
20VC: Why Small Funds Outperform Large Funds & AUM is a Vanity Metric | Why 99% of Investments in AI Startups Will Go To Zero | Being a "Traction First" VC & Investing Lessons from Investing in Canva and Missing Figma with Nikhil Basu-Trivedi
The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The PitchTue Sep 05 2023
Small funds outperform bigger funds:
- Difficult for billion-dollar plus funds to achieve a 5x net return
- AUM (assets under management) is not a reliable metric in venture capital
AI-first opportunities at Footwork and the hype cycle around AI:
- Uncertainty about investing in AI startups due to the current hype and competitive noise
- Expensive nature of AI-enabled companies may not be suitable for investment by Footwork
Importance of early signs of product-market fit and simplicity in businesses:
- Invested in The Farmer's Dog, a subscription service for fresh pet food, which turned out to be a big hit
- Realized that some of the best businesses are simple but built on unique insights
The challenge of assessing founders' ability to fundraise versus their ability to build a business:
- Being seduced by founders who can tell a great story and attract multiple term sheets without focusing on fundamentals
- Importance of distinguishing between fundraising skills and actual business-building skills
Ranking importance of people, traction, and market when making investment decisions:
- Traction as an important factor, indicating early signs of product-market fit
- Market size less prioritized due to difficulty in accurately predicting market potential
Misalignment between GPs and LPs in investment decision-making:
- Areas of misalignment include differing views on what makes a good investment or how decisions should be made
- GPs generally have more knowledge about specific industries or investments compared to LPs
Considerations when selecting LPs for footwork’s first fund:
- Emphasis on quality relationships with LPs, including those who have seen world-class success
- Taking into account mission values of institutions as well as check size diversity among LPs
Potential lack of focus on evaluating GP drive, hunger, and energy by LPs:
- Limited attention given to GP commitment and ability to get the job done by some LPs
- Highlighted importance of assessing GP characteristics beyond tangible factors
Balancing concentration limits and ensuring diverse LP composition:
- No single LP has more than 20% of the fund, avoiding overreliance on specific institutions
- Effort made to have diversity in check size and type of LPs (e.g., endowments, foundations, funder funds)
Warning against the idea that don't do a deal for a year advice is necessary or productive:
- Proponents suggest delaying deals until familiar with venture landscape, while critics argue for seizing opportunities when they arise
- Taking into account individual situations and resources when considering readiness for investing
Importance of finding exceptional companies that deserve exceptions:
- Highlighted success investing in exceptional companies despite deviating from investment norms
- Acknowledgment that special companies can defy traditional expectations
Learning from misses and successes in investments:
- Mentioned The Farmer's Dog as one of the biggest hits and appreciation for simple businesses built on unique insights
- Recognized missed opportunities like Figma due to emphasis on early traction and product-market fit before investment
Adjusting to parenthood challenges and embracing unpredictability:
- Coping with loss of control as a parent but finding joy in surprises and random experiences
- Strengthening partnership through shared purpose and raising child together
Impact of fatherhood on time management in venture capital activities:
- Increased prioritization of time spent meeting new companies for sourcing new investments
- Priority given to startups that indicate some signs of product-market fit for consideration
Assessment of platform value-added services provided by large VC firms:
- Skepticism towards alleged benefits provided by platforms beyond scaling firm operations
- Lack of perceived value creation for portfolio companies
How does having children affect work-life balance:
- Nikhil discusses how having a child changes his relationship with his wife and how it adds the element of time as a precious commodity.
- He mentions conversations with people who express regret for not having children sooner but personally, he doesn't wish to have had children earlier in life.
Challenges of being a parent while working hard:
- Nikhil worries that being a parent may hinder his ability to work as hard as before and explains that he can no longer spend long hours pounding at his desk.
- He prioritizes spending quality time with his daughter during specific windows each day, such as dinnertime, bath time, and bedtime. In the mornings, he takes her to Montessori school.
- However, Nikhil compensates by working from 7:30 pm to 10 pm every day but acknowledges that overall productivity might be slightly lower due to divided attention.
Change of mind on AI investments:
- Nikhil shares that he has changed his perspective on investing in AI-first or AI-enabled companies due to the hype surrounding the sector.
- He mentions challenges such as high expenses and intense competition within the space that deter him from pursuing such opportunities at this stage.
- Additionally, Nikhil highlights issues related to customer churn when novelty-driven users try out products built on top of large language models (LLMs) but eventually move away.
Concerns about venture capital metrics:
- Nikhil criticizes the focus on assets under management (AUM) as a vanity metric in venture capital. He believes small funds often outperform larger funds and suggests measuring success based on returns and enterprise value created.
- He also questions the validity of using portfolio company valuations (enterprise value) alone as a measure since investments made at later stages heavily impact these numbers.
Investing mistakes during the recent hype cycle:
- One of Nikhil's biggest investing mistakes between 2020 and 2022 was participating in pro rata investments when companies quickly raised subsequent rounds with significantly higher valuations.
- He highlights that these decisions were made without enough risk reduction within a short time frame, leading to potentially oversized positions and limited de-risking.
The importance of reserves and follow-on investments:
- Nikhil explains the value of having reserves for follow-on investments in their funds. He mentions scenarios where additional support may be needed by portfolio companies or where signaling becomes crucial for raising subsequent rounds.
- While acknowledging challenges related to reserving, such as concentrating capital towards unsustainable growth spikes, he believes having reserved capital provides flexibility and signals support to entrepreneurs.
Respect for lesser-known venture firms:
- Nikhil expresses admiration for Union Square Ventures (USV), believing they deserve more recognition alongside Sequoia Capital and Benchmark. He cites their collaborative nature and understated approach, offering examples like USV's quiet presence during Coinbase's IPO day.
- Another firm he respects is IA Ventures. Nikhil commends their disciplined investment approach, taste in deals, and consistent performance despite maintaining a lower profile.
Valued board member:
- When asked about the best board member he has worked with, Nikhil mentions Vasanad Rajan from Accel. He praises Vas' thought-provoking questions, ability to prioritize what truly matters for the company, and his strong track record with various successful investments.
Ideal dinner companions:
- Nikhil would love to have dinner with Sir Alex Ferguson, former manager of Manchester United Football Club, and Sir Michael Moritz from Sequoia Capital. As two of his heroes who co-wrote a book together, he envisions an enjoyable conversation fueled by chemistry between them.
Footwork's future aspirations:
- In 5 to 10 years, Footwork hopes to add one or two new equal general partners while continuing to work closely with founders on series A or seed financing rounds.
- Their main aim is to collaborate with exceptional founders and companies that make a significant impact on markets, achieve scale, create categories, and generate fundamental business value.
- Nikhil refers to Mike having had the experience of working with Stitch Fix founder Katrina Lake from early-stage to billion-dollar revenue, hoping for similar partnerships over the next decade.
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