing being litigated in the institutional markets has been happening in the retail markets since the beginning of time. It’s sleazy. it’s wrong. And it’s time to fight back. I have no problem paying for value and compensating parties for risk, but I don’t like being ripped off or seeing others getting fleeced, either. While BNY Mellon and State Street are have their practices challenged by deep-pocketed pension funds, what about the small retail customer that needs to send money home or move money across border to pay for educational expenses or rent? Aren’t they due the same square deal?

Talk about an area ripe for disruption…

As the leader of a young firm, I think I’ve got a pretty good lens on the challenges of newness and competing in a highly competitive marketplace against much larger, more established partnerships. Ultimately IA Ventures’ success will be a function of partnering with great teams in areas ripe for disruption where the opportunities for building big, important businesses are high. But how do we even get the chance to work with these great teams when there are so many other firms from which to choose? And how do we convince these teams that we’re in it for the long-term, and willing and able to support them through the inevitable early bumps and stumbles?

Upon reflection, I think you can break IA Ventures’ strategy for differentiation into three essential elements:

1. Focus
2. Engagement
3. Long-term perspective

Focus

When I started IA Ventures back in 2009, I articulated a vision laser-focused on the creation, management and extraction of value from large, often real-time data sets. Why? Because data and its effective management is going to change the world and be the catalyst of change for a generation. It is a thematic, geography-agnostic approach that cuts across industry verticals. The vision encompasses both core technologies and applications and involves building an investment team with expertise and passion in these areas. Bringing on Brad and Ben were the first steps, followed by Justin, Drew and Jesse. Deep technology, data, infrastructure, hacking and financial expertise. And most importantly a passion for the mission. We put a stake in the ground and worked hard to build awareness across the entrepreneur, data science and business communities that we aren’t messing around in data: we are ALL ABOUT DATA. And it is crystal clear that our investment focus, skills, relationships and interests support this strategy. This has been a boon for our firm and our portfolio companies, as it has created beneficial network effects among our companies. Different companies. Different missions. Data and data-related technologies at their core, with IA Ventures being the connective tissue linking them together. We have also sought to catalyze an ecosystem around our mission and focus, aided by our relationships across the various communities of which we are a part together with our portfolio companies. We have also worked hard and brought our energies, expertise and networks to awesome programs such as Techstars and HackNY. I don’t think there is much ambiguity at this point about what IA Ventures stands for, or the kind of value we can bring to our portfolio companies. Some companies will want it; others will not. But by being extremely clear about our focus and demonstrating this in myriad ways, we have sought to create an identity and an edge that helps us become the preferred partner for particular teams. 

Engagement

Different investors have different styles, and founding teams need to figure out what they really want because the range of engagement differs massively. At IA Ventures, we are unapologetic about our high level of engagement. Hopefully not in the annoying, stereotypical VC way of being micromanaging yet ultimately unhelpful, but by bringing our deep domain-specific knowledge and web of relationships to our partners. And make no mistake: we do not think of our companies as “investments” as one thinks of chess pieces arranged on a board. We work hard to function as partners with our founders, and to establish a level of trust and rapport that makes difficult but honest feedback safe to deliver. Vinod Khosla has been a great mentor in this respect: he hates referring to himself as an “investor,” when he really feels and acts more like a partner or as a co-entrepreneur. We completely buy this perspective and work hard to engage with our companies in this manner. Part of the reason we run as concentrated a portfolio as we do is to have the time available to be active and productive partners, particularly in ways that can materially impact the outcome for our companies. The entrepreneurial ecosystem is pretty small and companies share notes. There is an efficient information economy in how venture firms interact with their portfolio companies, spanning the range of the good, the bad and the ugly. I believe that the way we engage with our companies has created a positive reputation that has helped us in the marketplace, and solidified our position as a preferred partner for many kind of companies. And while I don’t have any hard data to support this notion, the anecdotal evidence is pretty strong. Regardless, this is the way we roll, and ultimately believe that this is the way we can best help our companies achieve their full potential and to create superior financial returns for our Limited Partners.

Long-term perspective

If there is one thing investors in early-stage companies come to know, it’s that there is seldom a linear path to success. In fact, it is rare that the business which ultimately succeeds is exactly the business that was envisioned at a company’s inception. And coping with these inevitable zigs and zags during a company’s early days requires both a cast-iron stomach and model that supports experimentation, discovery and change. Writing a company off at the first signs of trouble? Not helpful. Being punitive and angry when early targets are missed? Also not helpful. Mentoring and coaching young teams with whom you’ve decided to partner because you believe in them and giving them time to test, collect data, fail, test, collect, adjust, iterate, move into production and mature? Much better. We believe that if you are truly committed to investing in early-stage companies then you have to provide the necessary support and time to discover the right business and model. Sometimes this involves providing additional financial runway. Sometimes it doesn’t. But it certainly means a mind-set of partnership and patience in order to let the team whom you’ve backed to give it a real shot. And if they ultimately do demonstrate product/market fit and traction that warrants additional investment, that you’ve reserved additional capital to support the next phase of their development. Much as running a concentrated portfolio enables us to be truly engaged partners, it also provides us with the financial capacity to reserve heavily for follow-on rounds, such that we can lead seed, Series A and and even Series B rounds, and to do pro ratas when other great investor/partners join the investment group. We have always taken a life-cycle approach to investing while initiating our investments at the seed or Series A stage, and believe this is another way we’ve created a positive reputation in the marketplace that is valued by both our current and future founder-partners.

At the end of the day the most important thing is to be true to yourself, your mission and your partners. The IA Ventures strategy has been to line this stuff up and to execute our plan. And while we’re still a young firm and have a ton to learn, I think we’ve done a pretty good job creating an identity, reputation and track record that is appealing to many of the companies with whom we want to partner. But we can – and we will – get better.

Consider the breadth of the venture investment spectrum. On one end there are individual angels writing $25k checks into concepts scribbled on the back of napkins to quasi-private equity pre-IPO investing and everything in between. As a long-time market practitioner, my goal has always been to identify the optimal point along the “efficient frontier.” Most frontiers are not smooth lines but jagged functions where there are certain spots that yield superior returns for a given unit of risk. The question is: where, if any, do these points exist in venture investing?

It is easy to conceptualize the trade-offs at the extremes. Extremely broad angel portfolios are trying to capture the generational outliers (Facebook, Google, etc.), while having small absolute dollars and percentage ownerships in each of their portfolio holdings. More concentrated late-stage funds are calibrated around 2-3x exits with sharply lower risk with time horizons dramatically compressed relative to early-stage investors. But what is less clear are the risk-reward trade-offs among larger seed, early Series A, mature Series A, Series B and Series C rounds.  Obviously owning more earlier is better – if you are right. But being right is still a very risky proposition particularly in seed and Series A investing (though some professional LPs view even Series B companies as having experienced limited risk reduction), which begs the question: unless you are going to build a massively diversified seed portfolio, does doing seed investing really make sense at all? And if you’re not going to do a diversified mix of seed, Series A and Series B, does it make sense to play at these stages or rather move towards the Series C/D/E “growth” end of the investment spectrum?

From a pure math perspective, if someone wants the opportunity to secure truly extraordinary exit multiples, ownership needs to be established before the growth capital phase. While institutional LPs are generally happy with 2-3x cash-on-cash returns from this portion of the investment spectrum, it is because mortality is dramatically lower than in earlier stage investing and exit multiples reflect this lower level of risk through higher prices paid. It also follows that the variability of these returns is much lower than in early stage venture. In my discussions with experienced institutional LPs, my sense isn’t that they expect to achieve multiples well in excess of this across their early-stage portfolio, but that there is a meaningful chance that they can, e.g., a return distribution that exhibits positive skewness. In essence, whether they acknowledge it or not, that they are trying to isolate upside volatility while backing a set of managers with sufficient geographic, thematic and stage diversification to avoid extreme downside outcomes. Each LP has their own view of portfolio diversification which differs from that at the fund level. For instance. I can intuit that my partners are not interested in IA Ventures “diversifying” for diversification sake – they are doing that themselves at the portfolio level. They want me to try and identify potentially extreme outcomes and to invest as much capital in those few opportunities as I possibly can. But as a manager running my own business, I am conscious of trying to achieve my own optimal mix of risk and return, LP agendas notwithstanding. Besides trying to help my companies as best I can, this is the issue that gives me many sleepless nights.

Our thinking at IA Ventures has evolved during Fund 1 and into Fund 2. One basic premise under which we operate is that our tight thematic focus and domain expertise helps us filter, and requires a smaller portfolio in order to achieve the diversification benefits of larger, more generalized portfolios. For our $50 million Fund 1, this meant a portfolio of 20-22 investments from which to hopefully identify 4-6 investments that will generate >10x type returns. Further, it is necessary that we own enough of these >10x investments to drive an overall portfolio return of at least 3x (and hopefully higher). Given the ownership requirements in conjunction with our modest fund size, our belief was that w’d need to establish the lion’s share of our positions at the seed stage in order to achieve our initial ownership targets (and subsequent pro rata rights) and execute the plan. And this is exactly what we did in Fund 1 – 21 investments, almost all established at the seed (or pre-seed) stage, with a tightening distribution of who our likely breakout winners are and with reserves flowing to those companies as they scale. The good news is that we’re executing the plan. The challenge is that when you make 21 early-stage investments and hold 14 board seats, this kind of seed stage partnership takes tons of time and scales very poorly. It is a labor of love but make no mistake, the labor is extreme – and necessary.

As we’ve grown our Fund 2 to $105 million, we find ourselves re-thinking our philosophy around entry points, risk/reward and scalability. Let’s assume that our target portfolio in Fund 2 is 24-26 companies with 6-8 that will hopefully generate outsized returns. We could continue with our existing entry philosophy and start almost exclusively at the seed stage, and reserve massively for follow-on rounds. Or we could enter our positions across a range of early stages – seed, early Series A, mature Series A – and trade some skewness for risk reduction and scalability. As of now, we are pursuing the second option. We’ve already done our first “real” Series A as an entry point (Next Big Sound), an “early” Series A (Visual Revenue) and two seed investments (Drawn to Scale and one yet to be disclosed). In the cases of Next Big Sound and Visual Revenue, though still early they have fully-formed products, have achieved clear product/market fit and have built-out leadership teams. This is materially different than almost any investment we initiated in Fund 1, simply because they’ve been at it longer and have gone through the “seed hell” that every start-up naturally endures as they move through the idea-prototype-beta-commercial product life cycle. Did we pay more for these than we would a classic seed investment? Yes. Do we believe it has pushed us to a favorable place on the risk/reward continuum? Yes, we do. So using this model we’d expect to establish ~4-5 positions at the mature Series A stage, 10-12 positions at the early Series A stage and the balance in seed investments and incubations. So while true seed will continue to be a core part of our portfolio construction, it will not dominate as it did in Fund 1.

The more time I spend in early-stage investing the better I understand why so many successful managers have migrated towards the $200-$250 million fund size. They are actively seeking to optimize just as we are, but have a distribution that is more skewed towards mature Series A (and perhaps Series B) entry points versus the average early Series A entry point that we have in Fund 2. They can do this because of the larger size of their bankroll: they can write larger initial checks and pay higher valuations in order to achieve significant ownership in companies with still a lot of room to run. But as the numbers plainly show, even assuming an average 20% ownership position at exit you’re talking $3-$4 billion in gross exit value to achieve a 3x return. This is a high bar, simply too high for us at our stage of evolution. But for seasoned managers who have been through multiple cycles and have a proven edge, I can get why this fund size is a kind of magnet. Lots of flexibility. Lots of reserve for a “rainy day” (or weeks, months or years). Yet not unmanageable.

The sphere of portfolio construction has fascinated me for years, first in the liquid markets now in the least liquid of markets. This will be an ongoing conversation…