Counterparty Risk in Venture Capital

In a recent blog post, I discussed the importance of trust amongst investor syndicates and how a good group working together can reduce financing risk for a company.

This post expands on some of those ideas and further discusses the concept of counterparty risk in venture capital

Counterparty risk is the likelihood or probability that one of those involved in a transaction might default on its contractual obligation.

I use it more broadly here to describe any actions taken by one of the investors involved in a company that would adversely impact a company or its team

Success in a company is never a straight line – and good investment partners can increase the likelihood a business makes it through a difficult time – and bad behavior can have just as much negative impact on a company’s potential outcome


It starts with a firm’s limited partners

At True, we screen our investors for mission alignment

Our second set of screens is around their sources of capital + their historical track record of investing in the venture capital asset class

We bias towards investors who have large, stable capital bases – and who have a long history of investing in venture capital with a track record of continuing to back the same managers they’ve selected over long periods to time

Within our current LPs, we also prioritize length of relationship – many of our investors have been with us since Fund I

These long-term relationships give us more stability in our operations and planning – which ultimately lets us be better partners to the Founders that we work with at True


Next, it applies to our co-investors

One of my partners likes to say that “people like to invest with people they’ve already invested with” *

I didn’t fully understand it until later in my venture experience – it happens naturally, but has the added benefit of creating more trusted relationships which ultimately benefits the companies we invest in together


At True, one of our most common co-investors is Indie Bio

We have done team strategy sessions together – we share information on what we see is working in each of our portfolios – and most importantly, we’ve been through a meaningful number of good and bad experiences together – so we know how the other thinks + will act

It turns a one turn game into a multi-turn game


This applies more broadly for other investors we work with

There are 5 individual investors who I sit on more than one board with today

And 8 firms that I have worked on more than investment on together

Many of these people I’ve worked with for a number of years, met their family, gone on trips together

The degree of trust is high and behavior of the individual (and their firm) is more predictable

This creates more stability for the company – which makes us better co-investors


And the fact that we will work together again encourages a positive feedback loop

Founders will usually only will raise a few rounds of capital during their companies life

As investors, we will work with many different groups, many times

Helping guide companies to investors who behave better (or are generally more stable) is more than something we should do – it will likely drive better returns for us long-term


First example

Post seed company that has made tremendous product progress, but is early

Needs to raise a small A round to launch and prove their business model

It was too weird (or risky) for a new lead investor to lean in

The syndicate of 3 investors came together to underwrite the entire amount

This caused a number of other new investors to want to jump in and participate

The first part of this story is more normal than you might think

The second part where weird counterparty risk issues can emerge

And for each partner at each firm – it is a very complicated model to predict behavior

Except if you have real world data – from an individual’s behavior in previous complicated financings


Second example

Another post seed company that has made tremendous product progress, but is early

Different set of three investors – but two of the investors have limited capital to allocate to follow-on rounds

Syndicate breaks – so if they can’t find additional new capital – it would be up to the one investor to support the company alone – or the company would end up going out of business


A weird twist – one of the funds without additional capital in example 2 is actually a known multi turn player with the group – but due to a series of compounding internal issues – they weren’t in a position to participate in a way we’d seen in other similar situations

Working with known actors should reduce some risk – but it can’t reduce all risk and there remain volatility in an business that involves so many different human layers


I used to think you should choose investors based only how much they can help

Over time, my thinking has evolved to also include thinking about which groups may have the lowest likelihood of causing issues downstream

Similar to how we approach raising money at True – our advice to Founders is to focus on groups that have large, stable capital bases that have a long track record of investing in companies like you at your stage

If you don’t already know them – spend time getting to know them.  And ask them for as many references as you can handle – no one will have a perfect track record – but the more you know – the better aware you’ll be for the moment things get weird

In a world where we’re all already taking incredible amounts of the right risk – product, market, timing – you shouldn’t compound it by adding all sorts of additional (and discoverable) risk around people

Shelter in Place at True (May 2020 Edition)

There’s been a lot of discussion on whether investors are “open for business” during the current Shelter in Place environment and I wanted to share some observations based on my experience at True:


Since the start of Shelter in Place, our firm has made two new investments where the investment lead on our team wasn’t able to meet the company’s Founder in person

In one case, we had started discussions with the company prior to Shelter in Place, but travel restrictions had started before they could meet in person

In the other case, we were introduced to the Founder after the start of Shelter in Place and they ran an entirely virtual process


Both companies were introduced to us by Founders in the current True Portfolio – each person had known the person they were introducing for a number of years and the referrals were very positive

Both companies were in categories where we had deep experience – so we were more easily able to diligence the opportunity through existing Founders in the True portfolio


In both cases, the True deal lead spent more time talking with the Founder than they probably would have normally – text messages + phone calls in addition to Zoom meetings with others on our team.

I think this change will continue going forward – there is no substitute for working through problems with someone to understand how they think, how they handle feedback, and how you will ultimately work together


We already tap into the ecosystem of existing True Founders to find additional potential references for Founders of new potential investments – in both cases here, we did additional work to find as many other points of mutual connection as possible

One company was based outside the Bay Area – in a market where we have a number of other investments – and a number of those existing Founders knew this company and its team – and were able to provide additional background on them


We’re excited about a new opportunity now

This is a Founder that we’ve previously backed and know very well

He’s been an active member of the Founder Community for years and he’s in the process of starting a new company at the intersection of two spaces we know very well

Our lessons from 3 + 4 above are already impacting our process in a positive way – we’re spending more time thinking through some of the early opportunities and digging in on some of the thorny questions around the go-to market plan. 

We’re tapping into our network to help vet others on the team and potentially find others to fill the gaps they’ve identified.

We’ve already met in person prior to Shelter in Place – so this is less of a concern here – but I like that our recent experience is helping evolve our investment process and will hopefully make us better investors over time


Going into Shelter in Place – I think our group was mixed on whether we’d be able to make an investment without meeting a Founder in person first

The second investment described above really broke the glass on our thinking – it felt right and you can now see us developing the muscle on how to do it well

I don’t think we’re going to rush out and double investment pace – but when we find high quality founders working on ambitious projects in markets raising our type of money at our type of price – I think we will continue to be aggressive 


As I talk to other investors – I think this reflects the broader market – things have slowed down to give investment teams the time to figure out their new process – which I think may be the new normal for a while

Because even if Shelter in Place ends tomorrow, I think the process of returning to the office will be complicated – so more nimble groups and newer firms may have an edge for a period of time here


For follow on rounds in our existing portfolio – we have 4 teams in a fundraising process – 3 of which have signed or received term sheets

The process has become more bespoke – smaller target investor lists, more introductions via phone conversations to confirm the company is potentially a fit and the new potential investors firm is in the mental space to lead new investments

This process has been most successful with companies that have cash on their balance sheet and want to go faster or companies where the tailwinds from the current market conditions are very positive and they are being pulled to go faster


If a company is running out of money, the most likely source of capital is its existing investors.

Syndicate and co-investors always matter – these types of moments make that clear

This will work for some companies that do just need one more turn and could see success on the other side. We are also likely to see a high number of companies not make it – some number of which could have made it in a different environment 


Inside our portfolio, certain markets have been negatively impacted – but certain markets have definitely seen an acceleration in customer interest and commercial traction

These companies were riding existing trends in consumer + enterprise buyer behavior – this dislocation has dramatically accelerated these shifts and pulled demand in far sooner than I think anyone could have predicted

The revenue or business growth will likely be more volatile over the next period on our way to a new normal (TBD) – but people who never bought groceries online or would have been the last to start collaborating on music virtually can only use these services right now – and I think a lot of them never go back


In closing – the startup and venture capital market is built up of different players, with different business models, and different team bias – so I think it’d be difficult to make any sweeping statement about this market – this is simply data from one partner at one firm

One thing I think about a lot is a quote from my partner who says “work with people you know, always know more people” 

In times of high uncertainty – reducing risk on things you can control (Ie working with high quality people you know and trust) – is the even more important than usual

Another thing I think about is True Ventures in 2008 + 2009 – the firm had just closed their second fund and decided to accelerate new investment pace (by deal count) and doubled down on its best investments in Fund 1 

The first investment in Fund 2 was 1.75m stake in a pre product company called Fitbit (which as an aside – had been introduced to us by a founder we had known for a long time – and despite involving a device, touched a lot of the things my partners had worked on previously in the social web – ie Goodreads and Meebo)

Fund 2 is still a top performing fund in that vintage and I believe that work set up the firm to be a leader in the seed + early-stage venture capital market

I don’t know which new Series A firms will be most successful on the other side – I do know that a number are being more aggressive with our portfolio today – and thinking about how they could win investments and take market share in this current moment

Investing in Startups (Lessons from 10 Years at True)

I shared this post with our team last summer while reflecting on a number of different investments at True and after reviewing it at the beginning of this year, thought it’d be interesting to share more broadly:


Don’t fund tools or diagnostics

Businesses focused on tools or diagonstic often cost as much to build, but often aren’t able to capture as much value as therapeutics


I think this is generally true in other markets beyond healthcare (B2B, B2C) – the most value is captured in helping solve problems for end users (ie marketing automation software versus simple analytics software or sleeping pills versus sleep tracking devices)


The exception for diagnostics is for big markets where the information is incredibly valuable in being able to take an intervention (ie cancer diagnostics)

It is important to ask 1) is it actionable? 2) And how valuable is that action to the end user if they make the change (relative to how hard the change is and compared to the status quo)


Spend time understanding how much of the remaining product work is research versus development.  More importantly, work with a team that understands the difference and how it will affect their timeline


Startups are working within a fixed timeline on imperfect information. 

Urgency + ability to make decisions without complete information are important skills. Does the Founder have that mentality and can they build that culture within the team? 


Customer specifications should drive product.  The company needs to answer the question what do we need to build + why – this end result should drive the research + development roadmap.  


Meet customers where they are today.  The initial product may involve only some of the science, but greatly improve workflow.  Once you have the customer, you can slowly move them to a more and more advanced product over time


On each team, someone needs to define what to build and someone needs to know how to build it.  They are often different people. 


It is difficult to take a team that has been bootstrapping and have them accelerate as a venture backed company. The challenge is shifting company culture from a mentality of preservation to one of more risk taking

Don’t build one business to get to another business long-term – risk compounds 


Watch how people discuss those they previously worked with – if everyone isn’t up to their standards – it is probably a “them” thing versus an “everyone else” thing 


Be mindful about giving the co-Founder title to later additions at the company

It can be used as a short-term fix to get someone more engaged, but may create a number of issues in the future around compensation (equity), role (how senior), and external perception (if they leave) 


Have aligned co-investors with access to capital  


Understand the incentives of the different market participants and how the market is structured.

The buyer, the end users, and the decider aren’t always the same person and understanding what is important for all parties is essential for success

Best product or technology doesn’t always win. 


Bet bold

The best Founders with the biggest ideas will find access to downstream capital  

Investors want to fund exciting new ideas that have the potential to make a big impact

Important Attributes of Modern Consumer Brands

(This post was originally posted on the main True Ventures blog

We’ve been fortunate to work closely with a number of teams that have built and scaled modern consumer brands. These include Blue Bottle Coffee, Fitbit, Madison Reed, Peloton, Ring, and more.

Over time, we’ve compiled a list of attributes we think are most important to evaluate when investing in next-generation consumer brands and products.

This list shares some of those qualities and how we think about them in the context of building a scalable, durable business and consumer brand that lasts.

1. Lead Hero Product

Many of the great consumer brands we see today started out by doing one thing exceptionally well. A lead hero product helps companies create relationships with new customers and build a foundation of trust. From there, they can grow the relationship.

At True, we think a hero product should be able to generate more than $100 million in annual revenue. Examples include the Ring Video Doorbell, Lululemon yoga pants, and Tory Burch ballet flats.

In our portfolio, Madison Reed started with hair color, but gradually expanded its business to offer other products that further enhance the customer experience. These include Root Touch Up, color-safe shampoo, and a full suite of high quality, safe hair products.

From a financial perspective, this should result in increased average order value, increased customer lifetime value, and greater customer loyalty as a brand becomes a more important part of an individual’s everyday life.

An exception to this rule exists for some food and beverage companies. These businesses can look more like platforms in their early days in that they start with a single product, but with the intention of expanding to similar or adjacent categories.

An example is KIND, which started with bars, but now sells granola, cookies, and more. Similarly, True-backed Prime Roots started with a fungi-based salmon burger but has since expanded to sell chicken, beef, and other meat alternatives.

2. Third-Party Retail as Marketing

Third-party retail can eventually be an accelerant to drive revenue but can overwhelm a new startup in its earliest phases by impairing gross margin, creating costly operational complexities, and making the brand overly dependent on its initial retail partners.

Instead, we like companies that are strategic when selecting initial retail partners, deciding which products the partner sells, and when it becomes part of the business model.

Madison Reed partners exclusively with Ulta Beauty, while Ring sold its product via a number of big-box electronics stores early in its life cycle to increase the company’s number of potential software subscribers.

Long term, we think the strongest modern consumer brands will have omnichannel strategies that consider using third-party retail as an acquisition channel to give consumers a chance to sample product in person before purchasing direct.

3. Direct Customer Relationships

The relationship with the end customer is no longer owned by the retail store, but rather the brand. At the very least, modern consumer brands must be successful in securing the customer’s email address and phone number. At best, their product will have a natural purchase pattern that could lend itself to a subscription business model, which – in addition to enabling the brand to build a deeper understanding of its customer’s profile – creates a stream of predictable, recurring revenue.

A number of DTC brands such as Madison Reed have seen great success with SMS. When customers run low on the company’s hair care products, they receive a helpful text message encouraging them to restock. In addition to re-marketing, this direct relationship can help build a better product experience and tighten the feedback loop between the customer and brand — potentially leading to ideas for future product innovation and solving problems before they happen.

We believe this change in relationship with brands is the most disruptive part of the modern consumer brand model. Predictable, repeatable revenue via direct customer relationships ultimately leads to greater enterprise value.

4. First-Party Retail as Part of Strategy

Peloton Showroom in FLA

Self-owned retail, in addition to third-party retail as marketing, is an important part of any next-generation consumer brand’s strategy. The customer relationship will likely move online, but most new customers want a way to experience a brand and sample their products before committing to a long-term relationship.

If successful, physical storefronts drive initial purchases (which ideally turn into subscriptions) and send customers to the brand’s main website.

This may not work the same for all business types; ultimately, it needs to make sense in the broader financial profile of the company in terms of gross margin, average order volume, and real estate cost. But even in food and beverage, we’re seeing a growing number of interesting experiments with pop-ups as a channel for customer acquisition. Daily Harvest, Hungry Root, and Recess are all recent examples.

5. Amazon as Its Own Unique Channel

Amazon is an increasingly important retail channel for all omnichannel brands. And given its scale and relative share of wallet of potential customers, it justifies the time and energy required for a brand to develop its own unique strategy on the platform. For most consumables, it is a required channel today. Over time, this may become increasingly true for prestige products too.

For most brands, Amazon is an underinvested opportunity, similar to how Google SEO and SEM were 20 years ago. As more and more commerce moves online, it will continue to be a leader in e-commerce and continue to be an important channel for brands long term.

A caveat may be businesses in fashion and high-end jewelry, which have historically had a different relationship with Amazon and have a number of unique characteristics (fashion risk, size and IT challenges, and exit landscape) that may make them different than other types of products discussed here.

6. Community as Part of Strategy

Community commerce is the number-one trait we look for when considering investing in new consumer brands. People buy products that make them feel good. If your customers are excited to be associated with your brand in front of their peers and in public forums, you’ve achieved a watershed moment, which many brands strive for yet rarely attain.

When customers are genuinely excited to share your products with friends, community-driven commerce kicks in. This can drive down CAC, increase retention, create loyalty, and fuel product innovation. This is in great opposition to CPG incumbents that have limited access to customers’ wants, needs, and psyches.

The Ring User Group was a meaningful driver of product sales and provided important feedback and input on new and current products. Similarly, Madison Reed’s Facebook page is filled with pictures and feedback from customers who love the products.

From day one, these companies have been focused on understanding their customers. They want to know who those customers are and build authentic relationships with them. This gives them the opportunity to retain those users as well as upsell and cross-sell new and better products.

7. Awareness of Substitute and Alternative Goods

The best founders we work within this space take an expansive view of competitors. Not only do they consider products that compete with them directly, but they also consider other types of substitute goods that, while inferior or indirectly competitive, could sway a potential customer against them when making a purchasing decision.

In addition to great product differentiation, the best consumer businesses today need significant innovation with go-to-market strategies. They need to be able to stand out against a bunch of competitors who will make similar product claims, whether or not those claims are actually true.

Community, branding, and building direct customer relationships can help, but this concept of awareness around substitute goods is often built into the DNA of modern consumer companies from day one.

8. An Authentic Brand Story That Resonates

Most importantly, brands need to have a human face for customers to trust them. Customers want to have a relationship with the people behind the brand.

Jamie Siminoff of Ring appeared on QVC multiple times so he could tell the world about the company’s mission to reduce crime in neighborhoods. Amy Errett of Madison Reed takes the time to visit local Color Bars to tell employees and customers about why she started the company, her mission to make hair color with “ingredients you can feel good about,” and the real impact she wants to see in the world.

The traditional consumer brands of the past struggle to compete with these authentic personal stories. They matter in a big way to today’s consumer who wants more than colorful labels in their medicine cabinets, closets, and pantries.

This ultimately drives business value seen in measures of repeat purchases or customer retention, organic engagement on social platforms, and word of mouth/virality in terms of customer acquisition.

We are in a golden age for innovation with consumer brands and products, and we believe there will be many new, independent and public companies built over the next decade that will better cater to the consumer than the conglomerates of the past.

If you’re creating a set of consumer products in a category that stands to be disrupted to the benefit of the consumer, we’d love to connect and learn more.

View the checklist below for more of a window into what we look for in consumer brand business models. Also, thank you to Amy Errett of Madison Reed and Brian Nicholson of Sonoma Brands for reviewing early drafts of this post and greatly expanding on a number of the ideas featured here.

Consumer Brands Business Model Checklist

Founder-Focused Investing in Human Health and Biology

(This post originally appeared on the main True Ventures blog)

Recently, there have been a number of thoughtful blog posts on different models for funding emerging opportunities in human health and biology:

Biotech Researchers Venture Into the Wild
by Jorge Conde 

The $100 Trillion Opportunity
by Arvind Gupta

How Biotech Startup Funding Will Change in the Next 10 Years
by Jared Friedman

The Creation of Biotech Startups: Evolution Not Revolution
by Bruce Booth

All are excellent posts, and I recommend reading them if you’re interested in this market. I won’t rehash what they’ve already covered, but I would like to share True’s perspective and how we’ve approached investing in this emerging ecosystem.

Our focus at True has always been to fund the very best founders wherever they’re spending time. In 2005, many of these individuals were building new consumer products and media services on the web. These were enabled by new platforms, open-source software tools, and infrastructure services, which allowed for lower-cost tinkering and easier initial experimentation with new, bold ideas.

Over time, we’ve seen many of the same forces draw founders into other markets including infrastructure software, consumer hardware, human health, biology, and more.

In 2012, we made our first investment in this space when we funded Moleculo. The company was founded by Mickey Kertesz and Dmitry Pushkarev, two individuals with dual PhDs in biology and computation. As part of their research at Stanford University, they enabled long-read sequencing of DNA with a combination of tagging and algorithms using existing Illumina hardware.

When we met with them, we were unsure if Moleculo was the type of investment we’d make. Our firm didn’t have any direct experience with biology or DNA sequencing. However, we were captivated by several facets of the investment, which matched our sweet spot at True:

1. The founders had unique cross-discipline expertise which let them view the opportunity in a new way.

2. We were introduced to the founders by members of the True community whom we trust.

3. The founders had incredible ambition to reshape a big market by initially focusing on a small initial wedge.

As we spent more time with the team, we recognized that many of the same forces that enabled our earlier investments in software and media startups were in play here as well and could enable the company to reach meaningful milestones on fewer initial investment dollars.

These included:

  • Combining software and automation to increase efficiency.
  • A bottoms-up sales model where the company initially sells to individuals, rather than big enterprise, to build evangelism and lower the company’s initial capital needs.
  • Building a product on top of an existing platform with a built-in customer base.

Mickey introduced us to the founders of our second and third investments in this space. We source more than 50 percent of our investments from True’s founder community and take these organic introductions very seriously.

Josh Hoffman, Zach Serber, and Jed Dean previously worked together at biotech company Amyris before leaving to start their own business, Zymergen. The Zymergen team showed us that biotechnology could create an incredible number of new products and propel biology beyond traditional markets in healthcare.

Colleen and her Co-founders Jim Bullard and John Eid worked together previously at PacBio. They started Whole Biome to leverage their skills in long-read sequencing to understand and develop therapies for the gut microbiome.

At Whole Biome, the company chose to bring its first product to market as a medical food, which has a different regulatory and commercialization path. By focusing on the medical food path, they could launch a product to market more quickly than a traditional therapeutics business.

Building on our experience with Moleculo, Zymergen, and Whole Biome, we’ve since made more than 26 investments in companies focused on human health or biology. We’ve also established a strong relationship with life sciences accelerator IndieBio, which has proved to be a great match.

What we've learned so far

Over time, we’ve gotten better at understanding the types of businesses that will and won’t work with our funding model. Here are a couple of thoughts that drive our decision making in this space:

Focus on founders.

This is our north star at True. We believe that by backing the best, ambitious founders early, we will generate the best returns for our limited partners over the long term.

An example is Deep Genomics, an AI-driven drug development platform focused on genetic medicine. Deep Genomics Founder Brendan Frey is a world leader in his research field, which lies at the intersection of deep learning and human genetics.

Even though he had never run a company, we believed Brendan’s background made him uniquely positioned to be a founder and build a team around him over time to support the company’s long-term goals.

Similar to Brendan, we believe there is a class of incredible scientists out there who have the capacity to grow into leaders of a next wave of biology and health-driven companies, and we want to meet more of them.

Maximize early product and market risk. 

We believe there are an incredible number of large industries that will be disrupted by startups initially focused on reinventing small segments of those markets.

While the last century was dominated by petroleum-based materials and products, we think the next few decades will be defined by a more natural approach that uses biology as a technology platform. Zymergen, for example, is exceptional in creating products based on biology that were traditionally made with harsh chemicals.

We’ve also invested in companies at the other end of the value chain that are building new types of brands on top of these innovations in biology. Prime Roots Co-founders Kim Le and Josh Nixon are creating an alternative protein using fungi. These founders see a path from here to there and need a small amount of capital, support, and encouragement to test their ideas.

Look for outliers along the edge of emerging markets. 

We’ve focused on areas with product or market risk that we don’t believe fit the traditional biotechnology model. Our goal hasn’t been to compete directly with the existing firms in this space, but to follow founders into other emerging areas where we may have a different perspective.

One example is our investment in Vital Labs, which is taking a ‘software-centric’ approach to cardiac care for patients. Its initial product is a mobile application that uses the camera on smartphones to measure blood pressure. In the short-term, it lets the company get the product to market faster by not needing to ship a hardware device. Long term, we believe it gives the company the opportunity to provide better care by being able to more easily layer on additional services and biomarkers.

Another example is our investment in Filtricine, which is developing a non-drug treatment for cancer by using targeted nutrient deprivation. The founders at Filtricine developed their product as researchers studying metabolic disease at Stanford. This experience, combined with their previous work in developing traditional therapeutics, led to Filtricine’s differentiated go-to-market plan.

What we expect in the future

Both in the True portfolio and through spending time with IndieBio, we’ve been amazed at the large number of markets founders have attacked. These include food, beverage, packaging, materials, medical devices, consumer products, and more.

If testing a new idea requires meaningful amounts of capital, investors can become gatekeepers to innovation. But as the initial capital needs decline, that power balance shifts. Now, we see founders experimenting more frequently. We also see more founders with technical backgrounds in this space starting companies as full-time operational leaders.

Going forward, we think we’ll see even more convergence – not less. The book Complexity: The Emerging Science at the Edge of Order and Chaos by M. Mitchell Waldrop examines the magic of new ideas lying at the intersection of two or more fields of study, which we believe will continue here. Ultimately, that innovation is driven by the best founders who see the world in new ways, are curious, and want to try something new.

We remain active investors in great founders who are solving big and important problems in human health with biology. If you’re working on a solution at the intersection of multiple spaces and envision using biology to improve lives, we’d love to talk.

Biotechnology companies

Portfolio Geography – Comparing True Fund I to True Fund VI

As a follow-up to a conversation at a recent team offsite, I was curious to compare how the geographic focus of our investments has evolved from True Fund I compared to our initial investment data for True Fund VI.

Fund I (Vintage 2006)
34 Total Investments
25 Bay Area Investments (74%)

Other Geographies:

North Carolina
New York

Fund VI (Vintage 2018)
25 Initial Investments (including investments in process, but not yet closed)
5 Bay Area Investments (20%)

Select Other Geographies:

Toronto (3x)
NYC (3x)
LA (2x)
Boston (2x)
Fully Distributed (2x)

Also interesting, of our 5 Bay Area investments in Fund VI – 3 are companies building platforms at the intersection of AI, robotic automation, and biology for discovery or delivery of new potential therapies in healthcare.

(To compare, the total portfolio of Fund VI has a similar market mix to our previous funds – 20% consumer web + media, 40% enterprise + infrastructure software, and 40% other – which includes categories like consumer hardware, enterprise robotics, CPG, and computational biology)

This is an interesting shift for our portfolio over the past 12 years and one we believe will continue as the current emerging technology ecosystems continue to mature and new ones start to form across the globe.  (See our recent post on Toronto or our initial post on the topic related to Montana for more detail)

A core belief of True from the beginning is that great Founders are everywhere – our early investments from Fund I showcase that belief and we’re starting to see that early commitment to other geographies pay off in our performance data – both in terms of cash returns to our LPs and our large ownership stakes in high growth, high performance, scaling private companies outside of the Bay Area.

To add some additional context, two of our largest investments returns to date were based outside of the Bay Area – Ring in Los Angeles + Duo Security in Ann Arbor.  Looking at our portfolio today, many of our high potential private holdings are spread across the United States, Canada, and Europe including Peloton in NYC, in the UK, Deep Genomics in Toronto.

This trend is probably best seen with where we’re allocating our investment dollars for our Select Funds.  We raised our first Select Fund in 2016 with the strategy of investing in the later stage rounds of our best performing portfolio companies.  Our most recent Select Fund (True Select III) was raised in 2018 and over 70% of the dollars deployed from this fund to date have been into companies based outside of the Bay Area.

In closing, I want to emphasize that we’re excited about this continued trend and want to work with the best Founders working on the most ambitious ideas – and believe they can be found anywhere in the world.

We’re very excited about the number of new ecosystems that are emerging across the United States (and the world) and we will continue to work to discover the best Founders to where ever  they are located.

With that context, if you’re looking for a strong lead for your pre-seed or seed round and you think we could be a good fit – please reach out – we’d be excited to hear from you.


Persistence in Venture Capital Returns (Research + Thoughts)

Interesting NBER working paper on persistence in venture capital returns over time

From the abstract:

We use investment-level data to study performance persistence in venture capital (VC). Consistent with prior studies, we find that each additional IPO among a VC firm’s first ten investments predicts as much as an 8% higher IPO rate on its subsequent investments, though this effect erodes with time. In exploring its sources, we document several additional facts: successful outcomes stem in large part from investing in the right places at the right times; VC firms do not persist in their ability to choose the right places and times to invest; but early success does lead to investing in later rounds and in larger syndicates. This pattern of results seems most consistent with the idea that initial success improves access to deal flow. That preferential access raises the quality of subsequent investments, perpetuating performance differences in initial investments.

It is interesting to read their analysis with the context of an earlier paper titled “Is a VC Partnership Greater than the Sum of its Partners?”

From the abstract:

This paper investigates whether individual venture capitalists have repeatable investment skill and to what extent their skill is impacted by the VC firm where they work. We examine a unique dataset that tracks the performance of individual venture capitalists’ investments across time and as they move between firms. We find evidence of skill and exit style differences even among venture partners investing at the same VC firm at the same time. Furthermore, our estimates suggest the partner’s human capital is two to five times more important than the VC firm’s organizational capital in explaining performance.

If you agree with the conclusion of the second paper (which is that VC returns are driven by individual partners not firms) – the first paper’s conclusions make sense – there is a short-term advantage to a firm by having a particular manager as part of the firm – but when that individual partner leaves – the skill + value leaves with them.

In general, I think this is true of traditional venture capital – but I think two sets of activities that are more natural to emerging firms may start to change this for them


Focus on Firm Brand versus Partner Brand

Many traditional venture capital firms have had a focus on individual partners and their performance versus the firm’s performance.

This could lead to better deal flow for the individual (as well as better access to cheaper capital to downstream capital for his or her investment portfolio) – but the performance of a particular portfolio company is attributed to an individual versus the broader team or firm brand.

Examples of how this manifests is inclusion of investments by partner on a firm’s website or the annual enthusiasm around the Midas List.  (There are definitely counter examples to this – one example being Benchmark Capital)

In the emerging groups, such as Y-Combinator and Indie Bio – I think this is one of the most powerful parts of their model. Companies are highly associated with the investment firm – not an individual partner – and the downstream effect is that the firm gets to keep the “equity” value of its investments versus attribution being given to an individual partner

For YC – this is how they showcase their best performing portfolio companies (which includes only batch information – no information on who worked with any specific team)

Similarly – Indie Bio (as an example of a vertical within SOSV) has done an amazing job positioning itself as the first call for the best scientists who want to become entrepreneurs and building a system that can screen thousands of companies to end up with 14 or 15 per batch

Having invested in a small fund by SOSV to invest in every company in Batch 2 and Batch 3 – we have been fortunate to have a close relationship with their team and have been able to watch watch how their brand has driven amazing top of the funnel demand (thousands of applications per batch) while the number of companies they select has remained the same (and has increased the quality of each batch over time)

For both YC + Indie Bio – they have built firm brands that will last beyond their individual team members and portfolio company outcomes will have a positive effect on sourcing of future opportunities and will enable existing + future portfolio companies to access more + cheaper capital


Network Effects

The ability to cross pollinate learnings from within a portfolio is powerful – but requires a culture of trust (and probably non-attribution of individual partner performance) to work

For True – we saw this in our consumer hardware portfolio – where our early investment in Fitbit led to a number of other consumer hardware investments.

Initially, we were one of the few seed investors in the space – but as the market matured – the ability to access other Founders or teams who had scaled or faced similar challenges was a powerful tool in being able to win investments with the best new companies.

Some of this we did in formal events – but the goal was to get out of the way and normalize cross company collaboration within the portfolio – initially at the Founder level, but over time – we’ve seen it within functional senior leadership groups (ie in marketing, product, or engineering)

These are some of the events we hosted to start the conversation in specific markets – but we’ve seen this flywheel work in other markets including CPG, Computational Biology, Open Source Software, Insurance, Cryptocurrencies, and more.


As a specific example of how this can work in the portfolio, the initial Ring Video Doorbell used the same Wifi Chip as the Fitbit Aria scale.

During our investment process with Ring, the Fitbit team shared what they had learned about the wifi chip + helped work with the Ring team to use those learnings to help them best place the chip in the device.

This knowledge sharing helped our firm win the investment and then ultimately drove better performance of the company (and the on going relationship between the companies ultimately helped as technical learnings could flow back + forth between their groups)

First Round Capital + other firms have other programs that look to drive similar coordination – and I think the firms that do this well – will be stronger and ultimately have more predictable outsized returns over time.

New Investment Checklist (2017)

Below is my current working pre-new investment checklist.

Most of these questions are answered early through conversations with the Founder or others at the company – so this is mainly a final reminder of what qualities I’ve found to be important in potential investments over my time at True (either through others or learning directly the hard way)

Would love any feedback on any potential new qualities to add (or questions about attributes on the list that you’d disagree with)

New Investment Check List

Founder Questions:

1. Who is the main protagonist Founder that you’re backing?

a. Are there any potential trust issues?
b. Would you want to work with this person for the next 12+ years?
c. How do they treat other individuals? (Lawyers, employees, etc)
d. Do they have the ability to be a long-term leader for the company?

2. What do they understand about the market that other don’t?

a. What experience led to that unique insight?
b. Why would others think they’re wrong?

3. Do they have the ability to recruit great talent?

a. Who are their co-Founders and how is equity split?
b. Who are early advisors and why are they excited?
c. Can they identity the people they will hire for their first 10 roles?

Business Questions:

1. Does the company’s mission matter?

a. Will you be proud to talk about this investment?
b. Can it inspire employees, future investors, etc

2. What is the company’s long-term sustainable competitive advantage?

a. Network effects are ideal
b. Are there features that increase customer lock-in or switching costs?
c. Is this a company that could exist for 100+ years?

3. Are you swimming with the tide long-term?

a. What are the major macro market forces in your favor?

4. Why is this possible now?

a. Why would have previous attempts failed?
b. Either technology or capital efficiency story
c. Why would others say this business won’t work now?

5. Is there significant innovation around product?

a. 10x better than alternative products
b. Are there any alternatives that could be indirect competitors?

6. How often do customers interact with the product?

a. Ideally more than once per day

7. What is the quality of the company’s future revenue?

a. Visibility or predictability of revenue matter
b. Recurring or Re-occuring revenue is ideal
c. Arbitrage doesn’t usually lead to long-term enterprise value
d. Any customer concentration issues?
e. Any partner dependencies?

8. Is there a path to $100m in Annual Revenue? $1 Billion in Annual Revenue?

a. At scale, what is the customer + margin profile of the business?
b. What is the profile + challenges of similar businesses at scale?

9. Is there significant innovation around early go-to market strategy?

a. Organic marketing is best
b. Are there channels to effectively reach your target customers at scale?

10. How much equity capital is required to scale the business?

a. Are there alternatives financing sources if more capital intensive?
b. Can you make money as a seed investor?

Most Important Question:

1. If you could only make one investment this year, would this be it?

Crypto Asset Analysis + Seed Investments

Presentation from our Annual Team Offsite at Stinson Beach in July 2017 included below.

This shares some of our internal discussions on how we’re starting to think about evaluating new types of crypto projects + assets.

As an active investor in startups built around open source software, we’re increasingly excited about new + interesting business models to support community activity and have been participating in the cryptocurrency space since started accepting Bitcoin in November 2012.

As a firm focused on pre-seed and seed investing, we believe there will continue to be opportunities for venture capital firms to invest the initial startup capital into new crypto projects (as part of an initial equity financing or as part of an agreement in exchange for future protocol tokens.)

We’re interested in potential opportunities in:

  • Decentralized applications (ie projects like FunFair for Decentralized Gaming)
  • Enabling infrastructure (ie projects like 0x (Decentralized for Trading Tokens) or zCash (Blockchain + technology focused on privacy + selective transparency)

In particular, in potential crypto investments we’re looking for:

  1. Applications that truly need to be distributed (“Need to be built on a blockchain”)
  2. Solid technical team (with expertise across Internet infrastructure and crypto)
  3. Utilization Token tied to business model
  4. Potential for Strong Network Effects

If you think you’d be a fit with our portfolio based on the above information, please reach out – it’d be great to learn more.

True Science Investments

Presentation from our Annual Team Offsite at Stinson Beach in July 2017 included below.

This shares some of the lessons from our investments involving life sciences (starting with in 2011 + Moleculo in 2012) as well as some of the evaluation criteria we think about for potential future opportunities.

As a firm, our focus is leading the first institutional round (usually pre-seed or seed) with investments of $500k to $3m. We often invest with angels and love research work coming out of universities or other labs.

For companies based in core science or research – we like to see:

  1. Great science with large potential impact
    1. Therapeutic applications in healthcare
    2. Other non-healthcare applications with high margin potential
  2. Founder is a leader in the space
    1. Ability to develop cornerstone IP + reputation in the space
    2. Multi discipline teams; cross discipline individual expertise
  3. Path to efficacy (or similar metric) on less than $10m of paid in capital
  4. Market size + Product + New Type of Regulatory Risk
  5. Platform opportunity with large market potential
    1. Ability to build defensible data moat is key
    2. More data makes technology better; increases enterprise value

If you think you’d be a fit with our portfolio based on the above information, please reach out – it’d be great to learn more.