I’ve had the words “deal hunting” written on a yellow stickie by my desk as a reminder to write a post on how we compete for investment opportunities. Then Fred’s recent post Coming of Age helped to further clarify my thoughts on the matter. I think this issue is most relevant for younger firms who have yet to create the brand value and track record of a Sequoia, Kleiner, Union Square or Foundry, but is still important for the platinum-branded partnerships lest they get lazy and risk getting lapped by hungrier, newer firms. One need look no further than the impact of Andreessen Horowitz to know that new firms can - and will - disrupt the historical pecking order through innovative approaches to working with entrepreneurs.
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:
- Long-term perspective
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.
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.
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.