On To The Next One (Part 1)
Lessons In Seed Stage Venture Capital
One my favorite things to do every week is to write this newsletter. It’s an extremely fulfilling experience that helps me organize my thoughts, document my processes, and share my ideas with smart people (if you are reading this, that’s you!). That feeling I have Friday morning, when I wake up, knowing I hit publish on the newsletter is like waking up early in the morning in order to go play some incredible golf course. It’s terrifying, because you aren’t exactly sure you are ready for the experience, but exciting because you can’t wait to get out there. You hope your game is good enough to withstand the test, but even if it isn’t, there’s a part of you that’s just happy to get the chance.
Maybe that metaphor didn’t work for you so try this one - publishing a newsletter is like flying in a plane. You know it’s probably going to be okay and there’s nothing to worry about, but that doesn’t change the fact that you are a little bit nervous. And even if the flight is fine and you land safely, you can still have a bad experience along the way - bumpy rides, bad co-passengers, the works. But as soon as you do land, you are happy you took that plane because it has made your life much better.
Unfortunately for my psyche, recent events have caused me to lose the thrill of writing a newsletter for the past month. However, the cause of my literary absence is not unfortunate - my wife and I recently decided to relocate down to Cincinnati, our hometown, after she accepted a job with a consumer packaged goods company headquartered downtown (you know the one). I also found a job at a private equity firm - Brixey & Meyer Capital as an associate.
I am extremely thrilled about my new role. If you had told 21 year old Peter that he would be working for a Middle Market PE shop in the Queen City, he would have been over the moon with excitement. Hell, that’s still how I feel at 28. However, I do have to admit that I thoroughly enjoyed my previous work experience and I will miss many of the folks I got a chance to work with. Working in venture capital was an absolute blast, and working with people like Erik Berg, Andrea Ewing, Tim Roe, Bethany George, Ryan Helon, John Hrivnak, Parker MacDonell, and Michael Kindrat-Pratt was foundational to my (hopefully) lifelong career as a capital allocator. If you ever get a chance to work with any of these people, run - don’t walk - to that opportunity.
But, If you follow the venture capital community at all, you won’t be surprised to find out that most people who work in that industry have a pretty short career shelf-life. While I won’t go into all of the reasons for that phenomenon in this letter, I do think that it’s not a coincidence that there are only a handful of lifelong venture capitalists. It’s not the kind of job that you can do forever. It’s also not for everybody. While I enjoyed it, and will continue to stay close to the asset class, it was probably time for me to move on.
Someday soon I will write a blog about why that next move was private equity. But before I do that, I think it’s appropriate to document some of the lessons I learned while at Rev1 Ventures and working in venture capital. If you are new to this newsletter, you have probably already picked up on this by now, but I used to work as an Analyst with Rev1 Ventures - one of the more active seed stage investors in Columbus. For the past two years, I learned a ton about venture capital, startups, investing, the Midwest, and much more. Below is a non-comprehensive, slightly edited collection of my lessons-learned:
Early-Stage Venture Capital is an Asset Class
Depending on who is reading this, you might find this to be obvious. But for a lot of folks, they look at Early Stage Venture Capital and think it is a sub-category of venture capital broadly - it is growth equity, but at a smaller, riskier scale. Other folks think it’s not an asset class at all, but rather, an invitation to sit in the trenches with founders and build great businesses with them. The first category doesn’t realize how unique early-stage venture decision making processes are, and the second category doesn’t recognize that while being in the trenches with a founder can be very helpful if you are an investor, your primary objective is still that of an investor - finding potential returns through financial securities and capital allocation.
A common refrain I heard from people within the industry was that their differentiated insights were going to be what set a startup on the right path and lead them to the promised land. Again - investors can certainly be helpful - but that doesn’t matter if they pick bad companies to allocate capital towards and craft bad financial securities to make said capital allocations. Early stage investors, no matter how good their platform is, still need to do the work in order to win. What is “the work”? Diligently scouring the landscape for good companies, doing the right due diligence, crafting adequate financial terms on which to invest, and monitoring the portfolio effectively. This sounds obvious - but believe me, there are still plenty of people who don’t seem to grasp that. It took me longer than I care to admit to come to that conclusion myself, and I am still not sure it’s completely sunk in.
The flip-side is the refrain I hear from folks outside of the space is that venture capital is much too risky, the implication being that VC fund managers are gambling - just looking for a unicorn to ride to glory. Yes, investing in a single startup is extremely risky. You are more than likely going to lose your investment at the seed stage in any single investment. However, early-stage venture does not carry that same risk. Investors have been conditioned to think that bad news for a portfolio company is bad news for the entire portfolio, but that simply is not true. VC Funds (the good ones) are specifically diversified to reduce this risk and increase likelihood of healthy returns. But even the ones that take a more concentrated approach are hunting after companies that can single handedly return a fund on their own.
While it is theoretically possible for a VC portfolio not to have any losers, in practice, that likely means that the fund manager is not taking an adequate amount of risk. Because, like any financial professional will tell you - you are trying to get paid adequately for the level of risk you are taking. And if you are taking big risks, you are trying to get paid in a big way.
It’s hard to grasp that idea - one company returning an entire fund, but it’s not just possible, it’s the whole reason VC exists today, because it has occurred so frequently. And it will continue to occur. Don’t believe me? Check out the most recent Root IPO filings.
There is a Huge Opportunity in the Midwest for Venture
Speaking of Root and Drive, it became extremely evident to my tenure at Rev1 that the opportunity in the Midwest is way, way, way way, bigger than anybody is giving it credit for. I even think the folks who are beating the drum the loudest , might be underestimating the potential here. The reason is that it’s hard to see something that doesn’t have any historical precedence. A lot of folks talk about places in the Midwest becoming the next Silicon Valley - and that’s going to be tough to pull off. But it’s also hard to imagine in general - SF is a lot different from Chicago. Rather than being the next Silicon Valley, the smart folks in the region are trying to build Detroit in the first half of the twentieth century.
But before we dive into how big this opportunity is here, you might not be sold on the actual underlying possibilities. A lot of folks have put it better than me, so see below for some good resources:
Get the picture?
But even if you look at all of that data and say “I am not totally convinced”, I can speak from personal experience that the amount of great companies being built in Columbus, Ohio alone is astounding. If you spread that concentric circle out to include any state that touches a great lake, the number of great technology-startups is mind-blowing.
My craziest, most anecdotal (and I don’t have anything to back this up other than my gut, so please prove me wrong if you can) piece of evidence: I know of venture capital firms that effectively don’t have deal flow mechanisms. At first blush, this might not seem like anything. But if you are familiar with the venture space at all, you know that competition for deals has skyrocketed, which has caused the price for seed and series A rounds to explode. But if you look around the Great Lakes, that hasn’t really happened. In fact, some of the investors are still sitting in the cat-bird seat. They have all of the power and can wait for great companies to come to them. That’s pure lunacy! Trying to do that in New York, or the Bay Area, or Los Angeles, or Austin would result in you getting laughed out of the room.
Now, I am certainly not saying that every VC Firm operates that way. And I definitely do not endorse that method of deal-flow generation. Almost all of the good VC’s I became familiar with emphatically do not act that way - but still, those folks exist and continue to raise funds. The market is the opposite of saturated. There is plenty of room for growth.
Starting a Company is Impossible
For anybody who has ever started a business, regardless of how big or how small, you know how obvious this one is. If you are familiar with my origin story, you know that my love for entrepreneurship started when I was a kid and my mom started her own business. She definitely would bring her work home and talk about it at the dinner table. A great deal of credit goes to my mom because she always made it seem like entrepreneurship was really hard, when in fact starting a business is actually impossible.
I know what you are thinking: “but Peter, people start businesses all of the time, your mom even did it! So of course it’s possible”. Which, sure, fine, you are technically correct. But what I learned in dealing with so many entrepreneurs over the past couple of years is that starting a business and turning it into a going concern requires at least a couple of miracles, along with some ridiculous hard work and intellect. No matter how easy it seems from the outside, it is always way, way harder than it looks.
But to go even a layer deeper, I have been blown away by a consistent key theme in interacting with founders: they never do it alone. Starting a business is a team sport. There are too many balls in the air in order for any one person to juggle them all at once. The absolute best entrepreneurs all had one common trait: they were able to recruit great people to join them and take some of their juggling duties off their hands. The worst entrepreneurs were not the folks who had blind spots - it was the folks who did know they had blind spots and thought they could do it all on their own. Business failure rarely occurs because a company hires someone without a necessary skill set - it happens when someone thinks they can do something, but in reality cannot do said thing and refuses to ask for help (or doesn’t get it from the folks who hire them proactively).
If you are going to start a business (which I highly encourage you to do so), start by trying to convince some other folks to join you for the journey. If you can’t do that, go back to the drawing board. Because starting a business is hard, starting a business without a good team is impossible.
And just to make something totally clear here: I do not think that people who start successful businesses are “lucky” or did it by chance. I think they are miracle workers. Turning nothing into something is modern-day alchemy - a science that’s extremely difficult to understand and should be venerated.
I started writing this up and realized I had a lot more to say than I anticipated (I did work at Rev1 for more than two years). So I am going to break this apart into two parts. Look for part two next week - same time and place.
Easily the two best investing podcasts on the planet right now teamed up to create some incredible content that I highly recommend. Patrick’s story is a fascinating one and I was startled to hear how recently he started some of his efforts. In my head, Invest Like the Best is a stalwart of the investing podcast community - so when he said he got started doing it in 2016, I was shook. That shows the power of doing something consistently over time and letting that thing compound.
Favorite takeaway: Patrick talking about how it looks like he is doing a million things because everything he does is out in the open. He is doing the same as everybody else who work hard (which is not everybody), but because he is open about it, he improves his chances of something landing.
Potentially the most important capital raising event in Columbus’ history is getting teed up. If you have any rooting (ha. ha.) interest in Central Ohio, Midwest Tech, Insurtech, etc., you should be cheering for this to go well. This has potential to radically alter the landscape for the better.
I am looking forward to doing a deep dive on their S-1 in a couple of weeks.