On Funding — Shots on Goal

To be a great startup investor requires many things.

It is important to be able to see where the technology markets are headed and where future value will be created.

Market timing is critical. It is not a good idea to be too early. You can make a mistake and get back "also ran".

Also, you must be accurate about your team. You can still miss WhatsApp and Instagram, Facebook, Stripe, and Stripe if you are in the right market at the right time.

Market value has been a subject where I have definitely been wrong. Sometimes I was wrong about market value, but not too early. Both have been accurate, but I backed the second, third or fourth best player in a market.

In short, access to great deals, invitations to invest in these deals and ability to spot where value will be created in a market are all important.

Your first job as an investor or when you start writing angel checks, your primary obsession is "getting into great opportunities." Once you've been in the game for a while or have more responsibilities at the fund level, you begin to think about portfolio construction.

These are often referred to as "shots on target" at Upfront (a soccer analogy that is fitting given the EURO 2020 tournament right now). Here's what we discuss internally as well as with my LPs:

We support 36-38 Series Seed/Series A companies per fund (we also have a separate Growth Fund).

Our median first check is $3.5million. We can write as little $250k as well as as much as $15,000,000 in our first check. (We can also follow up with $50 million or more in follow-on rounds).

We create a portfolio that is diverse based on the focus areas of our partner. We balance deals across, among other things, cyber-security and FinTech, computer vision. Marketplaces, videogames & gaming infrastructure. Marketing automation. Applied biology & healthcare systems. Sustainability. There are many other things we do. These are the main themes of our partnerships

We aim to have some "wild, ambitious plans" within each portfolio, as well as a few businesses that are new models in an established sector (e.g. video-based online shopping).

We tell our LPs that we believe each company will be amazing when we write their first check, but it is hard to predict which fund drivers would emerge 10-15 years later.

Take into account:

It was a reservation app for restaurant reservations called GrubWithUs when GOAT first launched it.... Now, it is worth $3.7 billion

Even Shark Tank didn't finance Ring when it was founded. It was sold to Amazon for more than $1 billion.

Two companies were we had to bridge finance several times until they finally IPO'd.

A portfolio company turned down a $350m acquisition because they wanted at minimum $400 million. Two years later, they sold for $16 million

We were part of a group that jointly employed lawyers to help with bankruptcy proceedings. They also pursued (and succeeded!) in pursuing a resolution to the 2008 financial crisis. The company was sold for $1 billion. It was only 30 days away from bankruptcy.

Most successful companies are a combination of hard work and perseverance by their founders.

You need to have the right skills, access and a diverse portfolio if you want to excel at investing. Because not all investments will work out, you need to be able to see the goal.

Your strategy will determine the number of deals you make. A seed fund that owns 5-10% of the company and does not take board seats might invest 50, 100, or 200 times. You might only have 8-12 investments if you are a late-stage fund that invests when there is less upside and a lower "loss rate".

You should first determine how much money you are able to afford. Next, figure out how you will manage your money over time. For example, you might decide how long it takes to save money. Then you can calculate how many companies you believe you have enough to diversify and how many dollars you need to write each company. Don't limit yourself to only two deals! Many angels that I know have given up more than they could handle in 12 months, and feel stuck. Sometimes it takes years to see returns.

Upfront Ventures' "shots at goal" strategy is based on over 25 years of experience. We were established in 1996.

We are board members and we consider ourselves stock-pickers > company-builders. We have to limit how many deals we make.

This allows us to build a more focused portfolio. We seek greater ownership of the investments we make. This means that we are more aligned to the success and outcomes of the smaller number of deals that we make.

We have sufficient data across many funds to show that 6 or 7, out of 80+%, will drive returns. A priori, we don't know which 36-38 deals will be the best.

This means that each partner completes approximately 2 deals per year, or 5.5 for each fund. This is what we know going into a new funds.

Each fund is looking for deals that will return at least $300 million. This is the return and not the exit price. If we do it right, our funds will return 2-4x their respective value. The combined returns of the funds could be between $300 million and $500 million for another 3-5 deals. The remaining 31 deals are likely to return less than 20%. Venture capital in its early stages is all about finding the extreme winners. You need to score a lot of goals in order to find the perfect 2 deals.

These mega results have happened in almost every fund that we have ever managed.

In the following post, I will discuss how we determine how much money to invest in deals and when it's time for us to move to another fund. This is known as "reserve planning" in venture.