Once a year we have the VC equivalent of a board meeting, referred to as an Annual Meeting. And last Thursday marked our 4th Annual Meeting since starting Homebrew (Hunter and I have written about the prior ones here and here). It’s always one of our favorite days of the year because we get to bring together the two groups of people who’ve bet on us and Homebrew – our investors and our founders. During an afternoon meeting, we tell our Limited Partners (the investors in our funds) how the funds and individual portfolio companies have been performing, our perspectives on the seed stage venture market and what we’re doing and not doing well. The afternoon session culminates with presentations by the founders of a few of our companies, always a highlight for our LPs.
For me, the best part of the event is the dinner we hold that evening for our founders, advisors and LPs. It’s something we’ve done from the beginning of Homebrew, and it’s something that is more meaningful to us each time we do it. It also gives these groups visibility into the sides of VC that they normally don’t get to hear about or participate in. Understanding their respective motivations and goals educates them about people who have an important impact on their worlds and also makes it easier for all of them to understand why VCs work they way they do. And that transparency can only benefit the entire ecosystem.
Here are some of the things we discussed this year that stand out relative to prior years.
More money doesn’t mean more direct competition
Even though there is more seed stage venture capital and a greater number of seed VC firms than ever, the number who are fighting for the same seat at the table as Homebrew is relatively stable. We tell founders we want to be an “Investor of Record”. The investor who is going to put not just dollars, but also sweat and reputation behind them. The investor that will work tirelessly alongside them to build the company that they envision. There are usually only one or two of these investors in a company, often referred to as lead investors. And in our view, the vast majority of new seed money that has come into the market currently doesn’t target that strategy. In addition to the lead investors, every investment syndicate tends to have supporting investors, those that typically write a smaller check and can be reactively helpful. It’s this category where capital has exploded, which is a great benefit for founders. We enjoy great relationships with many of these firms and consider them to be fantastic partners more than competitors.
Pre-seed is a state of mind
As the cost of starting companies has dropped, the size of most venture firms has not. The natural gravitational pull of these larger firms is to write larger checks, which often necessitates taking less risk. Hence the need and opportunity for founders to sometimes raise small amounts of money to prove a few things before raising a larger round of capital. That money used to come from friends and families. But now, because it often comes from small institutions and might be closer to $750k than $250k, it’s called “pre-seed” capital. Our view, is that pre-seed capital is just a choice made by a founder about how much risk he or she is willing to take on at a particular moment in time. And pre-seed capital has emerged to fill the gap left by larger institutions that are unwilling to take what would historically be called seed stage risk. Homebrew is in the business of seed stage risk, and that doesn’t change based on the size of our first check into a company. In the past 12 months, we’ve made 7 new core investments, two of which would be considered pre-seed based on check size. But of those 7 companies, 4 were pre-product and 3 had only early versions of their products that were certainly pre-product/market fit. So are we pre-seed investors or seed investors? It doesn’t matter. Homebrew just aims to be the lead or co-lead investor within the first $0m-$3m of capital into a company.
The best founders lead us to innovation
Homebrew sits at the intersection of a focused investment strategy and a thematic focus, which we refer to as the Bottom Up Economy. The crux of that thesis is that as technology continues to get cheaper, more flexible and more accessible, it opens up its benefits to constituencies and industries that haven’t been able to leverage it historically. Small business can automate workflows, individuals can generate new income streams, traditional industries can access new data, etc. But underlying that thesis is the awareness that we aren’t going to be the ones who will see the future. The best founders show us the way. And we were reminded of that when five of our founding teams presented to our LPs at the meeting. If you would have told us four years ago that our portfolio would include a children’s clothing company, an AI robotic systems company, a service for helping people have amazing offline experiences, a business analytics software company and a consumer hardware company (yet to be announced but incredibly delicious!), we would have laughed heartily. But we do. And we couldn’t be more proud of the fact that these incredible founders have chosen to partner with us as part of the Homebrew family.
Picking is harder than ever
Our jobs have only gotten harder since the last time I wrote about our deal funnel. There is more entrepreneurial activity than ever, coinciding with the larger amount of capital. And we have a portfolio of companies that we try to actively support, with at least 50% of our time. So we’ve become even more rigorous in our deal process and our 2016 metrics bear that out. Here’s how our overall investment opportunity funnel broke down in 2016:
- ~2050 opportunities evaluated (100%)
- 339 companies with first meetings or calls with either me or Hunter (17%)
- 42 companies that then had a second meeting with the other one or both of us (2%)
- 8 core and 8 supporting investment offers made (0.6%)
- 16 investments made (0.6%)
We appreciate that raising money is a nerve-wracking and time-consuming experience for founders. So we try to get to “no” and communicate it quickly. And we need to continue to get better at that so we can devote as much time as possible to the small number of founders to whom we’ve pledged our time and energy.
As we tell our investors, we could talk for days, not just hours, about our business and our founders. So these are just a few of the many topics we reviewed at our Annual Meeting. We’re continually learning and iterating to improve the Homebrew product. And we’re so lucky to have the opportunity to do that. Thanks to our founders, advisors and LPs for making it possible. We’re just getting started.