Mark Goldberg: Why Politics is Rife & Decision-Making is Broken in Large VCs | E1219

Intro (0s)

• Multi-stage investing has a "dirty secret" where Portfolio Services teams are primarily for the benefit of Venture Capital firms (VCs), rather than founders, as they help make unscalable processes more scalable (0s).
• A common mistake in early-stage investing is attempting to make consensus decisions, which can result in "consensus funds" that lack strong direction (16s).
• Mark Goldberg appreciates his friendship with the host, Harry, and is excited to be on the show, noting that it's been enjoyable to watch Harry launch his new fund (36s).
• Harry's new fund has been described as a "10-year overnight success," which resonated with Mark, who believes Harry has been doing a great job (49s).
• Mark is thrilled to be launching his own fund at the same time as Harry and values the experience of having his own shop, with his name "above the door" (1m3s).
• Mark believes that building one's own business is a special experience, and he's grateful for the opportunity (1m11s).

Why Did Mark Start Chemistry in a Crowded VC Market? (1m14s)

• The world does not need another venture fund, but rather a new type of venture fund that addresses the current issues in the industry (1m25s).
• The idea for Chemistry, a new venture fund, was born out of a conversation between Mark, Christina, and Ethan about designing a fund that fully aligns the values of investors with those of founders (1m38s).
• The founders of Chemistry aimed to create a smaller, focused fund that combines experienced investors from large multi-stage platforms with a new approach (1m50s).
• The goal was to create a fund that allows investors to feel like owners, with a combination of experience and hustle being the key to success (2m6s).
• The founders of Chemistry believe that their unique approach and combination of skills will be the blueprint for a new type of venture fund (2m12s).
• The idea for Chemistry was developed over a long period of conversation among the founders, who were looking to do something different in the venture capital industry (1m34s).

Fund Size & Its Impact on Founder Alignment (2m21s)

• Fund size does not directly correlate to alignment with founders; instead, it is the perceived responsibilities of the fund that play a crucial role in this alignment (2m22s).
• Having a stage focus is essential, as the growth of different products and the size of a portfolio can impact the focus of an investor (2m31s).
• A paradox exists in larger legacy institutions where the most experienced venture capitalists have the least amount of time to spend on new deals, which can be a problem for founders (2m44s).
• This issue was a significant consideration when deciding whether to start a new venture, and it is something that can be addressed and solved (2m56s).
• The goal is to provide a solution to the problem of experienced venture capitalists having limited time for new deals, which can help improve alignment with founders (3m1s).

Multi-Stage Firms (3m3s)

• As a venture capital firm grows and matures, its portfolio becomes increasingly complex, much like an iceberg, with a large portion of the work being hidden beneath the surface, especially in an environment with limited liquidity (3m3s).
• The bureaucracy of a large institution can hinder decision-making and limit the time spent with founders, which is crucial for success, and taking an axe to this bureaucracy can give an organization superpowers in terms of what it can accomplish with its time (3m26s).
• In large venture capital firms, a significant amount of time is spent on people management, administrative work, and other tasks that take away from the most important thing: spending time with founders and finding the next successful startup (3m51s).
• Portfolio services teams in multi-stage investing are often not for the benefit of founders, but rather for the venture capital firms themselves, as a way to make unscalable tasks scale, and this can lead to cracks in the industry (4m15s).
• Founders want a direct relationship with experienced investors, not to be disintermediated by various teams and services, and this is the premise of some venture capital funds (4m41s).
• The intention behind portfolio services teams was initially good, but it has become a crutch for organizations to try to gain leverage in a difficult area and justify increased fund sizes (4m52s).
• The use of portfolio services teams can also be used to justify increased fund sizes, as it allows firms to show limited partners that they have a large team and need more funding to support it (5m12s).
• True alignment between general partners and founders is key, and this can be achieved by putting incentives in place that encourage experienced investors to spend time with founders (5m53s).
• Some venture capital firms prioritize alignment by focusing on common shares and putting incentives in place that encourage experienced investors to spend time with founders (5m43s).
• Founders want experienced investors who have time to spend with them, and they want something new and fresh in the ecosystem, which is what some venture capital firms are trying to bring (6m8s).
• Many venture capitalists (VCs) do not add value to the companies they invest in, with the best founders not needing them, and instead wanting the VC to provide money and stay out of their way, with this approach being sufficient to clear the bar for 80% of the industry (6m53s).
• At later stages, what matters most is the price and the VC staying out of the founder's way, but at early stages, building a trusted relationship with the founder is crucial, with the VC being available to offer support and guidance during critical moments (7m11s).
• A great investor's primary goal should be to "do no harm," but an excellent investor should strive to build a relationship with the founder, being available to offer support and guidance during critical moments (8m0s).
• The competitive landscapes and investor mindsets differ between Silicon Valley and Europe, with different approaches and priorities in each region (8m8s).
• When evaluating investment opportunities, the pitch to founders should focus on the VC's unique value proposition, such as out-hustling others, having a personal stake in the founder's success, and offering a clean slate and a small team (8m23s).
• The idea of having a small team and a clean slate can be an attractive proposition for founders who want a more personal and supportive relationship with their investors (9m1s).
• The importance of brand reputation varies among founders, with younger founders often craving the brand more, while second-tier serial founders may be more skeptical of the brand's value (9m13s).
• The name "Chemistry" was chosen for the fund because it reflects the idea of building a strong, personal relationship between the investor and the founder (9m9s).
• Large venture capital firms have an advantage in terms of brand recognition, with names like Andreessen Horowitz, Kleiner Perkins, and Sequoia being household names that are well-known to founders, making it difficult for new brands to access the ecosystem from day one (9m51s).
• A new fund is most successful when it is part of a network that already knows the fund, such as when the fund has been in the industry for a long time and has a large number of existing connections (10m27s).
• Having a strong network can be beneficial for a new fund, as it allows the fund to leverage its existing relationships with people it has invested in, including those who have spun out of its former portfolio companies (10m22s).
• The age of a venture capital firm is not as important as its proximity to its network, with the relationship between the firm and its network being a key factor in its success (9m39s).
• A fund's strategy can involve leveraging its existing network and connections to access new investment opportunities, rather than relying solely on its brand name (10m7s).
• Doug Leone has commented on the importance of a venture capital firm's network, highlighting the value of having a strong network in the industry (10m33s).

Is Venture Now a Low-Margin, Commoditized Industry? (10m37s)

• The venture capital industry has transitioned from a high-margin boutique community to a low-margin commoditized industry, characterized by industrialization, where large funds increase their assets under management (AUM) and team sizes, making it harder to know individual partners and check writers (10m38s).
• This industrialization has led to a loss of personal relationships at the early stage, which some funds like Benchmark and USV are trying to reconstitute (12m8s).
• Chemistry, a fund, aims to revert to a boutique approach, focusing on personal relationships at the early stage, with a fund size of $350 million, which was determined through a bottoms-up exercise considering the right pacing for each general partner (GP) (12m26s).
• The fund's investment history over the last 10 to 15 years showed an average of two to three investments per year, which informed the fund's size and pacing, with a target of 25 investments in each fund over three years (12m41s).
• The fund will focus on seed and series A investments, with an average check size of $10 to $15 million, although series A deals have been increasing in size, with some deals reaching $30 to $40 million (13m12s).
• The increase in series A deal sizes is partly due to the rise of AI deals, which can be much larger, but even excluding these, series A deals have been growing in size over the past five years (13m49s).
• The fund's size and strategy are designed to provide sufficient diversification while maintaining a focus on personal relationships and early-stage investments (13m23s).
• Large venture capital firms often invest in companies with obvious category winners and financial traction, but this approach can be risky as it may be too late to enter the market, and the firm may miss out on potential returns (14m2s).
• A more reasonable approach is to invest in companies at an earlier stage, such as a Series A, with a check size of $10 to $5 million, but this requires a different portfolio construction strategy (14m29s).
• The current reserve model used by many venture capital firms, where a significant portion of the fund is allocated to follow-on investments, can be problematic as it may lead to "peanut buttering" of reserves across all portfolio companies, which can be detrimental to both founders and limited partners (14m59s).
• A lighter reserve model, where the firm only doubles down on exceptional companies, can be a more effective approach, allowing for more flexibility and better returns (15m7s).
• This approach may lead to competition with other venture capital firms, but it can also be beneficial for founders as it allows them to work with multiple firms and choose the best partner for their company (15m43s).
• In the venture capital industry, it is common to both collaborate and compete with other firms, and a lighter reserve model can be a key differentiator for firms that adopt this approach (15m47s).

Concerns Over Growing Seed Round Sizes (15m58s)

• Concerns are raised about the increasing size of seed rounds, with some deals reaching $8 million for companies with limited traction at high prices, which is becoming the norm (15m58s).
• Despite this trend, there are still good companies emerging, but some deals are considered ridiculous and do not fit the risk-return profile (16m21s).
• To determine when to invest in a company with a high valuation, it's essential to consider whether it has the potential to be a category winner and whether the founder and founding team inspire conviction (17m7s).
• Being in the number two or three spot in a category is not ideal, and investors should be willing to take risks to invest in a category leader, even if it means stretching on the deal price (17m15s).
• Early-stage investing is heavily focused on the founder and founding team, and having insane conviction in them can give investors the confidence to invest in a company, even at a high valuation (17m36s).
• Investors should be willing to pay up to invest in a category winner, but also need to be mindful of their risk tolerance and the potential return on investment (17m9s).
• Mental plasticity is crucial in investing, and being open to changing one's approach can help avoid mistakes, such as missing out on opportunities due to rigid investment models (16m53s).
• Lessons learned from Index Ventures and mentors like Mike Volpi and Ilia Fushman emphasize the importance of being in a category winner and being willing to take calculated risks to achieve that goal (17m0s).

Competitive vs. Non-Competitive Markets (17m50s)

• In competitive markets, often 95% of the market share goes to one company, while the remaining 5% is divided among others (17m54s).
• Competitive markets can be valuable, but some people prefer non-competitive markets, while others think competitive markets are ideal because they create incredible value (18m6s).
• Ideas are abundant, but finding people who excel at execution and have the vision to outcompete others is crucial (18m18s).
• A competitive market can validate an opportunity, and having a founder who is willing to compete head-to-head in such a market is essential (18m36s).
• Execution is critical, and the reasons why it often goes wrong from zero to one include the founding team's ability to handle adversity and learn from it (18m48s).
• The founding team's grit and resilience in the face of challenges are key factors in determining a company's success, particularly in going from zero to one and eventually becoming a public company (19m2s).
• Missing OKRs (Objectives and Key Results) by a certain percentage is not as important as a founder's ability to learn from adversity and adapt quickly (19m13s).
• The velocity of learning is crucial in crossing the chasm, and some experts, like Zach from Plat, believe that OKRs are not suitable for early-stage companies, as they originated from the manufacturing industry (19m27s).

Why Does Execution Often Fail Post-Product Market Fit? (19m37s)

• Execution often fails post-product market fit due to limitations in hiring, particularly when it comes to finding the right leaders for functions such as go-to-market sales, with the wrong decisions around hiring and leadership teams being a common issue (19m46s).
• At every stage, especially when transitioning from founder-led sales to a professional organization, it's crucial to evaluate whether the right people are in key positions and consider what a venture capital firm can do to be helpful, such as showing founders what great looks like at different stages (20m10s).
• Providing founders with a sense of what great looks like for their stage and functions can be very important, especially for those who may not have seen certain functions before (20m54s).
• Hiring can be a lengthy process, taking 3-6 months to find the right person, 3-6 months to ramp them up, and potentially another 3-6 months to fire them if they don't work out, resulting in 18 months of lost time (21m3s).
• Serial founders can be beneficial due to their existing network and experience working with people before, allowing for faster hiring and onboarding processes (21m16s).
• First-time founders can bring a clean slate and a willingness to think outside the box, which can be beneficial for visionary and transformative ideas, outweighing the benefits of having prior experience (21m57s).
• However, there are caveats, and founders who have tried and failed before can be a great profile, as they often have a chip on their shoulder and a hunger to succeed (22m8s).
• Founders who have done extremely well financially may not have the same level of hunger as those who are trying to make a name for themselves (22m25s).
• Established brands can be beneficial for funding, but may not necessarily help with hiring or customers, and may even attract the wrong type of people who are more interested in the brand than the mission (23m21s).

What Was Mark’s Strategy for Organizing the Fundraise (23m45s)

• The fundraise was organized by tapping into a rich vein in the LP community, where some investors felt frustrated with traditional Venture funds that had become asset managers, and were looking for a pure play Venture fund with experience and hustle (24m1s).
• The fundraise started in June and was completed by August, which is a relatively quick process, especially during the summer (24m32s).
• The team's experience and novelty were key factors in the fundraise, as there aren't many teams of experienced GPs that come together with three folks in a short amount of time (24m45s).
• The macro backdrop of frustration with large multi-stage funds and legacy institutions also contributed to the fundraise's success (24m52s).
• The largest check was capped at around 10% of the fund to maintain diversity among LPs, with a goal of having around 20 LPs (25m10s).
• The fund's LP construction was focused on having good people, rather than being selective about the type of LP, such as family offices (25m28s).
• Going through a fundraise as a VC can be a valuable learning experience, teaching empathy and understanding of the pressure of pitching (25m51s).
• Fundraising can help balance the equilibrium of power between VCs and founders, and can be a humbling experience for VCs (26m7s).
• The experience of pitching and fundraising can be intense and awkward at times, but it can also be a valuable learning experience (26m29s).
• Fundraising involves putting oneself in the shoes of a founder, which requires empathy and understanding of what it takes to raise money, and meeting potential investors in person can be beneficial in building relationships and trust (26m50s).
• Meeting investors in person allows for a more personal connection and can help to build a sense of community, and being in San Francisco made it easier to meet people in person due to the number of LP events and community movements (27m16s).
• Hustling and spending time on planes to meet potential investors is also important, and having a strong partnership with co-founders can make the fundraising process easier and more enjoyable (27m24s).
• The "Tokyo test" is a way to gauge the chemistry between co-founders, and while it wasn't a formal test for the three co-founders, they did have many other tests throughout their relationship and founding story (27m59s).
• The co-founders took around 100 LP meetings, which were divided and conquered among them, and they tried to vet the meetings by screening for appetite for a first fund and weeding out those who were not serious about investing (28m24s).
• Pre-screening meetings by asking about previous investments in first-time funds helped to eliminate those who were not a good fit, and the co-founders were fortunate to have a high level of interest and oversubscription for their fund (28m55s).
• Despite having many "yeses," the co-founders also received many "nos," and understanding the LP community and what they are interested in is crucial in fundraising, as some investors may not believe in the asset class or may have different investment strategies (29m14s).

What Was the Most Common Reason Investors Said No? (29m37s)

• The most common reason investors said no to a new fund was due to team risk, specifically that the three founders hadn't worked together before, which was a concern for a new fund of that size (29m53s).
• Many investors provided reasons for saying no that were not the actual reasons, but rather a polite way of declining (29m51s).
• Some investors may have said no due to the fund being too early for their investment strategy, but the true reasons were not always clear (30m7s).
• When receiving feedback from investors, it's essential to ask for the real reason behind their decision, rather than just accepting a polite decline (30m26s).
• The best limited partners (LPs) were those who provided clear, direct, and communicative feedback, whether or not they invested in the fund (30m38s).
• The qualities that make a great LP, such as providing great feedback and being sophisticated in their market perspective, are also the qualities that make a great general partner (GP) (31m8s).

Best & Worst LP Meetings (31m12s)

• The best LP meeting involved Christina, who unknowingly drank White Claw instead of seltzer water during a 9:00 am meeting, making it a memorable and humorous experience (31m34s).
• The worst LP meetings were often due to misalignment, where the conversation started with questions about the worth of investing in the Venture Capital asset class, indicating a lack of understanding (32m8s).
• LP meetings with foundations, endowments, and family offices varied in terms of sophistication and intelligence, but the key was to build a diverse set of LPs who think differently and independently (32m23s).
• Having a diverse set of LPs helped avoid correlation and groupthink, making the fundraising process more successful (32m49s).
• The most meaningful LP check was from groups that showed speed to conviction, accelerating their decision-making process from six months to two weeks, demonstrating their strong belief in the venture (33m21s).
• These conviction checks were important moments in the fundraising process, as they showed that some LPs were willing to make exceptions and move quickly to support the venture (33m35s).

Most Recent Disagreement as a Parnership (33m46s)

• A significant disagreement within the partnership was about whether to build a junior team at Chemistry, with some members advocating for a streamlined GP-only group and others believing a junior team would add a dynamic element with different ages and networks (33m51s).
• The partnership ultimately decided on a small junior team with two members, one of whom has already been hired and is making a significant impact on the fund (34m38s).
• The team values in-office work and believes it is essential for building a new team and startup (34m53s).
• When considering a potential fourth partner, some respected individuals in the ecosystem include the Excel Venture team, Dan Levine, Vos, and Rajan, as well as newer funds like Conviction and Alt Capital (35m8s).
• The current moment in venture capital is considered the most dynamic in 20 years, with legacy institutions dealing with generational change and huge portfolios (35m31s).
• The best fund managers are compared to the best founders, making investors feel uncomfortable with their intensity, and there needs to be a "why now" moment in the ecosystem to make a fund or company exciting (35m47s).
• There is concern that too much money in the ecosystem is driving up costs, with some deals being lost due to competitors offering higher prices and accepting common shares (36m10s).
• A shakeout is expected in the ecosystem, with a turnover between old and new guard funds, and some funds representing the next chapter in venture capital (36m28s).
• The extended window of privatization by great founders is not a concern, as products will ultimately be judged by their quality and market demand (36m52s).
• The market will evolve to create liquidity options for late-stage private companies, providing early-stage investors with more secondary opportunities, as the capital markets will create new products to solve for the current liquidity duration issue (36m54s).
• The current trend of companies staying private longer does not necessarily mean that the liquidity duration will be as long as it is today, as innovation in this area is expected (37m1s).
• A long-term outlook is necessary in the venture capital industry, with many limited partners (LPs) rarely seeing closed funds before 15 years, requiring a stomach for being in the industry for an extended period (37m18s).
• The speaker joined the venture industry at the end of 2015 and was fortunate to be at a fund that did well in those vintages, allowing them to receive their first carry check (37m41s).
• The 2021 vintage funds are expected to be very challenged, and while they may return better than 1x, their performance will likely be tough (38m5s).

What Happens to Companies with Overinflated Valuations by Multi-Stage Funds? (38m18s)

• Companies with overinflated valuations by multi-stage funds are starting to see the consequences, with the "oxygen being sucked out" of these companies, which are often worth less than their valuation, such as $2-3 billion instead of $10 billion (38m18s).
• Many companies are now wishing they had taken a more gradual approach to fundraising, as the unrealistic valuations can hurt employee morale and the company's ability to perform well (38m40s).
• Founders who are deliberate and don't overstretch are seeing the advantages of this approach, and some investors are adopting a new approach to valuation discussions with founders (39m1s).
• This new approach involves letting founders choose the price, but with the condition that they must be 90% confident that they can triple that valuation by the time they raise their next round of funding (39m12s).
• Founders have responded positively to this approach, and it has led to smaller valuations, with some seed-stage companies reducing their valuations from 25 to 15 due to the increased scrutiny (39m37s).
• This approach changes the tone of the conversation from a zero-sum game to a long-term perspective, focusing on the company's journey rather than just the valuation (40m2s).
• The goal of this approach is to use mental "Jiu-Jitsu" to help founders think differently about valuation and focus on what is realistic and achievable (40m22s).

Investing in AI Today (40m27s)

• Investing in AI today is challenging due to large rounds, intense competition, and the need for sustainable businesses, with some companies still receiving unreasonable deals, but the premium for being an AI company is no longer as high as it was a year and a half ago (40m27s).
• The same founders who were involved in the crypto boom have migrated to AI and are starting to recognize the importance of sustainable businesses (41m4s).
• There is a pullback and a return to proportionality in the market, with some companies still receiving large investments, particularly in the AI infrastructure ecosystem (41m23s).
• A single-trigger model for decision-making is used, where any one of the three partners can make an investment decision, as consensus decisions can lead to errors of omission and a lack of strong convictions (41m42s).
• The single-trigger model allows for both successful and unsuccessful deals, but it solves for the extremes that do very well (42m17s).
• Chime is a successful business that was missed, and its smaller size compared to Revolut in a larger market is attributed to Revolut's unparalleled product velocity and ability to offer a wide range of products to customers (42m33s).
• Revolut's success is not necessarily a barrier to other companies achieving similar success in the US market, and there may be a company that can still achieve a $100 billion valuation (43m28s).
• Lending businesses are considered very challenging and potentially uninvestable, with a high level of difficulty in achieving success, and investments in fintech are often made through infrastructure that supports digital finance (44m2s).

Meeting an Amazing Founder in a Bad Market (44m22s)

• When meeting an amazing founder in a bad market, the approach would be to go all in on the investment, including lending, as great founders can iterate and create markets, even in unfavorable conditions (44m22s).
• Great companies, such as Figma, Whiz, and Data Dog, have been able to build and increase their market by expanding the surface area of their products (44m56s).
• Experience and having done this for almost a decade can be a danger, as it may lead to shutting off one's brain for a category that didn't work in the past, and having an allergic reaction to certain markets (45m32s).
• The evolution of fintech shows that even knowledgeable people can outsmart themselves from good deals, and having too much knowledge can be counterproductive, as it may lead to overthinking and missing out on good opportunities (45m50s).
• Matt Harris is considered one of the smartest and best fintech investors, having set the direction of fintech for a long time, but even he acknowledges that knowing too much can be dangerous (46m22s).
• Having an open mind is crucial, especially when it comes to new and crazy ideas, as they can be the most successful, and being too familiar with a pitch can make it hard to see its potential (46m51s).
• Turning people down requires honesty and strong constructive feedback, as polite but unhelpful feedback can be useless, and having been on the other side of a fundraise has helped understand the importance of giving real feedback (47m26s).
• Moving from a multi-stage fund to a single-stage fund has changed the approach, as it requires preserving optionality and keeping people on side, but also allows for a more focused approach and the ability to adapt and change operations (47m58s).

What Mark Compromises First: Check Size or Ownership (48m47s)

• When it comes to making compromises, check size is more likely to be adjusted in order to invest in a winning company, as being part of a successful business is a priority (48m48s).
• The capital concentration limit per company is typically around 10%, although the exact legal limit is not specified, and having more than 10% of the fund in a single company is generally avoided (49m15s).
• Brian Singman's approach to having up to 30% of some funds invested in a single company is noted, but this level of concentration would be uncomfortable for some investors (49m27s).
• Being a new fund allows for taking more risks and trying new things, which can lead to a better founder experience even if some investments don't work out (49m54s).
• One piece of advice is to not be afraid to do brand deals with tiny ownerships, as the most important thing is to align oneself with incredible founders and companies (50m11s).
• Some limited partners (LPs) have advised to prioritize being in brand deals and establishing a presence in successful companies, even if it means compromising on ownership (50m35s).
• There are positive externalities from being in successful companies, and being willing to compromise to achieve this is important (50m50s).

Quick-Fire Round (50m57s)

• The person who has been a tremendous mentor in the Venture industry is Mike Vuli, from Index Ventures, and continues to be a source of advice. (51m5s)
• The thing that would be changed about the world of Venture is the group think, which is bad for Founders, and there should be more independent thinking in the industry. (51m20s)
• Founders are either fundraising or not, and WhatsApp groups have changed the ability for associates to communicate very fast with large groups, which can damage a raise. (51m41s)
• Companies need to be very cognizant of these dynamics and the impact they can have on fundraising. (52m1s)
• As an investor, the thing that needs to be changed is giving more thought to how time is spent and reorienting it 100% towards playing offense, which is a new skill. (52m8s)
• Having a clean slate from day one allows for this focus, but it's not infinitely scalable and will change as the portfolio and team grow. (52m36s)
• The preferred investment would be in a Series A fund, as it offers the best risk-return on the market, with Benchmark being a top choice. (53m11s)
• Other notable funds include Thrive for growth, Cyberstarts at seed, and Nico at Adjacent A, with Excel Ventures and IVP also doing interesting work. (53m27s)
• Starting a new firm can be challenging, as it involves building something from scratch, and it can be hard to do everything on your own without a team's support (54m30s).
• One question that has not been asked but is worth considering is whether richer investors make better investors because they are not afraid of downside risks (54m54s).
• The correlation between wealth level and investing ability may not be directly related to the money, but rather to the people who are passionate about their job and have a natural talent for it (55m26s).
• To become a successful investor, it is essential to have a love for the craft and a strong work ethic, rather than just relying on wealth (55m45s).
• Mark Goldberg appreciates the friendship and opportunity to be on the show, and he is grateful for the congratulations on his fund (55m59s).