<Reflections on IA Ventures, 3.5 years inMonday, April 15th, 2013
by Roger Ehrenberg

I periodically write about my learnings as the leader of IA Ventures, principally to unlock what is in my head and in my heart. As an operating partner with people who are giving their lives to building their businesses and a financial partner with those who have entrusted us with their capital, this is a very serious undertaking. Sometimes I find it necessary to call a “time out” in order to reflect, assess and share. That time is now.

As I’ve written before, our most valuable resource is time, not money. Given this realization, we’ve continued to emphasize lead-managed investments or relationships where we are co-lead with a partner and firm whom we like and respect a lot. This necessarily means writing somewhat larger checks and working to own more of companies driven by compelling teams possessing great chemistry, rich skill sets and bold visions. The result of this strategy is to take somewhat longer to close an investment, but to have established an even deeper relationship with our founders, their customers and other key players in their ecosystem. I can’t tell you how many times I’ve referenced my friend and co-investor Mark Suster’s memorable post Invest in Lines, Not Dots. His advice cuts both ways – not only is it important for we as investors to get to know our potential founders well, but for founders to get to know us as people and potential partners, too.

This also works to cement one of my absolute bottom lines as an investor: our founders need to want to work with us as much as we want to work with them, and if there is a “fire drill” to consider an investment or a sense that founders are optimizing for round price and not for who-is-the-best-partner-to-build-the-best-business, we’ll simply agree to disagree and bow out. No hard feelings, but these are simply not the situations that comport with our notion of deep partnership. I’ve also been amazed and impressed at the due diligence our potential founder/partners are doing on us, and value and appreciate the thoughtfulness and the time they take to make sure we’re the right fit for them.

It is important to note that the above in no way has impacted the stage at which we invest in companies, which continues to be seed stage/first money in (or first institutional money in) or early Series A. Our fundamental philosophy is that we are best-suited to help build companies from Seed through Series B stages, and this is closely tied to our belief that we are building a portfolio that sits at the optimal point of the risk-reward continuum. We’ve always believed that “small is beautiful,” and continue to cultivate deep relationships with larger firms to partner with us at later stages of a company’s development. It is very hard to be good at everything, and we’ve deliberately chosen to focus on the early stages of a start-up’s life.

This approach also has also worked to shape our reserve policy. While we have always created significant reserves for follow-ons, we are now firmly settled into a “life cycle” approach: we are positioned to lead Seed and Series A rounds, with sufficient reserves to do our full pro rata in Series B rounds. We have done and will do select Series C participations, but only where we expect the marginal return on our capital to be in the 7-10x range or higher. But as companies experience rapid growth and begin to scale beyond our early-stage competency and capital base, we allow ourselves to get diluted down from the early high ownership levels to still significant but lesser levels as fresh capital is better deployed against new opportunities. This is a natural and comfortable hand-off that takes place from early stage to growth stage, and we are not in the growth stage business. And that is fine with us.

Likely the hardest thing about building a business for the next 50 years is team construction and company culture. While I work hard to create a particular culture that I hope is retained well beyond my leadership of IA Ventures, team construction is a delicate balance that needs to evolve as the business grows and develops. Venture capital is a people-powered business and one which doesn’t scale particularly well (at least in the way we interact with our partner companies). Therefore growth requires more people, each new person adds to and changes the culture to a certain degree. Core principles are retained but style and chemistry dynamically adjust to new people who have entered the system.

So as culture and vibe are shifting and incorporating new inputs, the nature of communication necessarily changes in response to more specialized roles and responsibilities. New analyst? That changes things. New principals and partners? I can only imagine the shock to the system. It’s not that shocks, jolts and new dynamics aren’t good; in fact, they’re mostly great! But getting the balance of skills and styles right that all fit within the culture is not an easy task. This is why we’ve been super deliberate when bringing on new team members, and our approach has worked thus far. But the stakes continue to grow as the firm grows, and as we are all so busy traveling and spending time with our companies it is challenging remaining centered, strong, focused, synchronized. Mindfulness is one thing: successful execution is something else entirely.

In the time I’ve spent building the IA Ventures business, it has become abundantly clear that I am facing exactly the same issues as those founders whom we back every day. Articulating and selling the mission and the vision of the firm. Clearly communicating the value and benefits of our product. Closing business. Staying close to and getting feedback from customers. Recruiting. Understanding the competitive landscape. Proactive strategy development and planning. Marketing and PR. To say that I have empathy for the startup founder is the understatement of the century. I get it. Believe me, I get it. Few things are as exciting or rewarding as building a business, but it is also among the hardest things I’ve ever done. But 3.5 years in, there is nothing I’d rather be doing. Thanks to Brad, Ben, Jesse, Julie, Joey, Adrian, Drew, and all of our founders. You’ve pushed me hard, yo! The best is yet to come…

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